Real Talk: How to avoid being house poor

Death. Divorce. Job loss. Sometimes tough stuff happens. Unfortunately, these not-so-great milestones often come with a financial impact. So, what do you do if you have to get a divorce? Or if a loved one suddenly passes away? Or if you find yourself with more debt than is comfortable? In our series, Real Talk for the Tough Stuff, we’ll tackle some of these situations head-on with the honest financial advice you need to get through and get on with life. 

Next up, Real Talk for the Tough Stuff: How to Avoid Being House Poor

There’s no question—buying a home is a big decision. It’s the single largest purchase you’ll likely ever make in your life. And unless you have fat stacks because of a lottery win or a distant wealthy relative left you their life’s fortune (lucky you), it probably represents the biggest debt you’ll ever carry too.

Lots of people have mortgages. But unfortunately, lots of people also bite off a lot more than they can chew in terms of what they can actually afford when it comes to purchasing a home. It’s called being house poor. And with a little advice and real talk, we’re hoping to help you avoid that. We called in an expert for some honest financial advice—Sharon Tucker, Manager of Credit at Public Service Credit Union in St. John’s, NL.

Most people don’t consciously make a decision to become house poor. It’s often the outcome of certain circumstances or not being honest upfront about what you can afford. A mortgage payment is just one piece of the financial pie when it comes to buying a home. Having an honest look at your finances before you even get in touch with a real estate agent can go a long way toward ensuring you don’t end up in trouble down the road.

“Even though it works on paper, we counsel people to try an exercise before they purchase their home,” says Tucker. “A colleague of mine, Wanda Keats, always tells members to stress-test their budget. Say you currently pay $1,000 in rent. And say you know your projected mortgage is going to be $2,000. Take the next six months and take the difference in your projected mortgage payment ($1,000), plus your estimated property tax, plus an estimate of your largest heat bill and put all that money aside in a savings account for six consecutive months. And if you don’t find it stressful on your finances, then you can probably handle the mortgage.”

The bonus? You’ve just saved more money toward a down payment. And also, you’ve just given yourself a financial stress-test to know whether or not you can really afford your dream home or whether you might need to adjust your expectations.

“A common mistake we see is that a lot of people want it all, and they want it now, and they don’t want to wait” says Tucker. “But the reality is that you might not be able to afford everything you want now, so you need to make some tough decisions.”

If you do end up with more house than you can afford, there are still a few options.

According to Tucker, “If you find yourself with a larger mortgage payment than is comfortable, you basically have three options: refinance your mortgage, sell the property, or find an alternative source of income.”

Option 1: Refinance

Chances are, if you’re struggling with your mortgage payment, you’re probably struggling with some other payments too. A mortgage is just one type of debt—many people also have credit card debt, student loans, a car payment, etc. Refinancing your mortgage can be a way to consolidate all of your various types of debt into one single monthly payment. A single monthly payment is not only easier to manage, but is often less than paying each bill individually. This also means you’ll have a more structured plan for paying off your debt.

Another option to consider here would be extending your amortization period. Assuming your payment history is good—that is, you’ve been making your monthly payments—many financial institutions will allow you to extend your amortization period.

For example, if your original amortization period was 25 years and you’ve been making payments for five years, you have 20 years remaining on your original mortgage. You might be able to stretch that back to 25 years again. The pro is that your monthly payment will go down, but the con is you will end up paying more interest in the long-term.

Option 2: Sell the property

If you’re unable to comfortably afford your mortgage payments, it might be time to sell your home. This can be a tough decision and depending on your mortgage, you may even face certain penalties for leaving the mortgage early. If this is the position you find yourself in, it’s all about looking at the bigger, longer-term picture and what’s going to make the most sense for you.

Option 3: Find an alternative source of income

This doesn’t necessarily mean getting a part-time job or a side hustle.

Tucker recommends thinking about things like whether or not you could create a rental suite/Airbnb in your basement to generate a bit of extra income.

For times when you find yourself in financial hot water, but it’s a short-term thing, there are other options like working directly with your financial institution.

“If you can see a light at the end of the tunnel in a few months, we certainly work with our members to waive some payments or add the payments on to the end of the mortgage. There’s always things we can do to find a short-term solution,” says Tucker. Ultimately, buying a home is a big decision with more than just your mortgage payment to consider in terms of the financial commitment. Need a little help figuring out whether or not you can afford to buy a home? Download our hidden costs checklist to give you a clearer picture of what it costs to own your home sweet home or book an appointment with your local credit union today.