How to Avoid Being House Poor and What to do if You Are

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Avoid being house poor

Want to learn 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, in the United States today, almost 40 million Americans 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 does it mean to be house poor?

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, however, not so much. This is because many folks can find themselves “house poor” if they don't tread carefully.

Essentially, most of their monthly income is going towards paying down their house (i.e. the mortgage and other costs such as maintenance and utilities, etc.). And 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.

 

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 and they do everything they can to avoid that. 

Being house poor comes with real impacts such as:

Your savings will quickly get depleted

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’ll get into debt for that. Does your car need to be replaced? You’ll 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. 

Your debt repayment plans will be slowed down significantly

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 and in turn impact your ability to achieve debt freedom.

Your overall life goals may be impacted

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 should your mortgage be of your take-home pay?

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 someone who is 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 but 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.

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

Utilities are costs that every homeowner can expect to make and 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 monthly budget as they will need to be paid. 

Maintenance

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 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 (e.g. truck rentals, movers etc) and to actually be able to create a living space you enjoy once you’ve moved into it.

 

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:

Sell things you own but don't need online

If you need quick cash, selling items that have been lying idle in your home on a site such as eBay or Facebook Marketplace can inject the extra wad of cash you need to make your monthly payments.

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. 

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 so that you can maximize your income and still find time to get some good rest in as well!

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.

 

In conclusion

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 course on this very topic. It will guide you through the step by step process on everything you need to know to successfully purchase your first home. 

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