Many people end up “house poor” because of poor communication, unrealistic expectations, or just plain wrong information. Although purchasing a property can be a great long-term financial investment, sometimes individuals will find themselves with a home that their monthly income can barely afford, leaving them house poor.
In this situation, the homebuyer is left with very little money to put toward their regular expenses or save. Little things like the need for new furniture, car repair, or medical expenses could become huge issues. It won’t take much to put you into severe debt if you’re already house poor.
You also won’t be able to put as much money as you’d like into your retirement fund or emergency fund. Additionally, your ability to pay off additional debts will be impacted, negatively affecting your credit score.
All of that said, here’s how to avoid being house poor.
[Related: Six Mistakes New Homebuyers Make]
Think of Your Home as an Investment
One big mistake homebuyers make is failing to think of their home as an investment.
Real estate is a great long-term investment since it naturally appreciates in value. However, in order for it to give back in the long run, homeowners need to keep up on its maintenance and take care of their investment.
This type of mindset needs to happen before you even close on the home. If a property you’re interested in is beautiful, but requires a lot of work or is outside of your budget, you need to consider whether or not the investment makes sense.
Budget What You Can Afford
When you purchase a home, you shouldn’t simply calculate whether you can afford the down payment. Your responsibility is to ensure you can afford your monthly mortgage — with living expenses to spare.
Lenders can run some calculations to determine your monthly payment budget, but you’re the only one who really knows your financial situation and spending habits. Lenders also typically rely on your gross income rather than what you actually take home, which could skew the amount you can actually afford.
Take into consideration your lifestyle, all of your bills, taxes, health insurance, and what you need to be putting into savings before you take the plunge to close on a home.
Although it really depends on your specific financial situation, most financial planners and experts recommend that mortgage payments should be 25-35% of your monthly take-home pay, with a more conservative approach leaning toward 25%.
[Related: Can I Afford to Buy a Home in Seattle?]
Consider All Extra Costs
Make sure you’re considering all of the additional costs before deciding that you can afford your monthly mortgage payments on your dream house.
Gas, heat, water, electricity, garbage, cable, and internet are all utilities that will require regular payments — and they can add up fast. A lender working to create a budget for your monthly mortgage won’t factor these in.
Does your potential home require a lot of work? You should also be budgeting this in order to avoid being house poor.
Write down a list of all of the maintenance that you know needs to be done on the property, and prioritize what needs to be done as soon as possible versus what can wait. These are additional costs that you’ll need to take into consideration.
From hiring movers and truck rentals to decorating and buying new furniture, moving in can really cost you. Don’t forget to calculate these initial move-in costs when preparing your budget for your new property.
[Related: Important Tips for Millennial Homebuyers]
Make a Larger Down Payment
One way to avoid being house poor is to save up and make a larger down payment. This will not only help build your home equity, but it will make your monthly payments smaller. Banks will typically offer a lower interest rate if you pay a larger down payment upfront as well. If you can do it, consider making at least a 20% down payment.
Look Into More Affordable Homes
A beach-side mansion sounds great, but is it feasible?
Even if you can afford the monthly payments, you need to have money left over for maintenance, utilities, and general living expenses. Make sure the home you are looking at isn’t out of your price range, and is one you can actually comfortably afford.
Ensure That You’re in a Secure Situation
Just because you can purchase a home doesn’t necessarily mean you should. If your job situation isn’t stable, or if you’re considering the possibility of long-term travel or relocation in the next five years, you might not be in the best situation to purchase a home just yet. And that’s okay!
Take the time to save up, use these tools to learn how to avoid being house poor, and cement your future plans.
Contact Seattle Mortgage Planners Today!
Seattle Mortgage Planners has all of the resources you need to make an informed decision when purchasing a home. We can also help you find the best mortgage rates around. Contact us today and let’s get started on your homeownership journey.
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