4 Clever Ways to Avoid Being Home Poor

If you’re planning to buy a house, then most likely, you’ve thought of a scenario whereby you will be left with no money after paying the monthly mortgage fees. If you spend most of your income on homeownership – monthly mortgage payment, insurance, property taxes, and maintenance, then you risk being home poor. In addition, when you spend too much on homeownership, you will find it impossible to achieve your other financial or personal goals.

Being home poor can hold you back

Although experts recommend that you shouldn’t spend more than 28% of your gross income on housing, the average American spends up to 40% of their income on housing. If you spend too much money on your home, you won’t have much left to cover other costs. Because of increasing healthcare, food, and transportation costs, you will have very little left for savings, education, insurance, and retirement.

If you spend too much on housing, you may end up living paycheck-to-paycheck. Therefore, if you lose your job, you may jeopardize your home. And if you struggle to make ends meet, pay your bills on time, rack up late fees, and put necessities on credit, you will put yourself further behind.

4 Ways to Avoid Being Home Poor

Even when you plan properly when buying a home, you can easily become house poor if you have a medical emergency or lose your job. To avoid being home poor, ensure you take the following steps before buying a home.

1. Conduct thorough research

The first thing you should do before buying a house is thorough research on how much you should save up to buy a home in your chosen neighborhood. The more you know about the price homes are going for, the better. 

To get the right information, you’ll need an experienced real estate agent in your corner. The market information they give you will go a long way in determining your budget. In addition, they will reveal to you the market trends and advise you on what you can do within your budget and risk tolerance.

2. Increase the amount you save

The bigger your down payment, the lower the monthly payments you will be making. Therefore, it’s crucial that you save more. Keep in mind that you’ll also have to pay closing costs which can amount to 5% of the home loan amount. Thus, it’s important that you calculate how much you will need to add on top of your down payment to cover the closing costs.

3. Consider buying a starter home

You don’t necessarily need to settle for your dream home when buying your first home. Instead, you may want to invest in a starter home. Before shopping, compare your needs versus wants. This will help you to determine what you actually need in a home. Buying a starter home is an affordable way to become a homeowner, and you can decide to rent it out later or sell it when upsizing.

4. Improve your credit score

Another great way to avoid getting home poor is to have a good credit score. A high credit score equals low-interest rates, which will help you keep costs down. Lenders often give borrowers with high credit scores the best rates. Therefore, with a good or excellent credit score, you will qualify for a higher amount with a low-interest rate and a better rate on the mortgage insurance.

Being home poor is avoidable. Therefore, just because your lender is willing to lend you a high amount doesn’t mean you should accept it. When you get to this point, remember that you have the option to find an affordable home that you can comfortably pay for. 

In the meantime, focus on improving your credit score and saving more for the down payment and closing costs.