Now that we know what it means to be house poor, how do people get that way in the first place? First-time homeowners may simply not plan beyond the costs of buying a house – and the down payment and closing costs are just the start of the lifelong expenses of owning a home.
But the costs of owning a home are 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.
Homeownership Costs
It's a good idea to do research on future household expenses before moving forward with a home purchase so that you're not surprised in a big way.
Many expenses may cost more than you think they will, so the more you know going in, the better you can be prepared. 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. Don’t forget to factor in costs like increased transportation expenses or services like landscaping or snow removal.
On top of the greater expense, there’s just a lot more of them. For example, if you’re moving from a city apartment where you dispose of garbage through a chute, you’ll have to buy garbage cans and bags. If you’ve never had to think about the garbage cans, you may be surprised to learn their cost and how many you’ll need. Also, you’ll need items like shovels, rakes, wheelbarrows and household tools for basic lawn maintenance and repairs. It adds up quickly.
Here are some of the big-ticket expenses beyond the mortgage to think about.
Although these are usually included in your monthly mortgage payment along with homeowners insurance if you have 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 had 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, you’ll have to pay HOA fees in addition to property taxes and homeowners insurance. Unlike these other expenses, though, HOA fees are not 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 rates 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 often 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 or, in a buyer’s market, ask the seller to include a home warranty with the purchase.
Being house broke or house poor means you're spending too much on housing expenses, relative to your income. This leaves little money left for savings or paying other bills, and can result in accumulating debt to cover daily living expenses.
If you are worried about becoming house poor, or already find yourself in this situation, there are some options. You can look to boost your income through a side job or gig work, and look to cut costs elsewhere. Refinancing a mortgage may be an option, especially if interest rates have fallen.
Your house and the expenses that go with it still represent only one piece of your monthly budget. Becoming house poor can affect your ability to save for retirement, pay off debt or afford other purchases.
The answer is yes. You can buy a house with a low income. While there's no universal minimum income requirement to buy a home, all home buyers must meet a lender and loan's financial criteria to qualify for a mortgage.
What is house poor? The expressions “house poor” and “house broke” refer to a situation in which homeowners are spending more than they can afford on housing costs. This can include mortgage payments, property taxes, insurance, maintenance or utilities.
Yes, you can buy a house if you make 25K a year. But purchasing a home on any income takes planning. You first need to understand how banks assess whether or not they'll give you a mortgage loan, what down payment assistance is available, and other factors that influence your ability to buy a house.
Lenders often use the 28/36 rule as a sign of a healthy DTI—meaning you won't spend more than 28% of your gross monthly income on mortgage payments and no more than 36% of your income on total debt payments (including a mortgage, student loans, car loans and credit card debt).
Millennials Got Cheaper Mortgages Than Their Parents
“As Gen Z looks to buy their starter homes in the next few years, they will face both high rates and high prices. It may be years before the housing market is affordable again,” Allison explains.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
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.
On a state level, California (43%), Hawaii (42.4%), New York (39.3%), New Jersey (37.7%), and Massachusetts (37.1%) have the greatest share of house-poor households.
How much of my salary should I spend on a house? 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.
Since renting an equivalent home is often cheaper than owning it, you may be able to take being house poor off the table and invest your cash flow difference toward your long-term goals.
Together, 54 percent of America's working poor—7.5 million households—pay over half their incomes for housing, according to the Center for Housing Policy. There are two ways to solve this problem: 1) raise wages, and 2) provide more subsidized housing to help fill the gap between incomes and rents.
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