A 21-year-old Pittsburgh man and his girlfriend want to build a $700,000 home, despite both earning variable incomes.<\/p>\n
\u201cWe want to know if we\u2019re way over our heads or if this is actually feasible,\u201d Joseph told The Ramsey Show<\/a> in a clip posted Dec. 3. (1)<\/p>\n He says his girlfriend is an insurance agent who earns commission, and he runs his own company. In total, they bring in approximately $10,000 a month \u2014 but that\u2019s not guaranteed income. They\u2019re looking to put down up to $130,000, plus a matching amount from her parents, on a house that hasn\u2019t even been built yet.<\/p>\n \u201cNumbers aside, you\u2019re in way over your heads,\u201d co-host George Kamel said. \u201cThere\u2019s not even a ring on the finger and you\u2019re going to sign up for a mortgage and put your names on a deed together?\u201d<\/p>\n Here\u2019s why The Ramsey Show hosts warn Joseph not to \u201cleapfrog\u201d into an upper-middle-class lifestyle long before their finances can support it \u2014 and what they should do instead to avoid becoming \u201chouse poor<\/a>.\u201d<\/p>\n Pittsburgh was labelled the lowest-priced major housing market in the country in October by Realtor.com<\/a>, with a median listing price of $250,000, more than $150,000 below the national median. (2) A $700,000 home in this market would most likely fit the bill of a luxury property \u2014 but is that achievable to the young couple?<\/p>\n A general rule of thumb to avoid becoming house poor is to keep your monthly household costs \u2014 including mortgage payments, property taxes, insurance and utilities \u2014 under 30% of your gross monthly income. You can calculate your debt-to-income ratio by adding up all of your debt payments and dividing that by your gross monthly income (multiply this number by 100 to get a percentage).<\/p>\n Read More: Vanguard reveals what could be coming for U.S. stocks, and it\u2019s raising alarm bells for retirees. Here\u2019s why and how to protect yourself<\/a><\/p>\n Buying a $700,000 home with a $260,000 down payment (thanks in part to the girlfriend\u2019s rich parents) and 30-year mortgage<\/a> with a 6.5% interest rate would result in monthly mortgage payments of around $2,800. Payments for a 15-year mortgage would be around $3,800 monthly. This doesn\u2019t count property taxes, insurance or fees. Since Joseph and his girlfriend can\u2019t count on consistent incomes month-to-month, there may be stretches where housing becomes unaffordable.<\/p>\n \u201cI love to plan. I love goals. But you\u2019re setting yourself up in a situation where everything must go as planned for this to work out,\u201d co-host Jade Warshaw said. And, even if everything does go to plan, they may be house poor for many years.<\/p>\n It\u2019s possible that Joseph and his girlfriend wouldn\u2019t be able to get a loan to finance a $700,000 home. Lenders consider your income, debt and credit history, as well as the amount of your down payment, to determine if and how much they\u2019ll loan you.<\/p>\n Even if they were able to fund a $700,000 home, a loan that leaves you house poor means you\u2019re cash-strapped in other areas. If they have to use credit cards or take out loans to cover other expenses or emergencies, they could end up getting further and further into debt.<\/p>\n Joseph mentions he and his girlfriend want to start having kids in the next couple of years \u2014 adding enormous costs \u2014 and being house poor may mean they\u2019d have to delay those plans.<\/p>\n \u201cWhy not get engaged, get married, rent together, save up on your own and then purchase a house or build when you\u2019re financially ready?\u201d Kamel proposed.<\/p>\n That would mean building an emergency fund<\/a> (three to six months\u2019 worth of income), growing their income substantially before considering a luxury property and renting or buying a more modest home in the meantime. They could then aim for a larger home once they can afford to put 20% down on a 15-year mortgage and ideally keep their housing costs under 30% of their take-home pay.<\/p>\n Kamel recommends that, instead of building a $700,000 home, the couple look for a more modestly priced home with a smaller mortgage they can \u201cknock out quickly\u201d and then upgrade their home over time.<\/p>\n \u201cI would move real slow and realize you don\u2019t need the lifestyle that her parents have today at 21 years old. It\u2019s okay for it to take a while,\u201d he said. \u201cThat\u2019s actually healthy.\u201d<\/p>\n Article sources<\/p>\n We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines<\/a>.<\/p>\n The Ramsey Show Highlights (1<\/a>); Realtor.com<\/a> (2<\/a>)<\/p>\n This article provides information only and should not be construed as advice. 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