Caution – Don’t Let Yourself Become House-Poor

What is “house poor?” It’s that uncomfortable state of being in which you’ve purchased “more house” than you can comfortably afford.

It’s that state that prevents you from taking a vacation, going to a concert, eating out, or even eating the meals you’d like at home.

In other words, it’s that state where you have to watch every penny, because every penny needs to go to that monthly mortgage payment.

In general, financial advisers say you should not pay more than 30% of your pre-tax income for housing related expenses. That includes your mortgage payment, property taxes, HOA dues, homeowner’s insurance, etc. According to a report by the Joint Center for Housing Studies at Harvard University, by those standards nearly 40 million U.S. homeowners are house-poor.

Of course, whether that impacts you negatively depends upon your income and your other fixed or optional expenses.

Meanwhile… why not be careful when you buy and avoid the problem?

Before you begin to shop for a home, calculate what you can afford. Do this by figuring your debt-to-income ratio. This is a comparison between how much you make and how much you owe – or will owe when the housing expense is factored in.

Your mortgage broker can help you do this calculation, but do remember that your lender might not know about some of the optional spending that is important to you and your family.

Debt-to-income, along with your down payment, your credit score, and your employment stability, is a factor lenders use in determining whether you’ll be approved for a home loan – and if so, for how much.

Remember that if you buy at the top of your allowable range, you could be putting yourself at risk of becoming house poor. While most of us expect our income to increase over time, sometimes unforeseen events come along to reduce our income. Be prepared for that.

As you contemplate that purchase, note that your down payment will not be your only up-front expense.

You’ll also need cash for closing costs, which typically range from 2% to 7% of the purchase price.

Yes, in some instances the seller will cover some of these costs, but that is less likely in a tight market when there are more buyers than homes available.

Here at Homewood Mortgage, the Mike Clover Group, we’ll be happy to do the calculations and show you just what you’ll need for a down payment and closing costs. Then, based on the interest rate we can offer, we’ll help you determine the top price you should pay for a home.

After that, remember that your mortgage payment, taxes, etc. are not your only household expenses.

All homes require maintenance from time to time, and sometimes repairs are necessary. You’ll also need to pay for utilities (which cost more, the larger the house is).

Keeping an emergency fund is a wise idea.

None of us knows what the future will bring, and while we expect only good things, sometimes we get unwanted surprises.

What if you (or your spouse) lose your job or become ill and can’t work? What if the house needs some major repair? It’s best to keep a reserve fund of 3-6 months’ worth of house payments and living expenses, just to be safe.

If you never have to use it, all the better. You’ll have had peace of mind.

Consider your overall dreams and goals before purchasing a house.

Yes, you’ll either make a payment or pay rent each month, but before you use your savings to make a down payment, consider your other goals.

Would you be better off saving to ensure a comfortable retirement? If retirement is coming in just a few years, would you rather save that money to purchase a motor home and travel the country?

If you’re a parent with school-age children – If you purchase now will you still be able to help your child get a college education? If you’re about to become an empty-nester, would you like to have the option to pick up and move to a different climate – without having to wait to sell your home?

Purchasing a home is a life-altering event, so consider all the angles before you make the decision.

And then, if the decision is “Yes,” give us a call at Homewood Mortgage, the Mike Clover Group. We offer some of the lowest rates and fees available in Texas, along with short closing times – all served with a smile.