WHAT IS HOUSE POOR? How To Identify And Avoid It

The term “house poor,” or “home poor,” refers to homeowners who can barely afford the regular expenses linked with their homes. It usually happens when a homeowner’s mortgage payment is too large in comparison to their income, cash flow, or net worth, or when there is little money left over after paying their mortgage and other recurring house obligations. In this post, we’ll discuss what it means to be house poor and the issues that come with it. After addressing how people become house poor, we’ll explore how to avoid it and what to do if you’re already in this condition.

What Is House Poor? 

House poor is a situation in which an individual spends a considerable amount of their monthly income on housing expenses, such as monthly mortgage payments, property taxes, and utility bills. They may not be able to meet their other financial or personal goals because of this excessive spending. As a result, people in this circumstance often struggle to keep up with other financial responsibilities. You may be able to pay off every bill that accrues to your property but in reality, you are drained and left with little or nothing. Irrespective of how much you earn, being house poor will limit your long-term financial goals. This is because you spend a large portion of your earnings on housing expenses. One of the reasons why people get stuck in this situation is because they were not cognizant of the entire costs of owning a house.

How Do I Deal With My House Poor Situation?

If you are house poor, doing any of the following could help you out of the situation. 

1#. Remortgage Your House

If you are house poor, you can choose to refinance your home. You may visit other mortgage providers or simply consult your mortgage provider for a remortgage. Remortgaging will give you a reduced monthly payment over a longer period. Also if your home equity increased because of the recent rise in home values around the country, or the modifications you’ve made then refinancing may be your best option. 

#2. Selling Your House

Another alternative is to sell your home and downsize if you are no longer able to afford the property you currently possess. However, you may be departing from your ideal residence, either permanently or only for a short time. As a result of your newfound financial stability, you’ll be able to focus on other aspects of your life.

#3. Put a Stop To Extraneous Spending

Another way to deal with your house’s poor situation is by limiting spending that is not necessary. Spending on necessities should be your topmost priority. If you’ve just suffered a financial setback, such as the loss of a job or an unexpectedly large cost, you may be able to help yourself by restricting or eliminating your discretionary spending.

#4. Your Savings To The Rescue

You may need to dip into your emergency reserves in the event of a major financial setback to get back on your feet in the long run. 

#5. Increase Your Earnings

If there is anything you can do to increase your earnings, such as taking an additional job, asking for a raise at the office, or starting a side hustle or part-time job. An increased income will enable you to take care of your excesses.

Indicators That You May Be House Poor

No one earns to take care of housing expenses alone. You sure will like to save for other things such as a vacation to your favorite island, retirement, and so on. So if you note the occurrence of the following parameters, watch out, you may be house poor.

1. When you spend a large portion of your income on property expenses.
2. Switching to your saving account often to pay up your mortgage for the month
3. Being unable to set aside some of your earnings for future use.
4. When there is no fund in place to handle emergencies.
5. Most times, you can’t afford to go on vacations or pursue other luxuries. 
6. Find it hard to spend on yourself once in a while because you have a mortgage payment to clear.

The Real Cost Of Becoming A House Owner

Many home buyers find themselves unable to keep up with the monthly costs of owning a property. Mostly, it is a tight corner for some as this situation can get one worked up. There is more to buying a home than clearing mortgage payments on time each month. Maintenance, utility bills, insurance, and other expenses must all be taken into consideration. Before you decide to buy a house, research the cost of utilities, insurance, and other common household bills. The more you know ahead of time, the more equipped you will be in dealing with unexpected costs. The joy that comes with becoming a house owner, can easily be cut short if you do not fully understand the costs attached to it. To avoid this, Business Yield advises you to contact mortgage brokers and financial advisers before purchasing that dream house.

Other Costs To Consider Aside from Your Monthly Mortgage 

The following are some of the additional costs homeowners pay.

#1. Deposit and Closing Costs

The initial deposit and the closing fee you will pay upfront are significant amounts. Therefore, it is paramount to put aside a large sum for this using your savings.

#2. Maintenance Costs

Most homeowners do not put the cost of maintenance into consideration. Unfortunately, if your house must remain habitable, you have to maintain it. The cost of maintenance may cost up to 1-3% of the property value depending on the maintenance need. How old your property is will also determine how much you spend on maintaining it. 

#3. Property Taxes

Property taxes is one of the additional cost any intending homeowner must put into consideration. One of the most crucial things to keep in mind is that most mortgage lenders pre-approve you based on an expected initial property tax bill, which is included in your monthly mortgage payment. Unfortunately, this increases as your property increases in value. To be on a safety net, ensure you understand how frequently values are assessed, and how rates are set when you buy a property. 

#4. Homeowners Association Dues (HOA)

The homeowner association dues are never part of your monthly mortgage payment. Although, it is one of the basic requirements that mortgage lenders use to qualify you for a mortgage. Like the property tax, the dues can also rise. However, keeping in touch with your HOA will keep you abreast with the current fees as well as previous dues.

Unforeseen Change In Circumstances

Unexpected changes in circumstances are also one of the reasons why people become house poor. Someone may lose their jobs or face situations that place them in a precarious financial state. For instance, Mr. Wilmort has a monthly earning of $7000 while his wife earns $5500. They both purchased a house through a mortgage and will have to pay $5000 monthly. Unfortunately, Mr. Wilmort lost his job 18 months before clearing the mortgage. Without good backup finance, keeping up with their mortgage payment, insurance, and other expenses will become difficult. Especially if Mr. Wilmort is unable to secure another job in time. Therefore, it is advisable to have a pre-purchase emergency fund in place. This is necessary to avoid losing your property.

How Can I Avoid Being House Poor?

Being house poor affects our mental and emotional health. Trust me, you don’t want to be there. How can I avoid being house poor? The best way to avoid being house poor is to be able to afford the house you intend to purchase. The following steps will help you avoid being house poor

Step 1

The best course of action is to get the advice of an independent financial advisor or mortgage broker before signing any legal documents or agreeing to any house ownership transactions. Their expertise will help you make the right housing decision. 

Step 2

Apply any money principle that will likely work for you.

 50-30-20 Principle

The 50-30-20 formula is a good starting point for figuring out how much you can afford to spend on a house. Household bills and other necessities, according to the norm, should take up no more than half of your income each month. Also, 20% must be set aside for debt and is saving, while the other 30% kept for your enjoyment. 

28% Rule

The “28% rule” states that you should not spend more than 28% of your total monthly income on housing costs as a general rule. Simply multiply your monthly salary by 28% to find the monthly budget you’ll need to start saving for a down payment on a home.

Debt To Income Ratio (DTI)

DTI is used by lenders to assess how much of a mortgage you can qualify for. Applying the Debt to Income ratio effectively can protect you from being house poor. With the DTI, your monthly installment and revolving loan payments are measured against your gross (pre-tax) income.

Buy House Poor Credit

Poor credit is a bad credit score or rating. Having a poor credit score doesn’t mean you can’t buy a house. Relax, you can still be a property owner even with bad credit. It is possible to buy a house even if you have very poor credit, but the process is more difficult and expensive. 

It is possible to buy a house even if you have very poor credit, but the process is more difficult and expensive. To buy a house with poor credit, first, determine why you want to own a property. Secondly, assess your financial health or status. You must do these tests because owning a house comes with loads of financial burden and if you are not financially healthy to carry it, it will be extremely difficult.

Furthermore, failure to take these assessments may land you in the state of a poor house owner. This is because everything you earn will go into the house and you will have nothing left from your income to take care of other expenses. Instead of the above situation, renting in the meantime, maybe a wiser decision. Finally, To buy a house, you will have to make a part payment, have a good credit history if you’d be using mortgage renders, and have a good source of income for at least a year or two. 

Buying A House With Poor Credit

There are several loan options available to people who intend to buy a house with poor credit. Some of these loans include;

#1. Regular Conventional Loans

Generally, a conventional loan does not have a minimum income, credit score, or down payment requirements. Unfortunately, you need a credit score of at least 620 and above to access this loan. However, if your earn higher than the amount you want to borrow, then the 620 credit score limit will be an exemption and does not apply to you.

 #2. Federal Housing Loans FHA

For someone buying a house for the first time with poor credit, FHA loans are quite appealing. This is because its requirement is lenient and everyone can benefit from it. The least credit score for FHA loans is 500 which makes buying a house with poor credit possible for people. . Finally, the has a limitation, FHA is only used for residential homes. 

#3. Veterans Administration Loans VA

If you’ve served in the military or are currently serving, you may be eligible for a VA loan. With VA loans, buying a home with no down payment is possible. The loan is insured by the Department of Veterans Affairs. You may be required to pay a one-time “funding charge” by some lenders. Similar to FHA loans, your home must meet a set of requirements before you can get a loan. This includes a credit score of 620.

#4. USDA Loans

The U.S. Department of Agriculture (USDA) is a government loan that can help someone with poor credit in buying a house. The loan requires no down payment but it can only be used to buy houses in rural housing. Another strict requirement is its credit score of 640.

Improving your credit score before you go house hunting will make the home purchasing process that much easier. Many home sellers in today’s hot market are reluctant to accept modest down payment offers that require them to cope with FHA’s demanding appraisal process. Thus, increasing your credit score will help you qualify for a traditional mortgage and make more competitive offers on properties. Also, remember the goal is not just to own a house but also to avoid being poor house. Let’s consider possible ways to boost poor credit scores.

What Should I Do If I’m Already House Poor?

If you’re feeling house poor right now, the best way to get out of it is to cut your costs or increase your income. In the next sections, we’ll look at the spending side of the equation before moving on to income.

#1. Refinance Your Residence

Property values have been rising across the majority of the country, so you may have more equity in your home than you realize. If you’ve done any modifications, this will help increase the value of your home. More equity in your property, however you get there, represents less risk for lenders. This can result in a cheaper interest rate when refinancing your mortgage.

Aside from lowering your interest rate, you could refinance into a longer term. If you had a 15-year mortgage and lost your job five years into repayment, you may refinance your remaining ten years into a 30-year fixed loan, which would drastically reduce your monthly mortgage payment. It may provide you with more wiggle room in your budget. You may also choose to put more money into your payment to pay off the debt sooner if you had more money.

#2. Sell Your Residence

If you believe you can no longer afford your current house, another alternative is to sell it and downsize. On the one hand, you may be leaving your ideal house, either permanently or temporarily. On the other hand, you’ll enjoy the financial peace of mind that comes with knowing you’re now living in a home you can afford. It’s something to think about if you’re reevaluating your finances.

#3. Restriction on All Discretionary Spending

If you’ve just encountered a financial shock, such as a job loss or an unexpectedly large cost, you may be able to help yourself by limiting or eliminating discretionary spending for a period of time. Budget solely for what you absolutely need.

This isn’t fun, but it may be a necessary measure until a long-term solution is in place and the urgency that drove the austerity budget has gone.

#4. Make Use of Your Savings

If you’re really struggling, using emergency reserves in the case of a shock may be a required short-term temporary strategy until you can get back on track in the long run. While this is not something to be taken lightly, emergency reserves are maintained on hand for short-term difficulties.

Missing payments on a home or car is often a preferable alternative, especially if you’re attempting to protect credit and the long-term solution is to renegotiate your current mortgage or downsize into a different residence. Contact your lender, explain your situation, and negotiate a loan forbearance and payback plan.

#5. Increase Your Income

While it is true that it is easier said than done, there are steps you may do to increase your income. When combined with appropriate spending limits, this could offer you more confidence in your ability to afford your home.

1. Request a Pay Increase

Asking for a raise may seem frightening, but there’s no reason to feel bad about asking for what you’re worth. The least they can do is say no, allowing you to start hunting for better-paying work.

It doesn’t harm to ask if you have a good case. Prepare to back up your case for a raise with evidence of your performance and how it has contributed to the success of your team, department, or even the company. The more you can portray yourself as an indispensable contribution, the better.

2. Obtain a Second Job

If a raise isn’t in the cards, taking on a second job could be a reasonable option. Although this may not sound tempting, COVID-19 has just expedited a trend that began a few years ago toward the gig economy.

Personal shopping or food delivery could be examples. You may also be able to find freelance work that you can do from home on sites such as Fiverr or Upwork. These opportunities make it even easier to earn extra cash while working on a flexible schedule that fits your current job aspirations.

Conclusion

While your home is both your location in the world and a valuable asset in your financial portfolio, you shouldn’t spend so much that you’re house poor, and need to put aside every other financial and personal ambition to make your house payment. If you do this, you may find it difficult to enjoy life at home because you won’t be able to save for retirement or family holidays, for example.

House Poor FAQs

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References

• Investopedia
• RocketMortgage
• Bankrate