Wouldn’t it be nice if buying a home were as easy as walking into a store and out with a new smartphone? Unfortunately, it’s hardly so simple. As I’m finding out, getting ready to buy a home requires a ton of preparation (not to mention saving). But as I give this decision a lot of thought, I’m still amazed by all the people you read about who bought way too much house.
Although it seems like common sense, perhaps I need to restate this cardinal rule of home buying: Before you even start seeing properties, know how much house you can afford.
Fail to heed this advice, and you’ll wind up house poor.
House Poor: A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations… — Investopedia
Some people become house poor when their income plummets and they stay in an expensive mortgage payment. Others create the problem by buying too much house to begin with. Whatever the cause, the financial consequences of being house poor are dire and often include creeping credit card debt and an inability to save enough for retirement.
So how can you avoid the situation altogether?
KNOW THE REAL COSTS OF OWNING
The best way is to keep that mortgage payment in check.
The rule of thumb is that your entire mortgage payment should be no more than between 28 and 33 percent of your income. In addition, you want to keep your total debt to income ratio (your monthly debt payments, including the mortgage, divided by your income) below 40 percent.
Second, it’s important to realize the financial difference between renting and owning that almost everybody overlooks: A home requires maintenance and upkeep!
The contributing costs range from the trivial, like leaky faucets and torn screens, to big replacements like a new AC or roof. But just how much does home maintenance run? Ilyce Glink, author of 100 Questions Every First-Time Home Buyer Should Ask warns, “You can expect to spend anywhere from a couple thousand dollars to more than $10,000 per year, depending on the size and condition of the house, on general maintenance.”
That’s a big difference from what you’ll spend on upkeep as a renter (zero).
ENSURE YOU’RE (REALLY) READY TO BUY
The best way to avoid becoming house poor is to only buy a home when you’re honestly ready. Just because you can doesn’t mean you should. A bank will likely approve you for a mortgage for up to 35% of your gross (before tax) income if you 1) have good credit 2) have held a job for two years and 3) have cash to use as a down payment.
But a house is a big commitment, and there are good reasons not to buy a home. For example:
- You think you might want to move in less than five years.
- You’re unsure how long you’ll earn as much money as you do today.
- You don’t want to be bothered by home maintenance.
- You want to spend money on other big things, like travel, education, or a wedding.
And if you’re worried that you’re throwing money away on renting, consider this: Any return on investment you may be losing by renting really isn’t a loss if you factor in possible credit card debt and defaulting on your mortgage if you become house poor. And in this economy, your house probably wouldn’t be an investment anyway. According to this article at the Wall Street Journal blog, home prices have plummeted to 2002 numbers.
Living house poor not only hurts your finances, it takes a toll on you mentally and physically. Knowing that your income and your home expenses rule your life can be a great source of anxiety. Being house poor removes the liberating feeling of being in control of your finances. Ironically, we Americans view home ownership as the ultimate symbol of financial security and success, but if you’re living house poor, your finances are anything but secure.
As I’m finding, it’s better to make slow, thoughtful moves towards home ownership instead of jumping in too early and becoming house poor. When you’re really ready to own a home, the experience will be that much more sweet.
What about you? Are you or have you ever lived house poor? How’d you get there, and what strains did too many housing expenses put on your finances?