Updated 5/29/17, Originally published 8/7/15
- Budget off your mortgage payment, not purchase price
- Don’t assume you can or should spend everything your lender preapproves you for
- Spend as little as possible to meet your needs
What does it mean to be house poor?
It’s actually the opposite of having a poor house. Rather, it means you probably have a great house, so much so that your behemoth mortgage is sucking the life out of you and your bank account.
People who are “house poor” find themselves there for a simple reason: They bought more home than they could chew.
Having more house than you can afford can have tremendous financial consequences, of course. If too much of your income is going into your mortgage payment, then it leaves little left over for other priorities. It also means you don’t have as much money to go toward savings and other investments. Finally, if you were to lose your income somehow, that massive mortgage is going to start looking really big.
Sadly, many who are house poor are playing with fire, with potential foreclosure looming after any downturn in fortunes.
Here are some recommendations to follow so that you do not end up house poor.
1. Don’t spend everything you are pre-approved for.
When your lender pre-approves you, they will often give you the highest number they would be willing to lend to you – if your debt-to-income ratios were stretched to their breaking points.
Don’t stretch your budget to the breaking point!
A home is just like any other purchase. Just because you can spend something doesn’t mean you should. If a lender preapproves you for $250,000, but you are finding homes that meet your needs for $200,000, then spend $200,000! Spend less and count your blessings that what you want is so affordable in our area.
2. Don’t shop for things you don’t need.
It is a classic real estate agent maneuver. Show the buyer something a little bit higher than their budget and watch the buyer fall in love with a home they can’t afford. There’s several reasons agents might do this, but the main one is that they are trying to please you. You have a list of what you want in a home, and they are trying to show you the home that has everything you want, price be damned. Don’t fall in love. Stick to your senses.
That doesn’t mean it’s a bad idea to see homes at different budgets and get a feel for the market – I do that with buyers all the time. But be sure you have a list of what you need in a home and stick to it.
3. Think in terms of mortgage payments, not sales price.
Can you afford a $150,000 home or a $250,000 home?
Who knows? That doesn’t really mean anything until you see what that means in terms of mortgage payments. Can you afford $1200 or $1700 a month? Now that makes more sense. Once you’ve determined a monthly mortgage budget, your agent can work backward from that number to figure out your price range.
Also, mortgage rates, inflation, markets, and terms are changing all the time. Someone who could afford $200,000 one month might only afford $150,000 a few months later. Or vice versa.
Budget Your Ft Hood Mortgage!
- Budget based on your monthly mortgage payment, not your purchase price
- Plan on that mortgage going up
- Your lender is your #1 resource for planning your budget
4. Budget for utilities.
Your mortgage doesn’t cover utilities. Here in Fort Hood as with all military installations, Soldiers are given a Basic Allowance for Housing, or BAH. Many Soldiers interpret that as their budget. $1100 a month BAH means an $1100 mortgage. But BAH is designed to cover utilities, as well, which can be $200-$500 a month depending on the home. Be sure you are considering those unavoidable expenses.
5. Budget for maintenance.
For myself and the investors I work with, I recommend budgeting at least 10% of the mortgage/rent a month toward repairs and maintenance that may come up. Just as it is for investors, this is good counsel for homeowners. If your mortgage is $1200, budget $1320 instead, setting aside $120 (.10 * $1200) a month to a repair fund to pay for little things like air filters and HVAC services, or bigger things like new appliances or repairing the pipe that froze over winter.
Talk to a Recommended Lender!
Talking to a lender is the #2 step in buying a home (after talking to a Realtor).
View, interview, and shop for lenders in the Fort Hood area that I highly recommend.
What if you lost your job? Or had an accident? How many months could you continue making mortgage payments?
I recommend keeping a good amount of savings specifically allocated just for that purpose, ideally with six to twelve months’ mortgage payments ready and waiting. Having that handy will be a tremendous peace of mind and help in the event you have to go through some life transitions down the road.
7. Think about the future.
Is this home designed to be your dream home in which you expect to retire and eventually be found cold and stiff in your bed?
If not, then maybe you don’t need as much in a home, yet. Think more about the utility of the home, and save a little on your mortgage each month so that in 5, 10, 20 years when it is time to upgrade into your dream home, you have the resources to get what you want and can afford then.
8. Have a backup plan.
Life’s unpredictability shouldn’t stop you from buying a house. Homes are a big commitment that will extend out many years and even decades. A lot can change in that time, but the rewards of homeownership are often worth it.
But it is still good to have a backup plan. Pick a home with good resale value, in case you have to sell it down the road. The weird Art Deco home surrounded by traditional ranch bungalows might fit your Bohemian tastes perfectly but might also have a hard time attracting a buyer if you were forced to sell or rent the home.
9. Don’t get jealous of your house-poor friends.
It’s hard to compromise on your wish list when your friends have it all. They may have the built-ins, jetted tub and game room with its own ZIP code. But you probably don’t know what their real finances are. Maybe they have an inheritance or generous parents that you don’t know about. Or maybe they are frantically getting by paycheck to paycheck trying to keep afloat. It’s natural to want to have a perceived quality of life comparable to your peer group, but if you don’t heed the reality of your situation now, then reality will barge its way in later, uninvited and unpleasant.
The first step in buying a home is talking to a Realtor. A Realtor (such as myself!) can manage your expectations about what the local market can provide you on your budget.
The second step in buying a home is talking to a local lender. Besides having important information like current rates, they can estimate your mortgage at different price points.
Using your lender and Realtor as resources, be sure you are budgeting wisely for your home purchase. Your future self will be thanking you!