When home buyers take on more debt than they can afford to pay, they can find themselves overleveraged and having to consider refinancing, loan assistance programs or, in the worst cases, foreclosure.
A recent study compared the average mortgage debt to median income and home value in more than 2,500 cities, using U.S. census data from 2010 to 2014 to determine median income per individual and median home value for each city. The analysis found Durango households rank high for getting in too deep with mortgage payments.
The study, conducted by WalletHub, found that in the 96th percentile with an average mortgage debt of $279.676, Durango ranks second highest for overleveraged households out of cities surveyed in Colorado. Durango comes in only behind Boulder, which falls in the 99th percentile with an average mortgage balance of $362,526.
“A safe mortgage debt-to-income ratio is about 300 to 500 percent of your income,” Wallet Hub analyst Jill Gonzalez said. “Some cities have triple these numbers.”
When the Great Recession drove property values down in 2008, some homeowners found themselves overleveraged as victims of the market. As the housing market has inched toward recovery, declining mortgage rates are enticing prospective buyers, yet certain practices can thwart a homeowner’s ability to make payments in Durango, as local lenders have found.
One such practice is using an equity line as you would an ATM.
“People will take that as a checking account or debit card and use it for things other than home improvements. They take a vacation, buy a car,” said Scott Sohle, a mortgage banker with Bank of the West. “They spend their equity when they should accumulate it. I’ve been doing this 30 years, and that’s the biggest problem people get into.”
A high-maintenance house, or one that requires major remodeling, particularly as building costs are on the rise, can also steer homeowners toward mortgage payments they can’t afford.
Other variables are based on housing climate, as opposed to personal financial decisions. In Durango, buyer interest is far outpacing inventory, so home buyers are willing to pay for property in town.
“I think a lot of people think their home values will just go up, and we’re seeing an environment where people pay closer to asking price now than a few years ago, just from the competition,” Sohle said. “A lot of buyers are competing for the same property, so they may rationalize paying a premium.”
But other lenders say that heightened scrutiny and stricter policies adopted in reaction to the Great Recession have put a stopper on overleveraged homes. The qualified mortgage rule, for instance, generally does not allow home buyers to qualify for large loans if their debt payments exceed 43 percent of their gross monthly income.
“The reason the bubble burst (during the recession) was because no one did anything to qualify people,” said Lisa Reed, owner and president of Southwest Mortgage. “We saw low credit scores and inflated prices. These things had to be overcome, so there were bankruptcies and foreclosures. We don’t see too many people upside down in Durango anymore, because they’ve gone into bankruptcies and foreclosures. The majority of the distress we see, the damage has been done.”
The most basic principle to navigate all facets of home buying: create a budget, and allow for unexpected costs, which is especially applicable to first-time buyers who may be for the first time paying double for a mortgage payment compared to rent. w
Establishing credit is another baseline but often overlooked necessity for responsibly buying a home, Arete Mortgage owner Jeanne Szczech said.
“One of the things people don’t know is you need to have open lines of credit,” she said. “It’s a Catch 22. Lenders want two to three open lines of credit for several years to show you’re credit-worthy, but using cash is a nice luxury. I find clients that have no credit cards, and then we have to wait one or two years.”
If you are overleveraged, refinancing is an option, as are loan- assistance programs like HARP, or the Home Affordable Refinance Program. But if you’re a homeowner who plans on staying put, an appraisal value that exceeds the loan amount isn’t necessarily an issue, Szczech said.
“To owe more than your property is worth – that happens, and it’s really not a big deal if you’re not planning on selling,” she said. “If you look at real estate like an investment, which it is, you freak out when you see the house is losing value, but that’s on paper. If you’re not planning to sell, it should not be of great concern if you can still pay your mortgage payment.”
jpace@durangoherald.com
On the net
Overleveraged debtors:
https://wallethub.com/mortgage-calculator/
