Borrowing

The top 3 U.S. cities where homeowners borrow more than they can afford to pay

"Your home should never be a speculative purchase and you should never buy more than you can afford."

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Owning a home is a lifelong dream for many Americans, but some buyers are in over their heads. The national median home value is nearly $272,450, and those without a plan to pay off their mortgage loans might find it hard to keep up especially during the pandemic.

A key concern among current and aspiring homeowners is that their existing debt will make it harder to buy a new, bigger home or manage the expenses of ownership. Banks do factor in your monthly debt obligations when determining how much they're willing to lend, but it's still possible to be overleveraged, which means you've borrowed more than you can actively afford to pay back.

WalletHub used September 2020 TransUnion data to calculate the ratio between the median mortgage debt and the median income in more than 2,500 U.S. cities and determine which had the largest share of overleveraged mortgage debtors. Researchers then found the difference between each city's median mortgage debt and its median home value.

Here are the top three American cities where the most homeowners are overleveraged, according to WalletHub.

Willis, Texas

Overleverage score: 66.57
Median mortgage debt: $141,804     
Median house value: $84,500
Median income: $25,570
Mortgage debt-to-income ratio: 555%
Mortgage debt-to-house value ratio: 168%

Dumfries, Virginia

Overleverage score: 66.49
Median mortgage debt: $280,392     
Median house value: $213,300
Median income: $39,079
Mortgage debt-to-income ratio: 718%
Mortgage debt-to-house value ratio: 131%

Bell Gardens, California      

Overleverage score: 62.57
Median mortgage debt: $260,390     
Median house value: $415,200
Median income: $27,257
Mortgage debt-to-income ratio: 955%
Mortgage debt-to-house value ratio: 63%

Americans still struggle with debt

The wise move is to avoid becoming overleveraged if you can, says A. Donahue Baker, a CPA and the chief executive officer and co-founder of Money Avenue who's also a real estate developer. "Your home should never be a speculative purchase and you should never buy more than you can afford."

But it's no wonder that many adults struggle with housing costs on top of their other expenses. Including consumer debt such as credit cards, personal loans, mortgages, and student debt, the average American is over $90,400 in the red. Millennials owe an average of $78,400.

About one-third, 32%, of adults in a Clever survey from January told researchers they believed that they had too much debt to even qualify for a mortgage in the first place.

Take smart financial steps before you buy a home

Your best opportunity to avoid taking on too much debt comes before you buy. Carefully consider what you can afford before you start looking for a new home, and when you're gauging affordability, be sure to factor in other housing expenses such as property taxes and utilities.

Don't rely on the bank's estimate of what you can afford, which may be rosy. Financial experts suggest that you should be cautious about taking out a mortgage that totals more than three times your salary, or that has a monthly payment that represents more than 28% of your gross monthly income.

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While taking the right financial steps beforehand can prevent you from starting off overleveraged, there are also steps you can take if you later find yourself having trouble making monthly mortgage payments.

Refinancing the mortgage to take advantage of lower rates is one method that could potentially reduce your costs. You could also look to lengthen the term of the loan, which could also reduce the monthly payments, says Derek Delaney, a CFP and the founder and lead planner at PharmD Financial Planning.

Get creative if you have to: "Create a new source of income that can be applied to the mortgage payment," Delaney says. "Renting out a room to that person for a fixed monthly price can help lower the expected contribution you need to make to that mortgage payment. If your home has yard space, you could start a garden and cut back on your grocery bill."

If you own a home or are saving up for one, improving your credit score can put you in a good position to land a home or refinance your mortgage to a lower rate. Some loans accept "poor" scores as low as 500, but the baseline needed for most is 620. To get the best rate, you should have a 760 score or greater.

Check out Grow's mortgage calculator to help you figure out an affordable monthly payment and the most appropriate payoff timeline for your budget.

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