The phrase “house poor” describes buyers who’ve bought a home they can’t afford. Most financial advisers say those who spend 30 percent or more of their pretax income on housing costs qualify for such a label. Under that standard, nearly 40 million U.S. households are considered “house poor,” according to the State of the Nation’s Housing 2017 Report from the Joint Center for Housing Studies of Harvard University.
Banks use different criteria to determine how much money they'll lend. Debt-to-income ratios are often used to help lenders compare how much money a person makes with how much he or she owes. Then, lenders figure in a mortgage amount to that equation. Banks typically don’t want borrowers to have a DTI ratio above 36 percent.
However, Debra Neiman—a financial planner at Neiman & Associates Financial Services in Arlington, Mass.—suggests keeping the DTI under 30 percent and cautions buyers to carefully assess what they can truly afford in a mortgage. “If you buy at the top of your price range, you could be putting yourself at risk of becoming house poor,” she says.
Financial experts also say it’s important for home shoppers to figure in other costs of homeownership, too. Besides the mortgage payment, property taxes, and homeowners insurance, buyers also need to figure in general maintenance costs, repairs, utilities, renovations, and even household goods. Make sure you detail for your clients the typical closing costs for your area, especially for first-time buyers.
Source: “What Is ‘House Poor’? What It Means, and Whether You’re at Risk,” realtor.com® (Jan. 1, 2018)
