When you're looking for homes, you may have heard of the term, "house poor." You are cautioned to stay away from "buying more house than you can afford" and to ensure you're not "buying too much house." Both of these phrases can be confusing, and both have to do with being house poor.
In this article, Landmark Home Warranty will explain what it means to be house poor, what can cause being house poor, and how to stop being house poor.
What is being House Poor?
When someone is house poor, it means they pay more on their home than they can afford. This may mean they don't have enough money to spend on credit card bills, food, or emergencies that arise because they're busy having to pay their mortgage.
When you get a mortgage, a mortgage broker will look at your debt to income ratio. They want to make sure your total debt should be about 36% of your paycheck, and 28% of that should be housing. Having a high debt-to-income ratio could mean you don't get approved for a mortgage. Sometimes, you can get approved for a higher mortgage than you can afford, and your debt to income ratio is extremely high. This will mean you're house poor.
Sometimes, according to Forbes.com, the homeowners may not even know they're house poor. They live paycheck to paycheck and are fine. They pay their mortgage, insurance, taxes and have enough left over to spend on food and entertainment when the month is over. One emergency that requires a chunk of savings, though, they've suddenly realized they don't have enough money to pay the extra bills that have come their way.
Ways You Become House Poor
Usually, experts say that someone becomes house poor when they're not patient and don't wait to buy a house. Instead of waiting and saving money, they buy a more expensive house that's bigger or in a pricier neighborhood and then end up paying more money than they can afford on a mortgage, insurance, taxes and HOA fees. However, it doesn't always have to do with individuals being irresponsible with their money. Buying too much house for your price range is only one way to become house poor, you can also become house poor by ...
Having a Dip in Income
Sometimes, people can become house poor when they have a sudden dip in income. They may lose a job, become demoted, or maybe one member of the family quits their job for family or medical reasons. Whatever reason there is, having a dip in their income can increase their debt to income ratio, making it so the homeowners are paying more money on housing than they can afford and are living paycheck to paycheck without any being able to save money.
Speaking of savings, not having savings when you move into a home can be a way to become house poor, and quickly! Although it may make sense for a homeowner to spend all of their savings on a down payment, you need savings to keep systems and appliances up and running in a home. Unfortunately, things break after use for long periods of time. Unless you get everything in your home brand new when purchasing it, you can probably bet that you'll have to pay money for repairs. If you don't have any savings to fall back on, nor any money left over to pay for repairs, you're going to be considered house poor.
Too Much Debt
Say you purchase a home while you already have a student loan payment, car payment and credit card debt. If you have a lot of extra money one month, instead of using it to put into savings for a rainy day, you can bet you're going to pay off some of that debt. Then, when something big happens in your home, you won't be able to pay for it because you won't have enough money.
How to Stop Being House Poor
If you're just starting out on your home buying journey, the first step to making sure you don't end up house poor is to look at your debt to income ratio. You can use this calculator to determine how much money you could afford for a mortgage payment. If you have a low debt to income ratio, you won't end up house poor if you stick with looking for homes that will keep your mortgage payment low. If you have a higher debt to income ratio, be patient. Don't jump into buying a home just yet. Pay off some debt and increase your savings and try a bit later.
If you've already purchased the home and are worried about becoming house poor in the future, you can do a few things to prevent this.
Increase your Savings
Make sure every paycheck you set a small amount of money aside so that you can save it for a rainy day. You never know when something will go wrong with your home, and you have the sole responsibility to pay to have it repaired. However, you can also save yourself some money if you ...
Get a Home Warranty
Home warranties repair or replaced your worn out and failed system and appliances that break down from normal wear and tear. If you purchase a home warranty for your abode, you can pay a small service call fee between $60-$100 to repair or replace the failed system and appliance. You'll save money on repairs and replacements and you won't have to have as much money in a savings account for repairs if you purchase one. You can compare home warranty plans here.