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'What were we thinking?"; Affordable: Many homeowners are overestimating what they can pay in mortgages, leading to debt, resales and foreclosures.

THE BALTIMORE SUN

Looking back, Shiela Juchs can see that she and her husband Jim overbought when they purchased their Bowleys Quarters home four years ago, though they were both still working. When they had their daughter last year and Shiela decided to stay home, things came to the breaking point.

"We had to really adjust and go down to nothing to afford [our home]," she said. "We adjusted so much. We've gotten rid of cable, we can't call our family long-distance. We've cut corners in every way."

After they made their $1,200 monthly mortgage payment, they had almost nothing left.

"And we didn't even have a car payment," Shiela said. "We'd charge stuff to get by. I bought groceries on credit. It was a pain. It's no fun being house-poor. We want to tithe. We have no emergency fund at all."

Weekly groceries, $1,000 in curtains, other decorating items such as paint, all went onto the credit card. The Juchs also installed a $2,000 security system.

"It's all down the drain," she said.

For Shiela to remain home with her daughter, their only option was to sell the home and start over.

They paid $141,000 plus $10,000 in closing costs and fees, and recently sold it for $148,500. Shiela said they'll lose "a ton of money" that includes a $2,000 cash-back-at-settlement deal to the buyer.

She wonders why they bought in the first place, especially because they knew she would want to stay home with their children.

"What were we thinking?" she said.

Many homeowners are thinking like the Juchs, particularly those between 30 to 50 years old, financial planners say. Eager to get into a first home or move into a dream home, they stretch their budgets and neglect to save for major expenses such as loss of an income, health problems, college funds or retirement.

When something comes up, such as a layoff or baby, they wind up so far in debt that they have to make major sacrifices or lose their homes and good credit ratings.

"I'm seeing more people with financial problems in the last five years today people want things so fast," said Karen Kidwell Storey of Linthicum, a personal financial planner. "There are only two ways to deal with negative cash flow. Lower expenses or increase income."

"Many times they bet on future income increases, but with college costs what they are and retirement, it worries me," said Lyle Benson, a financial planner and accountant. "Is your salary going to go up enough?"

"It takes away from your retirement money. You have nothing but a big home that you owe money on when you're 65," Kidwell Storey said.

There's plenty of reinforcement for buying fever. Unemployment and interest rates are down, and advertising for home financing floods the media. American society has held homeownership in high esteem and a record 66.8 percent of Americans owned their homes in the third quarter of last year, according to the Department of Housing and Urban Development.

"They want immediate gratification -- with their houses, too. They want it now. Then they suffocate. It's getting worse, not better. They feel like they can be in debt forever. The mind-set is that it's OK to be far in debt," Kidwell Storey said.

Some say it's not just a matter of haste, but that people feel a house is the best investment they can make -- because they can enjoy living in their investment as it appreciates and gives them tax breaks.

"It's like what type of investment you make, stock or bonds, vs. money market funds," said Marc Witman, president of the Greater Baltimore Board of Realtors and an associate broker at Long and Foster Real Estate Inc.

"There's a lot of reasons to buy the most house you can. I don't want people spending money they don't have, but sometimes it's better to stretch and avoid the double move and all the costs that come with it," Witman said.

There's another perspective, according to Witman. Is it the house that's causing the budget problem, or the country club, the private school, the furniture or the credit-card bills? Are they really "house rich and credit poor?"

"We wanted a big house. When we bought it, we had no furniture for a year and a half," Kidwell Storey said. "We could afford the house, but we waited for the rest. People don't do it now."

The Consumer Credit Counseling Service of Maryland and Delaware is a federally approved, nonprofit agency that helps about 20,000 people a year with debt problems. Nationally, there are 1,300 offices. Linus Campbell, director of education for the Maryland-Delaware CCCS, said his average client is 39 years old, earns $30,000 to $32,000 but carries $28,000 to $34,000 of debt each year. That doesn't include car loans or a mortgage.

"This person has this much debt, plus fixed expenses and they're in a mortgage, too," Campbell said. "If you fall into this profile, even with four or five debts, there's a serious stress factor."

"Some of them don't pay their mortgage because they decide that the lender won't take the house, vs. towing the car that's not paid up," said James Kelly, spokesman at the Baltimore office of HUD. "They make the mortgage debt a lower priority."

CCCS advises such individuals, helping them to come up with savings alternatives and debt repayment options to climb out of financial difficulties. When that difficulty is paying off the mortgage, things are harder, Campbell said.

"All we can do is suggest going to a smaller home," he said.

'Expectations in order'

Kenneth Sharoff, a Phoenix-based psychologist, said personal evaluation is also useful to get to the root of overspending.

"They need to get their expectations in order," Sharoff said of home-buying couples. "They have to ask themselves why is it so important to have this? Who are they afraid they'll be disappointing if they don't have the big house? What is the audience in their head? Is it to make their parents proud or show someone they've made it? What audience are they playing to?"

Government loan programs also are said to contribute to buying fever. Under some city entitlement programs that involve low down payments and settlement deals, buyers can put almost nothing down, get into the house and then go into "payment shock."

MNC Mortgage Corp. services settlement expenses for numerous city loan programs, and officials are concerned about the potential for default.

"If a person can't do the repairs, will they just walk out because none of their own money is in the house? It concerns us," said Alan Ingraham, MNC vice president.

The St. Ambrose Housing Aid Center, Baltimore's largest and oldest nonprofit counseling center, sees thousands of people who fall behind in mortgage payments.

The center's typical client is female, earning $18,000 to $26,000 per year, with one or two children. Seventy percent of the clients are single parents.

St. Ambrose Executive Director Vincent Quayle believes buyers are lured by some overenthusiastic lenders -- including HUD, whose Federal Housing Administration lending standards have been loosened over the past several years.

He also blames some overzealous real estate agents who prequalify buyers for the maximum that lenders will permit.

"Families get shown these lovely homes that cost more than rentals, but they're paying $400-a-month rent and have no savings. They're being shown $800-a-month homes and no one says 'How will you make up this difference?' " Quayle said.

Real estate industry professionals agree that hardships happen, but argue that lenders do have income requirements.

"The lender won't let you borrow more than you can afford. There are no secrets when you go to get a mortgage," Witman said.

'Six months of reserves'

Many lenders require the homebuyer have three to six months of the mortgage payments in cash reserves. Some programs limit the amount they'll lend depending on income level and down payment, requiring that the buyer will need to spend no more than 25 percent to 35 percent of his or her monthly income on the mortgage.

"We like to see anyone who buys a home, after everything is done, have six months of reserves [for monthly house payments] in liquid assets," Ingraham said.

When it comes to move-up buyers becoming "house poor," many lenders and housing counselors point to home-equity loans and second mortgages as unworthy temptations.

"They're people with good incomes, but have leveraged themselves narrowly with home-equity loans -- they don't realize the property secures it," Ingraham said.

"They take seconds to support nonhousing consumption. It comes down to those who overextend to get their dream house vs. mortgages issues due to overconsumption. You don't get a second mortgage to buy a starter home," Kelly said.

Though the real estate community disagrees on the extent of the problem and who's responsible, there is agreement that the best defense is realistic planning before you shop, combined with restrained spending after the purchase.

St. Ambrose housing counselors see 1,000 families a year who are losing their homes to foreclosure. At that point, it is often too late to save the home. If the center speaks to the families before emotions are involved, they usually listen, Quayle said.

"The comfort zone is a big deal," said Anthony Parran, a St. Ambrose counselor. "You can pay $450 in rent for 10 years and when you go up to an $850 mortgage, it's a problem. You can't buy a cheese steak anytime you want. You're living for the house. You bring your lunch and you don't run the water while you brush your teeth."

If a family has little or no savings, St. Ambrose counselors usually advise them to pay a house payment closer to the rent they're used to paying, even if they qualify for a higher mortgage.

Karen and Joe Kandeel made geography work for them. When the couple decided they didn't want to rent, they knew the type of house they wanted -- and also knew they couldn't afford one in the Baltimore area. Their answer: moving over the state line to Stewartstown, Pa. They paid $156,000 for their 2,100-square-foot home on 1.25 acres. Similar homes they viewed in Baltimore and Harford counties started at $175,000 -- on cramped lots.

"We didn't want a fixer-upper, and we didn't know what was involved in owning a house," Karen said. "I stay home with my daughter, and we're not overextended. People ask us why we wanted a four-bedroom house now, but we knew we were planning on kids. I didn't want to move again."

Said Witman: "It comes back to circumstance. People should deal with it before they go shopping. There's nothing worse than falling in love with a house and not being able to afford it."

HOW TO AVOID BEING HOUSE POOR ...

* Set goals before you look to avoid falling in love with a home you can't afford.

* Evaluate your lifestyle. Do you want the big house, or more vacations, restaurants, shopping sprees, etc?

* Save at least three to six months cash for an emergency fund.

* The monthly mortgage of a home should be 28 to 35 percent of your gross income and you should be able to save an additional 10 percent of your gross for retirement and other long-term uses.

* Ask yourself how long you want to live in the home and be very sensitive to the values of the neighborhood in case you need to sell sooner than you thought.

...AND WHAT TO DO IF IT HAPPENS

* Earn more money by taking on a new job, or spend less. Even consider selling some assets.

* Try to claim as many tax exceptions as possible to increase cash flow.

* Don't rush out and get a second mortgage or home equity loan to pay off debt. Remember that if you don't pay off that loan, you can lose your house or the debt can follow you to the next house and the next and next.

* Call 1-800-569-4287 for more information on HUD-approved housing counseling programs near you.

Pub Date: 2/07/99

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