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Purchasing a home is a big and often stressful decision – especially with housing prices rising almost twice as fast as wages, and a shortage of affordable housing in many areas. And while owning a home may be one of your goals, the last thing you want is purchase your dream home only to discover in a few months or a few years that you can’t afford it, a situation commonly referred to as being “house poor.”

Spending too much on your mortgage and other expenses related to homeownership means you’ve got less disposable income to do things you enjoy – like going out to dinner or taking vacations. You might have a nice new home, but it is hard to enjoy it when you’re stressed about being able to cover your expenses.

If you’re thinking about buying a home, here are some tips to make sure you are purchasing a home within your means.

1. Know How Much House You Can Afford

While most lenders will approve a mortgage with payments of up to 35% of your monthly gross income, you really want to keep your housing costs under 35% of your take-home pay, including any taxes and insurance. Getting that number down to around 25 to 30% is ideal, though – so you’ll have more disposable income after you pay for utilities and other monthly bills. There are lots of simple online tools to help give you an idea of how much home you can afford, like  this calculator from bankrate.com.

2. Start Saving for a Down Payment Now

One good way to lower your monthly mortgage payment, and maybe even your interest rate, is to save up for a down payment. The larger the down payment you make, the lower your monthly payments will be. It will also help you reach the milestone of 20% equity in your home faster, which is important because lenders usually require homeowners with less than 20% equity to carry Private Mortgage Insurance (PMI). PMI protects the lender if you stop paying your mortgage and is often added to your monthly mortgage payment. PMI can cost as much as 1% of your entire loan amount, so not having to pay for PMI can save you thousands of dollars per year.

3. Work on Your Credit Score and Pay Off High-Interest Debts

The better your credit score, the lower the interest rate that lenders will offer, which can translate into lower monthly mortgage payments. So it pays to look for  ways you can improve your score. Just as importantly, pay off those high-interest debts first. This will help you save money on interest payments, and free up more of your income.

4. Plan for Changes to Your Income and Expenses

Buying a house is a long-term commitment, so make sure you plan ahead. Things like changing careers, starting a business, going back to school, or starting a family can have a big impact on your finances – so keep them in mind when considering how much home you can afford. The last thing you want is for these otherwise positive changes to put you in a situation where you become house poor.

5. Manage Your Expectations 

When you picture your dream home, you want everything to be perfect – the right neighborhood, the right size, the right style, and all within your budget. But if you’ve ever watched a show like Property Brothers, you know this is often unrealistic. Finding the home that’s right for you is often a matter of compromise – moving farther away from the city or into an up-and-coming area can get you more house for the same price, but it may mean a longer commute and a less than ideal location. When looking for, and purchasing a home within your financial means, you may need to realistically assess your “must haves” versus your “nice to haves”, maybe opting for a smaller home, an older home, or a home that isn’t located in your ideal neighborhood.

6. Consider a Fixer-Upper and Plan for Repairs

New and newly remodeled homes often come with a premium price tag. Homes that haven’t been renovated recently can make your mortgage stretch a lot further if you’re willing to put in the work. But you also need to make sure you know what you’re getting yourself into and budget accordingly. Older homes can end up coming with major expenses you may not expect, like a furnace that suddenly stops working or a leaky roof. It’s important to have the home inspected before you buy, as well as a renovation plan and a contingency plan for unexpected expenses if you want to avoid becoming house poor.

7. Avoid Lifestyle Inflation

When you first buy a home, it can be tempting to redecorate everything all at once. You may have more space to fill or maybe your old furniture just doesn’t fit the style of your new house. Or maybe you just got a raise, and it’s making you think about putting in a new deck or a swimming pool. It’s easy to get carried away at times like these without thinking about the short- and long-term impacts on your finances.

8. Understand Your Mortgage Options – Especially Adjustable Rate Mortgages (ARMs)

Mortgages with shorter terms like 15 years can be an attractive option if you can afford them, since they can save you tens of thousands of dollars over the life of your loan. Saving money later at the cost of becoming house poor now, however, is not generally a good trade-off and could end up costing you more than it saves you.

ARMs are also a popular option, especially if interest rates are high – and they often come with a set introductory rate that is lower than similar fixed-rate loans. The introductory rate can last as long as 10 years in some cases, but especially when the introductory rate is shorter, it’s important to understand how your monthly payment can be affected.

Refinancing Your Mortgage – A Tip for Longtime Homeowners

Becoming house poor isn’t something that only happens to new homeowners. Even if you’ve been in your home a long time, your income and your expenses can change – maybe your rate went up or you’ve spent a lot out of pocket on home improvements and repairs. If it feels like your disposable income is shrinking or your expenses are rising, refinancing your mortgage can help put you on better financial footing.