![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/06\/house-poor-location.jpg\")
<\/a>What exactly is house poor?<\/h2>\n
We hate to say \u201cit depends,\u201d but the definition of house poor really does depend on your income, location, financial goals, and debt. What\u2019s house poor to one homeowner may be perfectly acceptable to another.<\/p>\n
In its most basic terms, house poor means you are spending more than you can afford on your mortgage or can barely meet other payments (regardless of the proportion of income you\u2019re spending on the mortgage).<\/p>\n
You may hear a general rule of thumb to spend no more than 25% to 30% of your household\u2019s total take-home income on your mortgage, which includes taxes, homeowner\u2019s insurance, interest, and private mortgage insurance (if applicable).<\/p>\n
However, when it comes to safely taking out a mortgage, a more important figure to look at is your DTI, or debt-to-income ratio. This is what your lender will look at when deciding how much home you can afford.<\/p>\n
Your debt-to-income ratio looks at your total monthly debt payments (including credit cards, student loans, car payments, etc) and compares it with your monthly gross income. Basically your DTI is the percentage of your income you\u2019re paying toward debts each month.<\/p>\n
Most lenders will allow a DTI up to 43% (some programs may even go slightly higher), depending on the specifics of your financial situation. And while that allows for a bit more wiggle room, that means if you already have high debt payments each month, you may not be able to afford a mortgage payment that eats up as much as 30% of your take-home income.<\/p>\n
How do people become house poor? They may take on a bigger mortgage payment than they can realistically afford. Or perhaps their income significantly decreases after purchasing the house. This change in income may be due to a job loss, demotion, or personal decision to stop working. Unexpected life events may also lead to significant income loss, such as a serious illness, injury, or even death of a working household member.<\/p>\n
Additional expenses can also push homeowners into financial hardship, such as:<\/p>\n
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- Adding kids or other family members to the household<\/li>\n
- Costs associated with going back to school or starting a business<\/li>\n
- Unexpected home maintenance and repair costs<\/li>\n<\/ul>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/06\/house-poor-budget-666x381.jpg\")
<\/a>Source: ADragan \/ Shutterstock.com<\/figcaption><\/figure>\n How to avoid a house-poor future<\/h2>\n
Thankfully, there are some steps you can take to set yourself up for financial success as a homeowner.<\/p>\n
Maximize your down payment<\/h3>\n
First, make sure you\u2019re saving as much money as you can for a down payment. You\u2019ll pay this amount upfront, and your mortgage loan will cover what\u2019s left over.<\/p>\n
How much should you save for a down payment? Twenty percent of the home\u2019s value is often the suggested target<\/a>. If you put down 20% or more, you\u2019ll be able to avoid private mortgage insurance<\/a> (also called PMI on conventional loans, or just plain \u201cmortgage insurance\u201d or \u201cMI\u201d when applied to a government-backed loan). PMI is designed to protect mortgage lenders in case of default. Once your outstanding mortgage balance falls to 80% of the home\u2019s value, you can generally have the PMI premium removed (although you may need to refinance to a new loan to remove mortgage insurance on certain government-backed programs).<\/p>\n
Twenty percent may be attainable for prospective buyers with significant savings or those who already have equity in a home. For others, it may make more sense to shoot for a smaller figure and work to build up equity in the home. To help you determine a reasonable amount to save for a down payment (factoring in your loan type, home value, and market), crunch some numbers with a down payment calculator<\/a>.<\/p>\n
As you look at your options for a down payment, be sure to explore various financing options. There are many different types of mortgages out there<\/a>. If you qualify for a VA<\/a> or USDA loan, you may not need a down payment at all.<\/p>\n
Budget for maintenance and more<\/h3>\n
No matter how much you decide to put down, you\u2019ll need to budget for the ongoing costs of homeownership. These costs include property taxes, homeowner\u2019s insurance<\/a>, utilities, HOA fees<\/a> (if applicable), and maintenance. It\u2019s critical to factor these costs into your budget on the front end before getting a mortgage. That way you can land on a monthly payment that suits your long-term financial goals and doesn\u2019t leave you feeling strapped.<\/p>\n
Many first time homebuyers are surprised by the cost of basic home maintenance and even more taken aback by the financial damage major repairs can cause. There are many factors that play into how much home maintenance will cost you including past upkeep, value, location, size, and age of the home.<\/p>\n
You\u2019ll want to set aside a minimum of 1% to 2% of your home\u2019s value each year for maintenance and repairs. Get comfortable performing basic maintenance<\/a> to save money and flex your homeowner skills. A seasonal checklist can also help you stay ahead of minor issues<\/a> before they turn into expensive problems. Aubrey Cook<\/a>, a first-time homebuyer specialist in Colorado Springs, Colorado<\/a> who sells homes 39% faster than the average area agent, advises her clients to make home maintenance a priority.<\/p>\n
\u201cYou have to see a home just like a car. Every so many miles you\u2019re changing the oil or the filter, for example. It\u2019s the same thing with a home. If you don\u2019t perform regular maintenance, just as with a car, your house will become run down and have issues. It\u2019s the exact same thing \u2014 just on a larger scale.\u201d<\/p>\n
Polish up your credit score<\/h3>\n
Your credit score<\/a> is a critical piece of securing a mortgage and making homeownership happen. Lenders weigh it heavily when determining if you qualify for a loan and how much they\u2019ll lend you. Your credit score paints a picture of your payment history for lenders. You don\u2019t need a credit score of 800 to buy a house, but you should work to get it into tip-top shape before applying for a mortgage. A better score will help you snag a lower interest rate on your mortgage, which means lower premiums and a more flexible budget.<\/p>\n
If you don\u2019t know your credit score already, start by getting a free comprehensive credit report<\/a> from a trusted provider. You\u2019ll want to look for any inaccuracies so you can have them removed before applying for a mortgage. Then, work on quick wins to raise your credit score<\/a> step-by-step.<\/p>\n
Lower your debt<\/h3>\n
Next, take a look at your debt-to-income (DTI) ratio by adding up all of your monthly debts and dividing them by your monthly gross income. Your DTI will need to be 43% or less (including your mortgage payment) for most lenders. However, depending on your monthly expenses, a DTI just below 43% may still be too high for you to avoid becoming house poor.<\/p>\n
Mortgage banker Jenny Breaux of Renasant Bank<\/a> recommends taking a more conservative approach.<\/p>\n
\u201cThe generally accepted answer to avoiding becoming \u2018house poor\u2019 is the 28\/36 rule. This means that 28% of your gross monthly income is spent on total housing expenses and your total debt (car, credit cards, loans, student loans, mortgage) should stay under 36%.\u201d<\/p>\n
There are also down payment assistance programs for certain professions<\/a> and low-to-moderate-income homebuyers<\/a>.<\/p>\n
Shop for what you can really afford<\/h3>\n