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Where Homeowners Are Overleveraged


debtWith mortgage rates falling and the buyer’s market in full swing, some potential homeowners might be tempted to go ahead and buy before they’re ready. This could lead to a borrower becoming overleveraged, and owing more than they should. In a report, WalletHub [1] found which U.S. cities have the highest percentage of homeowners are currently overleveraged, by comparing the median mortgage balances against the median income and median home value in more than 2,500 cities.

With a median mortgage debt of $115,499 but a median home value of $43,800, McKees Rocks, Pennsylvania is one of the most overleveraged cities in the country. Mckees Rock holds a mortgage debt-to-house value ratio of 264 percent, and a mortgage debt-to-income ratio of 351 percent.

“New homeowners tend to not realize the cost of maintenance and desired upgrades, creating long run financial stress,” said Ron Throupe, Ph.D., Associate Professor, Franklin L. Burns School of Real Estate and Construction Management, University of Denver. “For any buyer overextending income ratios or counting on income increases to justify the purchase is a long run misery to avoid.”

Other cities on WalletHub’s list include Kahului, Hawaii, with a debt-to-income ratio of 955 percent. The median mortgage debt in this city is $375,249, while the median income is just $39,279.

Another expert WalletHub spoke to is Robert Stoll, a Certified Financial Planner and Founder of Honey Lake Advisors. According to Stoll, one of the biggest financial mistakes potential homeowners make when buying a home is simply buying too expensive of a home.

“Conventional wisdom in personal finance says that you want to keep the amount of your combined mortgage payment, property taxes, and homeowners insurance to less than 28 percent of your gross, pre-tax income,” said Stoll. “Many lenders will lend you more money that pushes that ratio above 28 percent, but buyers need to keep in mind that if they pay too much for a home, they will have to sacrifice elsewhere. A lot of people who "reach" for a bit more expensive home find out they don't have money to take vacations or eat out as much, or they don't have any money left over to save for college or retirement.”