I keep hearing stories from people who, after buying their first home, become immediately overwhelmed by the financial toll of homeownership, especially when they spend more than they can actually afford. And, when buying your first home, it can be so easy to get in over your head.
When we were in the process of buying our first home, we were given a pre-approval amount of $150,000.
If we would have bought a house for that amount, I’m sure it would have led to us being house poor, which is when you buy more house than you can actually afford. While that amount may not seem like much to some, it was more than enough to purchase a good starter home in St. Louis, where we were living at the time.
This $150,000 number seemed high to us because we were quite young, just 20 years old, and we both had mediocre jobs. Yes, we were both working full-time, but our yearly salaries put together were still very low, and I definitely do not think we should have been approved for $150,000. If I remember correctly, our annual take-home income was only around $30,000.
Thankfully, we did not buy a house that was $150,000. Instead, we made sure to buy a house for much less because we didn’t want to be stressed out by large monthly mortgage payments that we couldn’t afford.
According a report on Trulia about home buying trends (this is not sponsored in any way), homebuyers are spending more and more money in order to buy a house. And, I’ve personally noticed this when I’ve talked to people. People are going bigger and bigger when it comes to purchasing a home, which means many people are likely spending over their actual purchasing ability.
I did some more research, and according to Business Insider, Americans are spending approximately 37% of their take home pay, on average, to put towards housing.
That is a lot of money to spend on housing, especially if you are not aware how this will impact your financial life. This can lead to being house poor, which can cause even more problems.
If you are unfamiliar with the term, house poor means you have spent most of your money on your mortgage without leaving enough for additional expenses.
Being house poor can lead to many problems in your life. While having a roof over your head is a great thing, it can be easy to let home expenses get the best of you if you don’t do enough research before you buy.
You might be surprised by how many people are house poor, and just because your neighbor or friend has a nicer house than you does not mean they are doing better than you. So many people see housing as a status symbol but don’t really think about how this may impact their financial situation.
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Below are some of the many different ways being house poor can limit you. When buying a home, please keep the following in mind.
Can you afford all of your home expenses?
Buying a home can easily lead to being house poor if you don’t do enough research on the total cost of homeownership. This can limit you because you may be even more house poor than you originally thought.
When some families buy a home, they don’t think about the total cost of their house. While you may be able to afford the monthly mortgage payment, you may not be able to afford things like insurance, taxes, utilities, etc.
When you find a house that you think is right for you, you need to make sure that you can afford ALL of the costs that come with that house.
Just because you can pay the monthly house payment doesn’t mean that you can afford everything else that goes with it. There are ongoing costs when buying a house, which is something that many homebuyers forget about.
In fact, according to Zillow:
U.S. homeowners, on average, spend more than $9,000 per year in hidden homeownership costs and maintenance expenses.
U.S. homeowners pay an average of $6,042 per year in unavoidable hidden costs: homeowners insurance, property taxes and utilities.
U.S. homeowners pay an average of $3,435 per year in annual optional costs, including house cleaning, yard care, gutter cleaning, carpet cleaning, and pressure washing.
Before making a home purchase, you should think about how much this house will cost you in the long run. There are many ways to think of this, such as:
Property taxes- These vary widely from town to town. You may find yourself looking at two similar houses with similar price tags, but the property taxes may vary by thousands of dollars annually. This can add up to a lot of money in the long run. While it may seem small when compared to the actual home purchase price, remember that you have to pay property taxes annually, and a difference of just $3,600 a year is $300 a month for life.
Gas– Many homes use gas to run the hot water heater, the stove, and so on.
Electricity– Generally, the bigger your home, the higher your electric bill.
Sewer– This isn’t super expensive, but if you own a home, then this is a bill you may have.
Trash– This isn’t super expensive either, but it does cost money.
Water (and possibly irrigation)- Depending on how you use water and where you live, water bills can vary widely. I know many who live in areas where the average water bill is a few hundred dollars each month.
Home insurance- Home insurance can be cheap in some areas but crazy expensive in others. Don’t forget to look into the cost of earthquake, flood, and hurricane insurance, and know that it can add up quickly depending on where you live. Flood maps, for example, are easy to access and should be checked before understanding the cost of insurance and home ownership.
Maintenance and repairs- No matter how old your home is, even brand new homes, repair and maintenance costs will eventually come into play. In fact, U.S. homeowners pay an average of $3,435 per year in optional costs, including house cleaning, yard care, gutter cleaning, carpet cleaning, and pressure washing. But, don’t forget about things like needing a new roof or other repairs that may come up!
Homeowners association fees- This can also vary widely. You should always see if the house you are interested in is part of an HOA. The fees may be high, and it may involve rules you may not like.
Home furnishings- Furnishing your home can be done cheaply, but I know some who buy huge homes and can’t afford to put anything in them, such as a table, a bed, and so on. Why own a $500,000 house if you don’t have any furniture?
Always remember to add up the total cost when deciding to buy a house!
Can you still afford the rest of your life?
If a lot of your money goes towards home-related expenses, this means you have less money for other things in your life.
This can prevent you from doing the things you want and can stop you from being able to reach financial freedom.
Being house poor may mean:
You can’t retire when you want.
You can’t go on a vacation.
You’re stuck at your job.
Your finances may make you too afraid to reach your dream.
You can’t afford the other things in life you want.
You may never feel free because you feel stuck to a large monthly payment.
Is the house going to add stress?
Banks, many times, approve home loans with monthly mortgage payments around 30% to 35% and sometimes even as high as 50%, and I personally think this is too high in many cases.
While in some cities this may be normal (such as New York City or cities in California), having a monthly mortgage payment that is less than the amounts above will make life much less stressful.
This is because the lower your expenses are, the less things, like a layoff, a firing, a large unexpected expense, and so on will impact you both mentally and financially.
If a high percentage of your income goes to home expenses, just think about how you will be impacted if all of a sudden you made less money or if your monthly expenses suddenly increased. What if all of a sudden your home expenses consisted of 50% or more? What would happen?
Even when my monthly mortgage payment was around 25% of our monthly income, I still didn’t like that.
Like I said, depending on where you live this might be hard, but I do think the lower the percentage, the better.
If you are house poor and want to change your situation, I recommend the posts below:
If you haven’t purchased a house yet.
Now, if you haven’t purchased a house yet but are thinking about it, I want to help you from becoming house poor.
Whether you are a first time home buyer or if this is your second or third house (or more!), you should ask yourself some questions: 6 Important Questions To Ask Yourself Before Buying A Home. This article goes over things such as:
Whether or not you can afford a home.
The factors you should think about before purchasing a home.
And more.
I recommend purchasing less house than what you are approved for. While in some instances getting a house that is similar to what you are approved for is fine. However, in many, many instances, the average person is approved for way too much house.
Like I said above, many potential homeowners are approved for home loans that are somewhere around 30% to 35% of their salary before taxes.
That’s a lot of money. This amount is before taxes as well, which means that your actual monthly home payment would be a significant portion of your take-home income each month. Many who buy at the full approval amount cannot afford their homes due to the fact that it is such a significant percentage of what they earn.
If you don’t want to be house poor, make sure to buy a home that is less than what you are approved for. You should also add up all of the costs of owning a home and make sure it is an amount that you are comfortable with.
Now, remember, banks are not there to actually tell you what you can and cannot afford. Just because you are approved for an amount does not mean that YOU can afford it.
So many people think that the banks are protecting them and that pre-approval means affordability.
But, that just isn’t true!
Please have an emergency fund.
An emergency fund isn’t just to protect you if you lose your job or take a paycut. They also exist to help you in case something goes wrong with your home.
Your roof could spring a leak, a tree may fall on your home, a pipe may burst, there may be an electrical problem, and more. Homes have many things that can go wrong, and you never know if something may need to be fixed.
By having an emergency fund, you will have money set aside to help you if something were to go wrong. An emergency fund prepares you for unexpected expenses and means you won’t need to go into debt to manage them.
Are you house poor? How much of your monthly budget goes towards housing?
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