Posted on: 24 June 2017
Buying a home is supposed to be a dream come true. For many buyers, however, the experience quickly turns in to a waking nightmare when their mortgage payments leave them too broke to pay their basic living expenses. Here are two reasons why people end up "house poor" and what you can do to avoid it when you buy a house.
They Buy Based on the Loan Amount
Banks will approve people for home loans based on their gross income and credit scores. The problem is many home buyers purchase houses up to the max amount without giving a lot of thought as to whether the monthly payments actually fit their budget and lifestyle, and experience sticker shock when they see they have no money left over month after month after writing their mortgage checks.
The bank will look at your debt-to-income ratio to ensure you can afford the monthly payments. However, it will only look at what you report on your application and what it says on your credit report. Chances are good you have more expenses than you realize that also need to be factored into the equation. You pay an assortment of fees for your kid's extracurricular activities, for example, or you need to purchase supplies for your part-time home business.
It's important to draw up a budget that includes all of these hidden expenses and base your home's purchase price on the monthly payment you can actually afford.
They Don't Plan for Life Changes
Another reason why people end up house poor is they don't adequately plan for life changes. While it's true not everything in life can be planned for, some things can be foreseen and should be taken into account when determining how much home you can actually afford.
If you're newly married and plan on starting a family, for instance, you need to budget for the costs associated with having kids, such as medical bills, childcare expenses, and supplies. At the very least, you should put money in savings to help fray those costs or develop a plan for increasing your income to account for the added expense.
Just because the mortgage payment that fits comfortably in your budget is a lot smaller than you realized doesn't mean you have to completely give up your dream home. You may still be able to afford it if you can cut out or reduce expenses or put up a bigger down payment. Connect with a real estate agent who can help you brainstorm ways to buy the home of your dreams with the income you have available.Share