Americans view home ownership as the ultimate symbol of financial security and success. When shopping for a new home it can be easy to look out of our price range, and don’t forget about keeping up with the Jones’. This can lead you to a pitfall and cause you to be house poor. You may not have heard the term before, but the family that owns a 3-bedroom house and can’t afford to pay their credit card bill is house poor.
The LTV (or loan-to-value ratio) is one of the factors lenders use to determine whether a borrower is qualified for the loan they want. Lenders typically want your mortgage payment to be between 28 and 33 percent of your income and your total debt (including car payment, credit cards, etc.) under 40 percent. Assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally have a higher interest rate or a requirement to purchase mortgage insurance. The danger in a high LTV ratio for a buyer is the possibility that you’ll end up house poor.
Buyers keeping in their price range may think they are safe, however there are other pitfalls that could cause you to end up house poor. This happens when other costs for moving into and/or repairing the home cause you to add more debt with credit cards or loans. It’s easy to get caught up in purchasing all the new furniture, replacing the out-dated items and making your home the perfect haven that the neighbors will envy. And, you’ll probably be too busy painting and ripping out floors and gardening and hanging window treatments to cook dinner, so add in a bunch of restaurant meals.
Living house poor not only hurts your finances, it takes a toll on you mentally and physically. Being house poor removes the liberating feeling of being in control of your finances. When you’re living paycheck to paycheck, missing just one could be enough to crumble your world. This can get really risky, complicated and stressful if there’s a job loss or other change of circumstances in your family. That’s why you need the 4 P’s to combat becoming house poor.
Prepare – Before you even start looking, get your finances in order, learn your LTV and budget. Avoid major expenses and adding to your debt. Talk to a lender and get pre-approved.
Price – Just because you are approved for a loan, doesn’t mean that you have to spend all of it. Breaking down the monthly payments and looking at a detailed accounting of what the home will cost you may be a better determining factor of what you can afford than the sales price of the house.
Practicality – If your budget is stretched to the limit, what will that mean for your future in terms of being able to save for college and other important items? What will it mean for the immediate future? Are the sacrifices you need to make in terms of limiting entertainment, vacations, gifts, etc. worth it?
Patience – Remembering how you want to live in that house can help you refocus to make sure you are spending on what you need. If you must have the new living room set right now, then you may need to live with an outdated kitchen. You don’t want to spend what you can’t afford.
Just because you can get it, doesn’t mean that it’s the financially responsible thing to do. For more information or to help finding a house that won’t make you house poor, call Helen today at 847.967.0022 or email [email protected].