June 7, 2021 | BY DIRECTION HOME LOAN

Buying a Home? 3 Ways to Avoid Becoming House-Poor

“House-poor” is a term that became widely used during the real estate bubble of the early 2000s. It’s used to describe the situation a homeowner faces when their housing costs require such a large portion of their income that they have little money left to pay for other things. 

The idea of homeownership might sound like a great one, but if you can’t pay your other bills or can barely afford to put food on the table, it’s a problem. The last thing you want is to have buyer’s remorse over what’s likely the largest purchase of your life.

There are, however, steps that you can take to protect yourself. If you’re thinking of buying a home, here are three ways to avoid becoming house-poor.

Save as much as you can for a down payment

Putting more money down on a home purchase means your monthly payment will be lower. You’re not paying as much principal back, and you’re paying interest on a lower balance. But a larger down payment can also bring additional savings.

A down payment of at least 20 percent will allow you to avoid private mortgage insurance (PMI), which is typically 1 percent of the loan amount each year and required on loans with down payments lower than 20 percent. If you were to buy a $150,000 home and put 10 percent down, you’d be financing $135,000, which would add around $112 worth of PMY to your house payment every month.

Larger down payments usually mean lower mortgage interest rates, too. If you want to qualify for the low rates you see advertised, you’ll probably have to put 20 percent down. A quarter-point difference on a $135,000 loan over 30 years works out to almost $30 more per month.

Don’t buy all the house you can afford

Mortgage lenders qualify homebuyers based on their house payment and overall debt obligations relative to their gross income. The guidelines say you must not spend more than 28 percent of your gross monthly income on your house payment and no more than 36 percent on your total long-term debt (car payments, credit cards, student loans).

If you earn $60,000 a year ($5,000 per month), a lender will determine you qualify for a monthly payment of $1,400. If that seems like a lot to you, it probably will be. The old rule of thumb in real estate has been “buy as much house as you can afford,” but if you’re at the very top of your budget, you might not have a lot of wiggle room.

And your utility bills, property taxes, and homeowners insurance costs are more likely to increase than decrease over time. Add in ongoing maintenance and improvement projects, and it’s easy to become over-extended by your home’s expense.

 

Expect the unexpected

Even the most disciplined spender with a perfectly planned budget can be thrown off by unexpected expenses. When you’re a homeowner, unexpected expenses are going to occur.

A roof can develop a leak. Your furnace or air conditioner can stop working. Windows, entry doors, and appliances will all have to be replaced eventually. If your budget doesn’t have room for such expenses, you run the risk of becoming house-poor.

One way to avoid becoming drained by unexpected expenses is to save for them. If you don’t buy the most expensive house you qualify for, perhaps you can afford to put 1 percent or so of the payment each month into a house savings account. That way, when something big does come up, you don’t have to go further into debt to pay for it.

The bottom line

Millions of people enjoy the perks of homeownership, but if you’re not careful, it can become a drag on your household finances. There are a few ways, though, you can avoid becoming house poor.

 

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