Want to learn what the house poor definition is and how to avoid being house poor? Well, it’s not just what you do; it's what you DON’T do that can make or break your house budget. It's painful to say, but a lot of information out there about homeownership can leave you house poor, financially worse off, and full of regret.
I'm not just talking about misplaced expectations or half-truths. But rather, I'm talking about bold exaggerations and zero reality checks for what your life will look like over the next couple of years.
Instead of upfront communication, you may find you get complete silence on basic questions such as…
- Do I really need a home this big?
- Can I make the monthly payments comfortably?
- Do I really believe I can find another home as good if I pass on this one?
Shockingly, many live in a home they cannot afford. So before you sign any legal paperwork, it's critical to learn what it really means to be house poor and what you can do to avoid it.
What is "house poor"?
So, what is "house poor" anyway? If you’ve been on the personal finance journey for a while, you’ll know that in most cases, buying a home is typically a good investment. However, in some instances, not so much.
This is because many folks can find themselves “house poor” if they don't tread carefully. They end up buying a home simply because they believe a house is an asset, but that's not always the case. Being house poor is when most of someone's monthly income ends up going towards paying down their house.
For instance, the mortgage and other costs such as maintenance and utilities, etc. As a result, people in this situation find themselves with little to no wiggle room to take care of other regular expenses or to work on their savings goals. This is also called being house rich and cash poor.
And while it might seem ridiculous upfront, anyone can easily land in this spot. You see, when making decisions, very few of us go by what the numbers alone tell us. There are so many other factors that come into play, and purchasing a home is no exception to this.
For some, expectations of raising kids in the future might drive the desire for a large home. Or the fact that it’s in a trendy neighborhood that is expected to experience booming growth in the coming years may trigger the need to go big.
So, while the numbers might tell one story, emotions can take a very simple and clear decision to a whole new unaffordable level. Now you know what the "house poor" definition is. So, let's cover what happens when people buy homes they can't truly afford.
What happens when people buy homes they can’t afford
Regardless of whether you’re buying your first home, purchasing a vacation home, or buying a rental unit, you probably think of this as more of a property you own rather than as an investment, right?
Well… not if you want to avoid being house poor. From what I’ve observed, people who thrive in homeownership view their property as an investment from day one.
That doesn’t mean that they don’t live in it and make it home, but instead, they approach their home with the mindset any investor would have when considering a property – one grounded in reality and based on numerical facts (not feelings).
They know the impact of being financially committed beyond their means in a home. They also do everything they can to avoid that. Being house poor comes with real impacts such as:
Being house poor will deplete your savings
As noble as it may sound to put all you have into buying the home of your dreams, doing so can sabotage your savings. Need a new bed? You could get into debt for that. Does your car need to be replaced? You could get into debt for that.
Do your kids need to go to college? They will get into debt for that. Being house poor leaves you with no wiggle room to take care of life’s other day-to-day needs.
Your retirement savings goals are impacted
Some retirement funds, such as a Roth IRA, allow you to loan yourself funds from your retirement account to buy your first home. And while it is nice to know that the option is there to fall back on, it can completely throw off your plans for retirement, especially if you don’t manage to pay back the loan.
If you’re having to consider borrowing against your retirement savings, you may have to ask yourself if you’re truly financially ready to make the purchase. It may be a sign to tell you otherwise.
Being house poor impacts repaying your other debts
If you have debt outside of your mortgage, such as consumer credit card debt, it would be wise to factor all your monthly payments into your budget before committing to a mortgage payment.
Otherwise, if you find yourself house rich and cash poor, you might struggle to pay these additional debts off. This will impact your ability to achieve debt freedom.
Being house poor can affect your overall life goals
On average, a mortgage can run as long as 30 years. The reality is, the rest of life will be moving along in that window too. You might still hope to travel, eat out from time to time or finally take the class you’ve been eyeing for a while.
Your mortgage should not hold you back from this. If done right, your mortgage should still allow you the freedom to pursue your other life interests – guilt-free. How can you do this? By setting a firm limit on how much of your take-home pay is committed to your monthly mortgage payment.
How much of your take-home pay should your mortgage be?
While a lender will run some calculations to determine how much you can afford in monthly payments, it is ultimately your responsibility to run your own numbers too. Don't just get caught up in coming up with your house downpayment; you also want to make sure you can comfortably afford your monthly mortgage.
You may have personal circumstances that your lender might not be privy to. Such as your care of elderly parents or out-of-pocket health care expenses you may face. Lenders might also not be able to accurately factor in your lifestyle and personality and the costs associated with that.
For instance, are you comfortable with a monthly mortgage payment that is a few thousand dollars each month? Are you willing to adjust your spending and lifestyle to support paying a mortgage? Or do you want to maintain your current day-to-day lifestyle and the things you enjoy spending money on?
In addition, lenders rely on your gross income to run their calculations. However, from your standpoint, as the buyer, working with your net income gives you a more realistic picture of how much money you have to cover not just your monthly mortgage payments but also your taxes, health insurance, bills, etc.
So what should the magic percentage be for your mortgage payment? There are generally two trains of thought on this – a conservative approach and a more liberal one.
The conservative approach
With this approach, some experts recommend that your mortgage payment should not take up more than 25% of your take-home pay. This will ensure that you have plenty left over to cover additional expenses you may be facing.
The more liberal approach
In other circles, experts advise that 35 percent of your pre-tax income is manageable to go towards a mortgage. Whatever number you decide on, be sure that it represents the flexibility or restrictions you are comfortable with embracing as you pay down your home.
Costs to consider when buying a house
In addition to your mortgage payments, other related costs you'll need to consider include:
Utilities are costs that every homeowner can expect to make. They typically include the cost of water, electricity, cable, heat, and garbage removal. A lender will not factor these in for you. So it is wise to make a provision for these expenses in your budget because they will be part of your monthly expenses.
Repairs are an inevitable part of homeownership. As time passes, some parts of the house may fall victim to regular wear and tear. Attending to these problem areas will be important, not just for you as the homeowner but also in order to maintain the value of the home should you decide to sell it in a few years.
If you’re house poor, your ability to cover these maintenance costs will be limited, potentially lowering the value of your home over time.
Association fees for planned communities
When you buy a home in a community such as a condo, you may have shared privileges with lawns, pools, a gym, or a parking lot. These shared areas typically cost money to maintain. An association committee will be in charge of collecting fees from all residents and maintaining the premises for the common benefit. These fees can add up.
Moving in and décor
Moving into and decorating a new home is not cheap. As a result, it is crucial to think of these costs beforehand to help you adequately prepare not just for the home purchase but also for the actual cost of the move. For example, truck rentals, movers, etc. Also to actually be able to create a living space you enjoy once you’ve moved into it.
5 Tips to avoid being house poor
Now that you know what costs to consider before buying your home, here are a few tips to help you avoid being house poor.
1. Avoid being house poor by making a larger down payment
Saving up a decent size down payment not only gives you more equity in your home but will reduce your monthly payment as well. Putting more down on your house can also reduce your interest rate. This can save you thousands of dollars over the life of the loan. It reduces the rate because your loan-to-value ratio will be better in the eyes of your lenders.
This makes you considered a less risky loan which results in a lower interest rate. Although there are loans that allow you to make smaller down payments make it a goal to put down 20% of the purchase price of your home to help you avoid being house poor!
2. Buy a more affordable home to avoid being house poor
Some people decide to purchase what is known as a starter home. Although this might not be your "dream house," it's a great way to become a homeowner without becoming house poor. Sometimes we need to compare our needs vs. wants to determine what we truly need from our home.
See if a smaller, more affordable home is better for your budget before making a decision. You can start off in a smaller house and then either rent it out as an investment property or sell it and upgrade once you have more money saved up for a bigger home.
3. Pay off other debt before purchasing your home
Another great way to avoid being house poor is to pay off your debt before buying a home. Debt is expensive, and that is money that you could save for unexpected expenses or upgrades to your house down the road. So create a debt reduction strategy to set yourself up financially to be a homeowner.
4. Have a dedicated emergency fund
A hard lesson as a new homeowner if your house poor is not having money for repairs. If all of your funds are allocated, and something breaks, then you have to go into debt to fix it.
So, create an additional emergency fund strictly for housing costs. This way, you are covered if you get hit with a giant repair that your insurance doesn't cover.
5. Try to budget with one income
If you are buying a home with your spouse, one of the best things you can do is to budget on one income. For instance, see if you can comfortably afford the payment with one of your incomes rather than both. This way, if one of you losses your job, you won't be strapped for money due to loss of income.
What to do if you are house poor
If you find yourself house poor today or if you’ve been forced into it through an unfortunate series of events, you can certainly find ways to make mortgage payments more manageable. Below are a few suggestions:
1. Sell things you own but don't need online
In fact, you could set up a side hustle where you flip used goods online, and the income could be dedicated both to growing your side business and paying off your mortgage.
2. Find a second job
Side hustles are not always practical, and sometimes getting a second job is so much easier. If this is the case for you, check out opportunities for additional work in your area, preferably close to home, or even work from home so that you can maximize your income and still find time to get some good rest in as well!
3. Cut back on your spending
Maintaining a budget is crucial for success during your home purchase process. With a budget, you’ll be able to easily track areas where you are spending above your means or areas where you have room to cut down costs.
4. Rent out a room in your house
Another quick way to make cash and stop being house poor is to find a roommate. Not only can you charge rent, but you can also split up the bills such as electricity, cable, and water.
If you're not keen on someone living with you all of the time, you can consider renting out a room on Airbnb. Sometimes you can make more doing this, and you don't have someone in your home 24/7. In fact, many people can rake in over $500 a month hosting. That's a good chunk of cash that can help you catch up on bills!
5. Downsize your home
If all else fails and you find you are barely keeping your head above water financially from being house poor, then it may be time to consider selling your home. This may sound drastic, but if you can make a profit and downsize into a smaller, more affordable home, then it can reduce your debt stress and prevent you from worrying about the possibility of bankruptcy.
Avoid being house poor to become financially successful
The bottom line; being house poor is a completely avoidable scenario. Just because a lender is willing to lend you a big chunk of change doesn’t mean you should take it. If you find yourself in this situation, you remember you have the option to find a home that costs less and allows you to afford your monthly mortgage comfortably.
In the meantime, it's perfectly ok to rent while you work on finding the perfect home that you can truly afford to purchase. If you are looking for additional information on how to buy your first home, check out our completely FREE course on this very topic.
It will guide you through the step-by-step process of everything you need to know to successfully purchase your first home.