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. Not to mention financially worse off, and full of regret.
Shockingly, many live in a home they cannot afford. So before you sign any legal paperwork, it's critical to answer some questions.
Specifically, what is house poor? And how can you make sure it doesn't happen to you?
What is 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, 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.
But what is house poor? The house poor definition is when most of someone's monthly income ends up going towards paying down their house, putting a financial burden on them.
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. Which is also called being house rich and cash poor.
How someone can become house poor
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 you might buy after finding out that the house is in a trendy neighborhood that is expected to experience growth in the coming years.
So, while the numbers might tell one story, emotions can take a very simple and clear decision to a whole new unaffordable level.
And even if your bills were reasonable when you bought your home, it is possible to become house poor later on.
For example, if a couple purchases a home and then one of them loses a job, this makes the payments a much larger portion of their income.
However, you can improve your situation, even if something unpredictable happens.
The impact of being house poor
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 overspending. 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. Overspending on a home comes with real impacts such as:
It depletes 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? It can become unaffordable.
Do your kids need to go to college? They may end up with student loans. Overspending for a house 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.
It 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. And it will impact your ability to achieve debt freedom.
It can affect your overall life goals
On average, a mortgage can run for 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 to avoid being house poor?
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.
And don't just get caught up in coming up with your house down payment. You also want to make sure you can comfortably afford your monthly mortgage. Here are some things to think about.
Consider your lifestyle
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?
Base decisions on net income
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. Which 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 (or 45% of your paycheck after taxes).
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.
7 Tips for how to avoid being house poor
Now that you know the house poor definition and what costs to consider before buying your home, here are a few tips to help you avoid overspending on a house.
1. Avoid overpaying on interest 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. It 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 is 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 overpaying later!
2. Buy a more affordable home to avoid overspending
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 and still love your home 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 dodge large home costs is to pay off your debt before buying a home. If you have bad credit and want to buy a home, paying down debts will likely improve your credit. That may in turn lower the mortgage interest rate you qualify for.
By paying off debt, your debt-to-income ratio will improve. You can then save the extra money 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 you're 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. That way, you are covered if you get hit with a giant repair that your insurance doesn't cover.
5. Dual income? Try to budget with one income to save more
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.
That way, if one of you loses your job, you won't be strapped for money due to loss of income.
6. Avoid house hopping
House hopping is when you essentially buy a house and live in it short-term while it appreciates in value. Then you sell it and move on to the next house, repeating the process.
The reason why house hopping can keep you poor is that people forget to factor in major expenses like closing costs, realtor fees, moving costs, repair costs, property taxes, and much more.
All of which can eat into any short-term appreciation you gain. It's important to think about all of these expenses.
7. Consider the costs associated when buying a house
There is a cost of homeownership besides just your monthly house payment. In addition to your mortgage payments, other related financial obligations 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 utility bills in your budget because they will be part of your monthly expenses.
Home 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.
Or you may live in a neighborhood with homeowners association fees (HOA fees), which may cost a few hundred dollars a month.
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, you may need truck rentals, movers, etc. It's also important 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 unfortunate circumstances, you can certainly find ways to make mortgage payments more manageable.
Below are a few suggestions for home buyers who are struggling with house payments:
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.
If your house payment is high, then it's important to cut costs in your budget in other areas as much as possible. Obviously, you still need to pay for the basics like food and transportation, but try not to spend money on unnecessary things.
Going out to dinner or the movies and taking extravagant vacations would fall into the category of unnecessary.
Understand that just because you choose to stop buying these things for a while doesn't mean you will never have them again. It just means you're taking a break to save money and get your home costs under control.
4. Rent out a room in your house
Another quick way to make cash and stop overspending on your house 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 your home costs, then it may be time to consider selling your home.
It 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.
6. Consider a refinance
While refinancing isn't always the right move, in some situations it can be helpful. For example, a refinance may make your payments become more reasonable if you switch from a 15-year mortgage to a 30-year one, or if you can lower your interest rate.
It's important to remember though, that a refinance is always a trade-off. You may have lower payments, but you'll likely pay more over a longer period of time. Not to mention the other costs of refinancing, which should be considered in your decision.
7. Avoid lifestyle creep
Sometimes housing expenses can go beyond what you would think. For instance, if you have a large home with a lot of space, you may soon decide to put a swimming pool in the backyard. Or perhaps you think you need better furniture to go with the nice house.
All of these things can quickly add up and make your home costs much higher than you thought they'd be.
To stop this from happening, be content with what you have and avoid lifestyle creep. That way you aren't adding extra expenses on top of what you already need to pay.
Avoid being house poor to become financially successful
The bottom line: having high home costs is usually avoidable, and now you know how to avoid being house poor.
Just because a lender is willing to give you a big chunk of change doesn’t mean you should take it.
If you find yourself in this situation, 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.