Mortgage Questions: Are You House Poor?
Is Your Mortgage Too Expensive?
So you just bought a new home. You're settling in, decorating and enjoying the perks of homeownership. Then your income unexpectedly changes. Suddenly, you find yourself with no extra money to pay for emergencies or even enough money to cover your expenses and save for the future because your mortgage payment is too big. Suddenly, you're house poor.
But what does it mean to be house poor? Experts say your house payment should be approximately 25% of your take-home pay, while others say you can go as high as 30% if you have no other outstanding debt and do not plan on going into debt.
You may end up house poor if your circumstances change unexpectedly and your payment becomes a much larger percentage of your take-home pay, such as 50 or 60%. You may even struggle to make your payments.
It could happen for many reasons. For example, you and your spouse may decide that one of you will quit their job to become a stay-at-home parent. Or perhaps you lose your job or have to deal with an unexpected illness.
Either way, being house poor isn't fun. Here's what to do if you ask yourself mortgage questions and suddenly find yourself house poor.
Determine the Cause
First, you should examine what caused you to become house poor. You may have been making a large salary when you bought your home, but that has since changed. Or you may have gone from a two-income family to a single-income family. Or perhaps your house payment was too large from the beginning and you didn't fully consider how much your other monthly expenses would be, leaving you stretched too thin financially.
If you have a switch in your financial picture or if you add expenses like daycare costs, medical bills, or other monthly expenditures, you may even start to resent your house payment and wish that you didn't even own a home.
Is This Situation Temporary?
Look at the situation and determine if it is temporary or permanent. If you know that this situation is only going to last two or three years, you may be able to power through, but you need to be committed to not spending unnecessarily. This spending limit means no vacations or other luxuries.
If you determine that your situation is going to last longer than three years, you should consider options. A mortgage payment that is too large can prevent you from reaching other financial goals, such as saving for retirement or building an investment portfolio.
Make Short-Term Sacrifices
If you love your home, you may decide that you are willing to make sacrifices to stay in it and not sell. These sacrifices may mean that you take on an extra job, pick up some freelance work, change jobs or careers, even rent out an extra room via a rental service like Airbnb.
These short-term sacrifices may allow you to pay down your other debt and build your emergency fund so that your house payment is more manageable.
It can be difficult to decide to sell a home that you worked hard for, and to downsize or move to a more affordable neighborhood. However, doing this can make it easier to do the things that are most important to you. It can also help you build a better financial future.
If you determine that you need to sell the house and move into something more affordable or even rent temporarily, you should contact a good realtor and put your house on the market as soon as possible. You do not want to wait until you're desperate to sell because you may not be able to sell for a few months or even a year, depending on the market. You may not be able to get as much money from the sale of the house if you are desperate to sell quickly.
When dealing with being house poor, you don't want to get to the point of being late on payments or worse, facing foreclosure, so be sure to take action before that happens.
Additionally, if you are underwater on the mortgage, it may be even more difficult to make this decision. If you can't sell your home for what you owe on the mortgage, consider talking to your bank about a short sale. A short sale means that the bank agrees to accept an amount for the home that is less than what you owe on a mortgage. But keep in mind that a short sale isn't a given on every home, so be sure to explore whether you qualify before pursuing this option.
Consider Moving to a Cheaper Area
In many areas of the country, housing prices can be astronomical and it can be very difficult to afford a home. Other places may have very affordable homes.
You may be better off taking a slightly lower-paying job in a different area to be able to afford the things that you want the most. Consider the lifestyle you want to live, whether it be owning a home, traveling frequently, or having a large budget for discretionary spending, then adjust your choices to make this possible.
For example, an expensive home may make it difficult to travel, while a smaller one may make it easier. If you want to spend more time with your family and less time working, choosing to live in a less expensive area may make it easier to reach those goals.
Prevent It From Happening Again
Before purchasing another home, you should set a budget before looking for a home and resist the urge to go beyond that, no matter how much you may love a home.
- Keep your payments at 25% of your take-home pay, and set your maximum budget at 2.5 times your current salary.
- Do not rely on what the bank is willing to lend you.
- Do not plan on salary increases, either. Buy the home that you can afford right now, or you may find yourself house poor down the road.
- You should also make sure you choose the right mortgage with a fixed interest rate to prevent your payment from increasing.
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