How to Avoid Debt as a First-Year Homeowner
- Owning a home may be more expensive than what you’ve bargained for.
- Understanding the costs of homeownership could help you avoid debt.
- Home maintenance isn’t an unexpected expense. It’ll happen. Expect it. Create a budget and build an emergency fund to prepare for inevitable home-related costs.
Table of Contents
Buying your first home is an exciting milestone. Not only do you no longer have to follow a landlord’s rules, but you can start to build home equity in a place of your own.
But owning a home could open the door to a host of unexpected expenses. And if you’re not prepared for them, you could end up in debt pretty early on. Here are some tips on how to avoid debt during your first year of homeownership—and beyond.
1. Learn All of Your Costs
As a new homeowner, you’re no doubt aware that you now have a mortgage payment to make each month. But that’s not the only expense you may have to deal with. Some of the other costs of owning a home include:
Property taxes
Insurance
Maintenance
The monthly mortgage payment you make may or may not include property taxes and insurance, depending on how your home loan is set up. Make sure you understand whether your monthly payment includes these costs so you don’t fall behind.
In addition to the expenses above, be sure to factor in the cost of utilities. You may be new to paying for heat, electricity, and water if they were included in your rent previously. Or, your utility bills may be higher if you bought a house and used to rent an apartment.
A good way to get a sense of your non-mortgage costs is to talk to the previous owner of your home and ask what they spent on maintenance and utilities. And if you can’t ask them, talk to neighbors with similar homes to see what they commonly spend each month.
2. Create a Comprehensive Budget
As a first-year homeowner, you may find that housing is your largest monthly expense by far. It’s important to set up a budget so you can track your spending carefully and make sure you’re able to cover all of your bills. You don’t want to risk overspending and end up needing debt relief as a result.
As a general rule of thumb, it’s a good idea to try to keep housing costs to 30% or less of your take-home pay. That 30% should include recurring costs like property taxes and insurance. Maintenance and utilities can be separate, though, since those costs can be variable.
If, after creating your budget, you see that you’re spending more than 30% of your income on housing, you may want to try to reduce other expenses. That could mean canceling a streaming service, cutting back on takeout or ordering lunch out on work days, or even trading your car for a model that’s less expensive.
3. Build an Emergency Fund
Factor home repairs into your budget each month. Chances are, you won’t have to fix something every month. But most homeowners face costly repairs every so often. So it’s a good idea to allocate money to repairs each month, and save that money when you have a month when nothing breaks or goes wrong.
In addition, it’s a good idea to work on building an emergency fund for those really big home repairs—think having to replace a roof, appliance, or HVAC system. Plus, as a homeowner, you’re on the hook for a mortgage. If you lose your job and can’t pay it, your credit score could take a hit, and you might eventually run the risk of foreclosure. So it’s important to have savings to fall back on.
When you’re a homeowner, a three-month emergency fund is the minimum to shoot for. It can be tricky to save money when you’re also managing new homeownership expenses, though. So if you can’t get to a three-month emergency fund right away, don’t sweat it. Start by saving what you can so you have a cushion, and then build on that as you’re able to.
4. Take Your Time Furnishing and Decorating
Owning a home can be very exciting. And you may be eager to furnish and decorate your home so you can wow your guests and enjoy a comfortable living space. But if money is tight, you’re better off taking your time doing those things rather than racking up a large credit card balance.
If your current home is a lot bigger than your previous rental, you may have quite a bit of furniture to buy. Make a list of necessary items in order of priority. It’s more important to put a couch in the living room and a table in the dining room than it is to furnish your guest room. You could always blow up an air mattress if you have visitors coming to stay for a one-off weekend.
Similarly, you may want to decorate your home so it reflects your personal style. If you have carpet in your master bedroom that smells, replacing it should take priority over getting nicer curtains or blinds if the only thing wrong with them is that they aren't to your taste.
Don’t Let Homeownership Drive You Into High-Interest Debt
As a new homeowner, it’s natural to be a bit overwhelmed by the various expenses you’re looking at. But if you make a point to understand your costs, budget carefully, build some emergency savings, and take your time furnishing and decorating, you may be able to avoid debt and the stress that comes with it.
Author Information
Written by
Maurie Backman
Maurie Backman is a personal finance writer with over 10 years of experience. Her coverage areas include retirement, investing, real estate, and credit and debt management.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
What is the lowest credit score to buy a house?
Some people manage to get a mortgage with a 500 credit score. But such cases are relatively few, not least because you need at least a 10% down payment to get approved. That 500 score is also for an FHA loan (a loan guaranteed by the Federal Housing Administration).
If you can scrape together only a 3.5% down payment, however, the minimum credit score for a mortgage is 580. Conventional loans that conform to Fannie Mae or Freddie Mac's rules have 620 credit-score minimums. The VA (the U.S. Department of Veterans Affairs) and USDA (the U.S. Department of Agriculture) don't have formal minimum scores for the loans they guarantee, but expect lenders to insist on 580-620 for the former and 640 for the latter.
Can I buy a house after debt settlement?
Yes, but probably not right away. Debt settlement usually does extensive damage to your credit history and credit scores. You’re likely to have some difficulty getting a mortgage immediately after debt settlement. However, your credit scores could climb after graduation from a debt settlement program, like Freedom Debt Relief's. The best way to rebuild credit over time is to avoid credit card debt and pay all of your bills on time. If you do these things and avoid applying for new credit accounts, you could be in a better position to qualify for a mortgage soon. It may not even take as long as you think.
Can you get a mortgage with 55% DTI?
It’s possible to get approved for an FHA home loan with a 55% DTI. However, lenders aren't obligated to make those loans, and many set their maximum DTI at a lower level. You have a better chance if you can show several “compensating factors.”
These include:
Little or no increase in housing cost. If the new mortgage payment, including principal, interest, taxes and insurance, isn’t much higher than your current mortgage or rent expense, it tells lenders that you can handle the monthly housing obligation even if your DTI is high.
Emergency savings to cover at least two months of mortgage payments. This shows that you can make your mortgage payment even if your income is interrupted briefly.
An excellent credit score, illustrating that you manage debt well.
A larger down payment, which reduces the lender’s risk.
Good work history and steady income, demonstrating that you’re less likely to experience cash flow problems.