Tips to avoid being house-poor

Demand for first-time homeownership is surging as many late-blooming millennials are finally seeking to settle down. But in some ways, their timing couldn't be worse. That's because entry-level homes are in severely short supply, and prices are still ascending.

Indeed, as of December a stunning 94% of U.S. metros experienced year-over-year price gains, according to statistics from the National Association of Realtors (realtor.org). In some areas, these gains even reached double digits.

At Seattle-based Zillow, the real estate data firm, economist Jeff Tucker is predicting a surge in home-buying interest as the spring selling season approaches.

“Buyers are already competing over near-record-low numbers of homes for sale. That is likely to mean more multiple offer situations and that buyers will have a harder time finding the perfect fit for their families,” Tucker says.

But such predictions haven't weakened the resolve of many wannabe owners.

Take the case of Catherine Wood, a Washington, D.C.based life coach. Now in their early 30s, she and her partner are extremely eager to own a place of their own.

Still, this couple, like many other aspiring owners in their age group, worries about the rising costs of real estate and whether their future mortgage payments would limit their ability to reach other costly goals, like traveling abroad or starting a family.

Here are a few other pointers for prospective first-time buyers:

Try to avoid taking so large a mortgage that you’ll be house-poor.

Many people assume lenders are now so cautious that even creditworthy homebuyers must struggle to get as big a mortgage as they desire.

But in reality, many buyers with solid jobs and decent credit scores can still obtain a home loan so large they're at risk of financial peril, says Keith Gumbinger, a vice president at HSH Associates (hsh. com), which tracks mortgage rates throughout the country.

One reason many buyers can qualify for too large a mortgage has to do with the way lenders evaluate applicants. Though household expenses have risen dramatically in many categories, including for health and education, lenders still rely heavily on applicants' gross income as the main gauge of their borrowing capacity.

“Lenders don't know how much money you have left over after you've met all your other obligations,” Gumbinger says.

Before taking out any mortgage that could make you house-poor, he encourages you to do a thorough inventory of both your financial priorities and expenses.

Take a close look at your pay stubs.

It's not only income taxes and Social Security contributions that come out of typical paychecks. Many people also have their net pay reduced for health insurance premiums, as well as group life insurance and retirement savings contributions.

Though lenders focus primarily on your gross income, you should look closely at your net pay before deciding how much to borrow for a home, says Mark Nash, a real estate analyst and author of “1001 Tips for Buying and Selling a Home.”

“When it comes to income, what matters most is the bottom line on your pay stub, not the top one,” Nash says.

Consider basic expenses in your calculations.

Nash says many first-time buyers are especially vulnerable to rising commuting costs when they leave an in-town apartment to obtain a house in the suburbs.

“People who depend on a car to get to work have to allow space in their budget for an increase of 5% or more per year in the cost of commuting,” he says.

Leave latitude in your budget for raising children if that’s your plan.

Are you a newly married couple embarking on your first home purchase? Do you also hope to have children within the next few years?

If so, you'll want to factor the costs of child rearing into your calculations on how large a mortgage to carry, Nash says.

“It's amazing how many people can't afford kids because their mortgage payments are too high. The shame of it is they didn't think through the trade-offs before buying that big house,” he says.

As Nash notes, the cost of day care in urban areas can easily top the $600-a-week mark, causing some mortgage-strapped families to forgo their family plans.

“It's sad to think you could give up your dreams of having a first or second child just to get a bigger house with more bells and whistles,” Nash says.