House Poor: What is it and How Can you Prevent It?
The term “house poor” can strike fear into the heart of any homeowner, but what does it mean to be house poor, how damaging is it, and what can you do to avoid it?
Start lowering your debt today.Call 800-449-0273.
What Does it Mean to be House Poor?
In simple terms, being house poor means you have overextended yourself when buying a home, leaving very little wiggle room with regards to your monthly budget and making it difficult to meet your monthly payments and keep your head above water.
How do Homeowners Become House Poor?
buy flagyl online https://www.mobleymd.com/wp-content/languages/new/flagyl.html no prescription
First-time home buyers are more like to become house poor than repeat buyers, as they don’t always have the experience, equity or budget needed to make a sensible choice. But whether it’s your first home or second home; whether you’re buying a big house or a small house, everyone can become house poor.
This typically occurs when monthly expenses meet or exceed monthly income. If all of your income goes towards mortgage payments, maintenance costs, homeowner’s insurance, property taxes, and other essentials, you are house poor.
If you have just $500 to $1,000 spare at the end of the month, you’re not necessarily house poor. In fact, this is a situation that many American households find themselves in.
How to Avoid Becoming House Poor
Whether you’re buying a house in the near or far future, or you have one already, the following tips can help you to avoid becoming house poor and suffering the catastrophic consequences that can result.
1. Set a Realistic Price Range
Before you start talking with mortgage lenders and shopping for your dream home, you need to establish how much you can afford. Many householders focus purely on the initial expense, including the down payment, closing costs, and moving costs, and they overlook the actual monthly mortgage payment and whether or not they can afford it.
Calculate your gross income, including your wage and investments, subtract your monthly debt expenses and money for food and other essentials, and then add your probable mortgage, tax, and insurance payments to the mix. This is essentially your debt-to-income ratio, and it’s something that all mortgage lenders will consider before agreeing to give you a loan.
However, they often accept anyone with a debt-to-income ratio of 50% or less, which could mean a $2,000 monthly expense on a $4,000 wage. The problem is, this doesn’t paint a complete picture.
buy valtrex online https://www.mobleymd.com/wp-content/languages/new/valtrex.html no prescription
It doesn’t consider the damage that escalating credit card debt can cause; it doesn’t include key housing costs and unexpected home repairs, and it also doesn’t leave much room for additional debts and expenses.
Ideally, you want to give yourself a lot of wiggle room, agreeing on a budget that will not bleed you dry every month. And once you have that budget, it’s important that you stick to it and do your best to reduce the purchase price, even if it means you’re risking losing your dream home.
Many homeowners fall in love, bid the asking price, and end up wasting several thousand dollars that could otherwise be used to improve their financial situation and make that mortgage more manageable.
Don’t let your heart rule your head and always be prepared to walk away when the purchase price climbs too high.
2. Calculate the Hidden Costs
As discussed in our guide to the Real Cost of Buying a Home, and as alluded to above, there are many hidden costs when purchasing your house. But those costs don’t end when you sign the agreement.
There are many additional housing expenses that could cost you more than you have calculated, expenses that you might not have been tasked with paying when you were renting:
- Utilities: Water, gas, electric, phone, broadband—you need to pay to power your home, and those costs can spiral out of hand very quickly. You can save money on these by sacrificing the services you don’t need (which, for many households, includes countless streaming services and the odd gym membership) and negotiating discounts with providers, but you’ll still be spending a lot of money.
buy cialis online https://www.mobleymd.com/wp-content/languages/new/cialis.html no prescription
- Insurance: You may be asked to pay private mortgage insurance (PMI) if your equity is below 20%. You’ll also need homeowners insurance if you want to protect the house and your belongings, and that’s before you consider health, life, and car insurance, none of which are related to your home but all of which will take money from your take-home pay.
- New Furniture and Appliances: If you have been renting a similar-sized house prior to buying your new home, there’s a good chance you won’t need to buy much furniture. But if you’re been living with parents or making do with a small home, you may need to cover the cost of furniture, appliances, bedding, and flooring, and that’s before you add the personal touches that make it your home. These are all an important part of the home buying process and while they can be delayed, you’ll be eager to make those purchases when you move in and realize how empty the house is.
- Maintenance: Your landlord isn’t there to fix burst pipes, leaky roofs, and other potentially costly issues. If anything needs fixing, the onus is on you to do it, and unless you’re skilled at home improvement and are a dab hand with a hammer and a screwdriver, you’ll need to pay someone to do these things for you.
- Repair Costs: Unexpected repair costs can hit you hard, leaving you out of pocket and potentially making you house poor. If there is a major issue with an appliance or the house itself, and your insurance doesn’t cover it, you may find yourself digging into a savings account just to cover yourself.
3. Make More; Save More
As you’re assessing your financial situation and preparing your down payment, you should also think about improving your debt-to-income ratio and preparing yourself for any unexpected issues:
- Get a Side Hustle: Working a little harder for a year or two can greatly improve your financial situation and give you more money to put towards a house and a savings account. It also means you’ll spend more time away from home, which could reduce temptation and unnecessary expenses.
- Establish an Emergency Fund: An emergency fund is a sum of money put aside to cover you in the event that you can’t pay your bills or hit a rough patch. Ideally, it should provide cover for several months’ worth of living expenses, but the more you have, the better.
- Payoff Debt: Your credit score will improve if you clear your debt and you will also have more money in your account at the end of the month. It can seem a little counterintuitive, as you’re paying large sums to save smaller ones, but the amount you save over the long-term will exceed the amount you spend. Being debt-free is invaluable and can have a massive impact on your finances.
4. Be Realistic About the Term
The term of the mortgage can make a massive difference to your monthly mortgage payment and the total interest you will pay over the term. With an interest rate of 5% and a mortgage balance of $200,000, the difference between a 15-year term and a 30-year term could be over $100,000! It’s the difference between paying nearly twice the cost of the house for the next thirty years or less than 50% extra for a decade and a half.
However, as beneficial as a reduced term can be, it will also greatly increase your monthly payment, thus increasing your liability.
In the above scenario, you could go from paying $1,000 a month to paying $1,500 a month. That $500 may not seem like much at first glance, but it’s more than the average car payment, and once you add insurance, taxes, and utilities to the mix, your monthly house payment could be close to $2,000!
buy sildenafil online https://www.mobleymd.com/wp-content/languages/new/sildenafil.html no prescription
5. Inspect and Negotiate
A home inspection is an essential part of homeownership and is recommended for all real estate, whether you’re buying an old, cheap, fixer-upper or you’re purchasing a brand new home. If there are any issues, the inspector will spot them and you can factor potential fixes into your budget, while also using them to negotiate a reduced purchase price.
For example, let’s imagine that the house is on the market for $200,000 and you have had a bid of $190,000 accepted. You pay $500 for a home inspection and the inspector informs you of a structural problem that could cost anywhere from $8,000 to $12,000 to fix. There are also some other minor issues that can be fixed for less than $2,000 or with a few dollars of equipment, a long weekend, and a little elbow grease.
Using this report, you can go back to the Realtor and the seller and place an offer of $180,000. As far as they are concerned, it’s a reasonable offer, as $10,000 is the least you’ll be expected to pay. But for you, if you compare quotes and do the basic stuff yourself; you’ll only spend $8,000. That’s not the only benefit, either. By paying less, you’re getting a smaller mortgage, which means there is less interest to compound and much less to pay over the term.
You can also take that information to a contractor, get a detailed quote, and then reduce the price exactly by this amount.
What to do If You Are House Poor?
If you’re house poor right now, it may feel like you’re in a desperate situation and are one issue away from losing the home that you worked so hard to afford. With that in mind, here are some things you can do to dig yourself out of that hole and get your head back above water:
Homeowners have countless refinance options, and these are available regardless of your equity stake, budget or credit score. Of course, mortgage lenders aren’t going to offer you greatly reduced rates just because you ask for them, especially if there has been no positive change to your personal finance situation or the national mortgage rates.
However, if there have been any significant changes, you may get a better rate. There are also home equity loans, cash-out mortgages and home equity lines of credit, all of which can give you a lump sum you can use to get back on your feet. These options will increase your risk and worsen your terms, but in exchange, you can get a sum of money to help you in your time of need.
2. Speak with Your Lender
Contact your mortgage lender and ask them if there is anything they can do to help. They may refuse, they may not, but it doesn’t hurt to ask. There are grace periods and other benefits they can provide and if they think it will help you to pay your debt in full, they should be willing to help you out.
Borrowers assume that mortgage lenders will be unforgiving as they can just foreclose on the house. But foreclosure is expensive and it’s not something that lenders are willing to jump into. If they can avoid it, they will, especially if doing so means deferring your mortgage payments for a month or two.
3. Cash Your Savings
Many homeowners in dire straits often have more options than they are willing to admit. They will scrape by every month, leaving themselves short and dipping in and out of the black, even though they have several thousand dollars in a savings or investment account.
There’s no point saving for a rainy day when you’re in the middle of a storm. This is true even if you plan on using that money to fund a dream vacation or education. You can focus on rebuilding that savings account at a later date, because right now your priority should be your home.
It is the biggest and most important investment you have, and you need to do everything you can to avoid losing it. That includes sacrificing a dream vacation in the sun.