Ways to Avoid Becoming House Poor

by Staff

If you are thinking about buying a home, you are probably thinking about the additional space and features you will get that you might not get in your current living situation. But one thing to beware of is being house poor, which is something that happens to homeowners who can’t really afford where they live. This happens when the mortgage payment and other upkeep on the home is higher than it should be in comparison to their current income and savings. Just because you are comfortable financially right now doesn’t mean you can’t become house poor.


Try to Pay Off Other Debt First

Paying off existing debt can make it easier and more affordable to buy your home. Paying off your debt can improve your credit score, which can give you better interest rates on a mortgage or help you qualify for better terms. It also improves your debt-to-income ratio, meaning less of your income will go toward debt. You can put the difference toward a mortgage once you get one, and in the meantime, you can save the difference in an emergency fund. The fund can then be used to upgrade the home or do unexpected repairs. If you have larger debt, like student loans, it might seem like you will never get them paid off. However, even taking small steps each month can help you pay them off sooner. You can review a guide with some ideas on what you can do to reach financial freedom sooner.


Consider All Your Lifestyle Choices

Mortgage lenders evaluate your income and savings, but they won’t have all the information on your lifestyle preferences. If you like to travel, need to take care of elderly parents, or enjoy the newest gadgets, the mortgage payment you can afford might be lower than what a lender will approve you to. Ask yourself if you are willing to adjust your lifestyle habits to make a mortgage affordable. For some, getting an evening job may be the right way to go, but for others, that is simply not realistic.


Avoid Moving Too Often

House hopping happens when you purchase a home but only live in it for a little while before moving on to the next one. However, this can keep you house poor, even if the residence appreciates while you own it. There are other expenses, including repairs, property taxes, closing costs, realtor fees, and others. These can all eat away at the appreciation and give you a lower net worth overall.


Make Your Decision on Your Net Income

Many times, lenders do calculations on gross income, which is the amount you earn before bills, taxes, and benefits are taken out of your paycheck. But you will get a more realistic idea by seeing what your monthly take-home pay is and trying to keep your monthly mortgage payment at a third or less of this number. This makes it more likely that you will be able to keep up, especially when you consider the other costs of having a home.


Put a Larger Down Payment Down

Having a larger down payment can help you start off homeownership with a greater degree of equity. It also means you won’t need to pay as much each month, and it could reduce your interest rate because lenders see it as being less risky for them. Just because you can put a smaller down payment down does not mean you should. Try to put at least 20 percent of the price down upfront. 


Of course, this also limits how expensive a dwelling you can purchase, since you may not be able to afford 20 percent of the residence you have your eye on. That’s why it’s common to purchase starter homes. A starter would likely not be a dream house, but it can help you build equity in a way renting can’t do. It can also allow you to get out of renting while you work up to one you really love. It’s important to think about your wants and needs to determine what you really need for now.


Plan for Emergencies

If you can barely afford where you live, you won’t have much leftover if you need to do repairs. If you have already budgeted your income to the max and there is an emergency, you will have no choice but to go into debt. While you should have a general emergency fund for things like health emergencies and car repairs, you should have a separate fund for home repairs. That way, if a major appliance goes out or you have a leak, you can fix it as soon as possible.


Another way you can plan for an emergency is to see if you can afford your home and living expenses with one income if you have two incomes. This is especially helpful for couples making the purchase together. If you can afford the mortgage payment with one income and one person loses their job, money will not be as tight.

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The New Jersey Digest is a new jersey magazine that has chronicled daily life in the Garden State for over 10 years.

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