Buying a house can be an exciting prospect, but detrimental to your finances if something goes wrong or is overlooked. Home buyers can find themselves house poor if any of the following happens:
They Underestimate Their Homeownership Costs
First-time home buyers may simply not plan beyond the money needed to buy a house – the down payment and closing costs are just the start of the lifelong expenses of owning a home.
Meanwhile, the costs of owning a home can be significant, and you should include them when you’re creating your house buying budget. More than the monthly mortgage payment goes into buying a home.
If you’re moving from an apartment or condo to a single-family house, you may be shocked when you get your first utility bill, which may be higher than you’ve been paying for a smaller home. You should also factor in costs like increased transportation expenses or services like landscaping or snow removal. There may also be trash pickup services to pay for, and you may need to purchase garbage cans as well.
If you have a lot of yard space, you’ll need items like shovels, rakes, wheelbarrows and household tools for basic lawn maintenance and repairs. It adds up quickly.
Property Taxes
Although these are usually included in your monthly mortgage payment, along with homeowners insurance in an escrow account, one of the important things to realize is that your mortgage lender is preapproving you based on an estimated initial property tax.
This is one of the biggest items that changes after you buy a home. Your home’s previous owner disclosed what they’d been paying based on the home’s assessed value. If you paid significantly more than their assessed value, your taxes rise accordingly because your purchase price becomes the new assessed value of the home.
Visit the website of the property taxing authority where your new home is located to find out exactly what your tax bill will be after purchase, whether there are any property tax rate hikes on the horizon and how often property values are assessed.
Homeowners Association (HOA) Fees
If the home you’re considering is located within a homeowners association (HOA), you’ll have to pay HOA fees in addition to property taxes and homeowners insurance. Unlike these other expenses, though, HOA fees aren’t included in an escrow account and aren’t part of your monthly mortgage payment.
Because of this, they can be easy to forget until they become due. They also tend to rise over time. There can also be special assessments to meet major maintenance costs. Check the homeowners association meeting minutes for at least the past year to see if there are any plans for major maintenance on the horizon.
If you fail to stay current on your HOA fees, you may face penalties and interest on those fees. If you don’t pay, eventually you’ll have a lien placed on your property, which will make it difficult to refinance or sell your home.
Maintenance Expenses
Something is eventually going to break in your home. While it’s impossible to say when, you can make some educated guesses based on how old the home is and when major systems, the roof and any included appliances were last replaced. Maintenance costs are often between 1% – 3% of the purchase price of your home each year. Whether you can expect to be at the low or high end of that range typically depends on the age of your home.
If you’d prefer to have a stable home maintenance cost that handles unforeseen contingencies, you may want to consider a home warranty.
They Experience A Change In Circ*mstances
If you’re approved for a mortgage based on your monthly income, you could struggle to afford your monthly mortgage payments if you lose your job. Unless you can find another job quickly, your finances could take a huge hit.
Your circ*mstances can change outside of your employment as well. The costs of living in your area could go up suddenly, or the interest rates on your credit cards could rise.
For these reasons, it’s important you try to leave room in your budget for emergencies, raising costs and potential loss of income.
“House poor” refers to the situation where a homeowner buys a home beyond their means, and their new home becomes more of a financial burden than a positive investment. Struggling to keep up with housing expenses doesn't leave a lot of room for fun or discretionary spending, either.
Key Takeaways. A house poor person is anyone whose housing expenses account for an exorbitant percentage of their monthly budget. Individuals in this situation are short of cash for discretionary items and tend to have trouble meeting other financial obligations, such as vehicle payments.
The conventional rule of thumb for house poor is the 28%/36% rule. Keep your housing costs under 28% of gross income and all of your debt payments including your mortgage under 36% of gross income.
Meanwhile, according to a recent study using Census Bureau statistics, 27.4% of homeowners are “cost burdened,” or “house poor” — meaning they pay more than 30% of their income on housing.
House poor means you've overextended yourself on the mortgage and need to make cuts elsewhere. It's a range, some people are a little house poor and others a lot. Upvote 191 Downvote Reply. Nimradd. • 1mo ago.
Given all of these factors, most experts recommend having a minimum of 6-9 months' worth of living expenses after closing. Some advise having up to 20% of the home's value leftover in cash reserves, though this is not practical for every home buyer. Ultimately how much you need depends on your own financial situation.
A homeowner is considered house-rich, cash-poor when they have wealth tied to their home but lack readily available cash to meet their everyday living expenses. Being cash-poor can result from a myriad of factors, such as unexpected expenses, debt, budgeting issues, medical concerns, or reduced income.
This rule says to choose a home priced at about 2.5 times your annual household income, but for this rule to work, it really depends on where you live; 2.5 times your household income in California, where the homes are quite expensive, might not go as far as somewhere in the Midwest.
California doesn't have a set minimum income to obtain a mortgage. Agencies such as CalHFA offer mortgage loans designed for low-to-moderate-income borrowers. CalHFA does not directly approve individuals for mortgages. Instead, a CalHFA-approved lender like New American Funding will service the loan.
Apply the 28 percent rule: What is 28 percent of your monthly income? That's the amount that you should not exceed in house-related expenditures. Don't over-finance: Just because you get preapproved for a particular amount does not mean you need to spend it all.
If you make $60,000 per year, you should think twice before taking out a mortgage that's more than $180,000. However, if you have a partner, and your combined income is $120,000, you can comfortably increase your loan amount to $360,000.
Most of the top 30 “house poor” cities are in just two states, Florida and California, according to the report — The Sunshine State is home to six of these cities, while a staggering 14 are in the Golden State.
The 28% rule is a general guideline that says you should try to spend no more than 28% of your monthly gross income on housing expenses. To determine what your monthly homeownership budget should be under this rule, simply multiply your monthly income by 28%.
How much house can I afford with 40,000 a year? With a $40,000 annual salary, you should be able to afford a home that is between $100,000 and $160,000. The final amount that a bank is willing to offer will depend on your financial history and current credit score.
To determine how much you can afford using this rule, multiply your monthly gross income by 28%. For example, if you make $10,000 every month, multiply $10,000 by 0.28 to get $2,800. Using these figures, your monthly mortgage payment should be no more than $2,800.
The 28/36 rule, a commonly used financial guideline, states that you should spend no more than 28 percent of your gross monthly income on housing costs. Be sure to factor a down payment and closing costs into your budget too.
Introduction: My name is Velia Krajcik, I am a handsome, clean, lucky, gleaming, magnificent, proud, glorious person who loves writing and wants to share my knowledge and understanding with you.
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