American Dream

Although buying a home is still part of the American Dream, it should also be pointed out that a record high of 30% of families have zero (or negative) non-home wealth in America. (1) This is what can be considered “house poor” and is a sweeping concern across the nation. In fact, according to the State of the Nation’s 2017 Housing Report, nearly 40 million households are currently house poor in the US.

House poor is a common term that refers to a person or household who spends the majority of their income on homeownership – which can include mortgage, taxes, maintenance and utility costs. How can it happen? Several situations may lead to this less-than-ideal state – some more avoidable than others:

  • Unprepared: this is all about doing your homework before diving into this big purchase and big decision. Read on for some ways you can prepare and set yourself up for success now and all along your homeownership journey.
  • Home maintenance: as a homeowner, all home maintenance is on you. So whether a roof leaks or an appliance breaks, these costs can really add up if you don’t have a savings fund to fall back on.
  • Living outside your means: this is true with anything – without a budget and plan on where your money goes, it can quickly spiral out of control. As a homeowner, these funds take a priority in order to continue paying your mortgage and keep a functional roof over your head.
  • Change in salary: in the event of a demotion or pay cut, any change in salary can hinder the ability to keep up on housing costs.
  • Unexpected life events: although planning is key for sound financial health, unexpected events, such as the loss of a loved one or a car accident, are inevitable. These can be accompanied with large financial burdens that can put a severe dent in your finances.

However, there are some simple strategies that you can take to plan, prepare and achieve this exciting milestone of homeownership and avoid falling into the house poor category. The first includes understanding the factors and options you have in purchasing a home. Since most of us don’t have a huge chunk of cash sitting around to buy a house, you will likely need to get a mortgage. A mortgage is simply a loan in which real estate is used as collateral. There are many different types of mortgages available depending on your situation. According to Realtor.com (2), here are the most common:

  • Fixed-Rate Loan: simply uses a single interest rate locked in for the life of the loan (usually 15 or 30 years).
  • Adjustable-Rate Mortgage (ARM): interest rates are usually lower than a fixed-rate, but only for a period of time (such as 5 or 10 years). After that, your interest rate will adjust to the current market rate.
  • Federal Housing Administration Loan (FHA): great for first time homebuyers or someone with little saved up for a down payment (it only requires a 3.5% down payment). Be aware that this option does require mortgage insurance to be paid either upfront or over the life of the loan – usually 1% of the borrowed amount.
  • Veterans Affair Loan (VA): if you’ve served in the US Military and qualify, you can score no money down and no mortgage insurance requirements.
  • Check out ISU Credit Union's mortgage options

Although there are many loan options available, some common components of personal finances play a role no matter which option you choose. Remember, with any loan you apply for, the lender will assess your risk potential as the primary factor for deciding your loan amount and terms. A few extra percentage points on your interest rate may only be a little bit extra each month, but it can add up to tens of thousands of dollars over the course of the loan.

  • Healthy Credit – also known as your credit score, this is a huge factor for any type of loan you receive and reflects your creditworthiness.
  • Debt-to-Income Ratio (DTI) – this means dividing your monthly debt responsibilities by your monthly income. As a general rule, you should aim for a DTI under 36%.
  • Down Payment – by putting more money down upfront, it alleviates risk for the lender down the road.
  • Job History – typically at least 2 years of the same employment is recommended to show the lender stability and a consistent stream of income coming in.

Now that you have a general idea of what factors into your mortgage amount, you can begin your due diligence to get an idea of how much home you can afford.
There are a few different ways you can do this:

  1. Starting Point – a General Rule of Thumb: the first place to start is the general 28/36 Rule of Affordability. This has 2 parts: the first states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses.
    (To calculate: take estimated PITI (monthly principal, interest, property taxes and insurance payments, plus any HOA or community fees) for your ideal home and divide by total household gross monthly income)

    The second part states that a household should have no more than 36% of total debt. This is the DTI ratio mentioned above, and includes all debt, including credit card payments, car loans, student loans, personal loans or even monthly child support or alimony. Plus, you would factor in any new mortgage payments that relate to your home.
    (To calculate: list all monthly debt liabilities, including anticipated PITI from above and divide by total household gross monthly income)

  2. Leverage Online Calculators: there are countless online resources to take advantage of to get a general sense of your home affordability bandwidth, specifically online mortgage calculators. These are free to use and allow you to enter in your ideal home details, such as: home value, down payment amount, loan interest rate, loan term, annual property taxes, PMI and insurance costs. It will then automatically calculate a mortgage repayment summary and provide specific insight into all the details of that loan. It is easy to change up the numbers to evaluate various scenarios and can be a very helpful tool to wrap your head around the most optimal terms for your situation.

  3. Get Pre-Qualified or Pre-Approved: although these terms are often thrown around interchangeably, there is a difference between each. Pre-qualification is an estimate taken by understanding your income, assets, debt and estimated credit score. On the other hand, pre-approval requires documentation and verification of your finances in order to provide a more accurate loan amount. Each is beneficial depending on where you’re at in the real estate process:

    Pre-qualification: great if you are just getting started in planning or seeing if home ownership is a possibility in the future. This will give you a sense of the type of home you can begin looking at, or it may identify some areas in your financial picture you should address before buying a home.

    Pre-approval: is a key step in the process if you are already planning to purchase a home. This verification is often required to make a competitive offer in the market. Sellers typically prefer offers that have already been pre-approved to avoid any surprises later in the process.

Just like you wouldn’t test drive and attempt to buy an expensive car if you can’t afford one, the same is true in the home-buying process. It is more important than ever to prepare yourself for this investment, no matter how close or far away it is in your future. There are several resources to support you, including experts to walk you through the process and ensure you are on the right path. It’s an exciting life event that requires preparation, planning and eventually celebration with keys in hand.


(1) https://goldsilver.com/blog/many-americans-are-house-poor-have-negative-wealth-and-no-savings/
(2) https://www.realtor.com/advice/finance/what-is-house-poor/