Want to know what the house poor definition is and how to avoid becoming house poor? It’s not just what you do; it’s what you DON’T do that can make or break your home budget.
Many pieces of information on homeownership can leave you losing money. Not to mention financially worse off, and full of regret.
Before signing any legal documents, you have to answer a few questions.
Specifically, what is house poor? And how can you make sure it doesn’t happen to you?
What is house poor?
If you’re in the personal finance business for some time, you’ll know that typically, buying real estate is a sound investment. However, in some circumstances, not so much.
This is largely due to the fact that many people might be homeless if they make unwise purchases. Many purchase homes merely because they think of a house as a valuable asset, but that is often not the case.
So what is home poor? Home poor is a situation where a lot of a person’s income goes toward paying off their residence, placing them under financial strain.
That is, the mortgage and other fees such as taxes and utilities, and so on, result in hardly any disposable income for these individuals. As such, they struggle to balance their regular living expenses with their savings goals. It also contains the idiom “house rich, cash poor.”
How someone can become house poor
Very few people take numbers at face value when making purchasing decisions. There are many other factors that come into play, and purchasing a home is no exception to this rule.
For some, the expectation of raising kids in the future may lead to the desire to live in a big house. You might instead buy a home after discovering that it’s located in a highly desirable neighborhood that is expected to grow in the future.
While numbers might provide a simple story, emotions can make an important determination to a completely new level of unaffordableness.
And even if your mortgage rates were reasonable when you purchased your house, you could later find yourself house poor.
The median monthly mortgage payment for a couple is significantly higher if one person loses a job.
However, you can improve your situation, even if something unexpected 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?
Don’t buy a house just to save money. From my perspective, people who tend to thrive in homeownership view it as an investment from day one.
That doesn’t mean that they don’t live in their apartments and return them, but rather, they think of them as they would regard an investment property, one in which reality is valued more than feelings.
They understand the damage of borrowing money beyond one’s means at home. They never want to have to suffer the consequences of that.
It depletes your savings
As admirable as it is to buy your home with everything you own, doing so can devastate your savings.
Do you need a new bed? You could go bankrupt purchasing one. Is your new car too expensive to maintain? It may become unaffordable.
Will my kids have to go to university? They may also end up with huge student loans. Buying a house may make you unable to manage other living expenses.
Your retirement savings goals are impacted
Some retirement plans, like a Roth IRA, permit you to borrow funds from your retirement account for the purchase of your first home.
And it would be a shame if the option were to prove to be unavailable. This would be particularly true if you don’t obtain the money to repay the loan.
Possibly you need to question if you are financially prepared to borrow from your savings against your future needs. It may be an indication that you would be better off keeping your money.
It impacts repaying your other debts
If you owe other creditors in addition to your mortgage, including credit card debt, you should factor all your monthly payments into your budget before committing to a monthly mortgage payment.
You may not be able to keep up with your additional expenses if you are house rich and money poor. It will make it challenging for you to reach debt freedom.
It can affect your overall life goals
On average, a mortgage lasts as much as 30 years. The truth is that the remainder of life will be going on in that time period too.
You can still hope to travel, eat out from time to time, or finally take the class you had been eyeing for some time.
Your home should not keep you from pursuing your other interests. Provided it is done correctly, your mortgage should not interfere with your other endeavors.
How can you do this? By setting a firm cap on how much of your monthly take-home pay is spent on your house payment, you can save money.
How much should your mortgage be to avoid being house poor?
A lender will calculate your monthly payment range by performing certain computations, but it is ultimately your responsibility to run your own numbers as well.
Don’t forget that you also need to comfortably afford your monthly mortgage payment. Don’t just focus on the down payment on your house. Here are some suggestions to think about.
Consider your lifestyle
Your home situation may be unique from that which your mortgage lender is aware of. Examples include the care of elderly parents or out-of-pocket medical expenses you could face.
Lenders may not be able to properly take into account your lifestyle and personality and costs related to 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 use your annual income to calculate your payments, but from your point of view, as the buyer, using your income gives you a more realistic picture of how much you have to pay for all of your expenses, including your monthly mortgage payments, taxes, insurance, utility bills, and more.
So what should the meeting the needs of 50% mean for your mortgage payment? There are two schools of thought regarding this question – a conservative approach and a more relaxed one.
The conservative approach
The International Monetary Fund suggests that your mortgage payment should not account for more than 25% of your take-home pay. This will ensure that you have plenty of extra cash for other expenses you might be facing.
The more liberal approach
In other areas of the world, 35% of your pre-tax income is considered to be reasonable for a mortgage (or 45% of post-tax income).
Whatever number you select, ensure that you represent your flexibility or restrictions as you pay off your house.
7 Tips for how to avoid being house poor
Now that you understand the house poor definition and what costs to consider before purchasing your house, here are several tips to help you get around overspending on a house.
1. Avoid overpaying on interest by making a larger down payment
Saving up a decent down payment not only gives you more equity in your home but also reduces your monthly mortgage payment as well.
Lowering your mortgage amount will also reduce your interest rate. It can save you tens of thousands of dollars over the course of the life of the loan.
It is safer for the lender because it reduces your annual interest. The lower the monthly payment, the less risky the loan is perceived to be. This is a much less expensive loan with a lower interest rate.
If you would like to avoid paying too much for a house, make sure to put down at least 20% of its cost. Even a modest down payment can improve your financial situation in the future.
2. Buy a more affordable home to avoid overspending
Some people choose to buy what they call a starter house. Although this isn’t your ideal home, it is a great way to become a home owner and still like your home without being house poor.
Sometimes we need to use our needs vs. preferences to determine what we really need from our house.
Start by looking for a smaller home for your budget and see if that is better before you purchase a larger one. You can live in a smaller house in order to start investing in real estate or sell your home and then upgrade when your finances permit it.
3. Pay off other debt before purchasing your home
Another way to avoid paying expensive housing costs is to pay off your debts before purchasing a home. If you have poor credit and intend to buy a house, paying off outstanding debts will improve your credit rating. This could reduce the interest rate on your mortgage that qualifies for qualification.
By paying off debt, your debt-to-income ratio will improve. You can then save the extra money for emergencies or home upgrades later. Create a spending strategy to establish yourself financially as a homeowner.
4. Have a dedicated emergency fund
As a new homeowner, you’ll have a difficult lesson if you are house poor and do not have money for repairs. If you cannot spare any money, you may have to go into debt to repair something when it breaks.
Be sure to make a special emergency fund just for house-related expenses. In this way, you are protected from a large emergency repair that your insurance policy does not pay for.
5. Dual income? Try to budget with one income to save more
One of the primary things to think about when buying a home as a couple is coordinating your budgets to make one income stretch as far as possible. As an example, if you can afford to pay one household expense with your earnings instead of both, you can save a great deal of money.
That way, if one of you will lose your job, you should not be stuck with debt due to a loss of income.
6. Avoid house hopping
House-hopping is when you buy a house to live in it for a brief period, sell it, and move to the next house. You continue this process until you’ve had enough houses to sell.
House-hopping can make you poor because you do not account for major expenses such as closing costs, realtor fees, moving expenses, repair costs, property-taxes, and more.
All of these costs will eat into any short-term increase in your wealth. It’s important to consider these costs as well.
7. Consider the costs associated when buying a house
There is also a cost of homeownership aside from just your monthly mortgage payment.
Utilities are fees that every home-owner can be expected to pay. They include charges for water, electricity, cable, heat, and garbage removal. A lender will not factor these items into your loan calculation.
It is important to add utilities to your budget, as they will be included in your total expenses each month.
Any home-owner is bound to face routine home maintenance needs as time passes. Some parts of the residence may wear out due to regular use.
These issues must be addressed, not only for you as the home’s owner, but also in order to preserve the house’s value if you decide to sell it in a few years.
You may be able to handle these expenses only if your circumstances permit it, possibly lowering your home’s value over time.
If you buy property in a community like a condominium, you might have access to fitness facilities, pools, a lawn, or a garage. These shared areas often cost money to maintain.
A committee will oversee the collection of fees and the maintenance of the premises for a communal benefit. These fees can add up.
Or you can live in an area where homeowners’ association dues (HOA fees) may apply. These costs can run several hundred dollars per month.
It is important to consider the costs of moving into and decorating a new property before making a financial commitment. In order to prepare for these costs, it is a good idea to determine these amounts ahead of time.
For example, you may need truck rentals, movers, etc. It’s also essential to actually be able to create a living space you enjoy once you’ve moved in.
What to do if you are house poor
You can make your mortgage payments much easier if you are house poor today or if you have difficulty making ends meet.
Here are some suggestions to help first time homebuyers struggling to pay their home’s monthly installments.
1. Sell things you own but don’t need online
If you want extra income, selling items that have been lying around your home on a site such as eBay or Facebook Marketplace can inject the money you need into your monthly budget.
In fact, there is a way for you to start a sideline business where you buy and sell used goods online, and the proceeds could be allocated to both growing your business and paying off your mortgage.
2. Find a second job
Side jobs are not necessarily useful, and sometimes having another job is so much simpler.
If so, check out opportunities for extra work in your area, preferably nearby, and possibly work from home to enable you to earn as much money as possible while getting some shut-eye as well!
3. Cut back on your spending
Setting a budget is necessary to successfully completing your home purchase. With one, it is simple to identify areas in which you are spending above your means or locations where you have room for savings.
If you can’t afford an expensive house payment, then you’ll need to cut spending in other areas as much as possible. Of course, you still have to pay for necessities such as food and transportation, but try to keep expenses down on items in excess.
Taking trips to restaurants or movie theaters or going on extravagant vacations would be considered unnecessary.
Keep in mind that just because you choose not to buy these things for the time being doesn’t mean that you will remain without those items. It just means you are taking a break to save money and acquire your house expenses under control.
4. Rent out a room in your house
Another efficient way to earn quick money and spend less on your residence is to find a roommate. In addition to paying rent, you can split utility bills such as electricity, cable, and water.
If you don’t mind living in a companionless setting, you can rent out a room for as little as $20 per night on Airbnb. Sometimes you can make more, and you don’t have to house someone 24/7.
Many people can earn over $500 hosting. That’s quite a bit of money that can help cover expenses!
5. Downsize your home
You may be able to sell your home, especially if you find that you are barely maintaining your head above water financially from your home expenses.
It can be difficult to consider, but downsizing into a much smaller home can save you a great deal of money, keep your debt load low, and reduce your worries.
6. Consider a refinance
While refinancing isn’t always the optimal decision, in some circumstances it can be helpful. For example, a mortgage refinance may lower your monthly payments if you switch from a 15-year to 30-year loan, or you may be able to lower your interest rate.
It’s important to remember that a refinance is always a compromise. Your payments are lower, but you’ll almost certainly pay a lot more over a longer period of time. In addition to the other costs of refinancing, which need to be considered in your decision, there is also the matter of waste.
7. Avoid lifestyle creep
Plumbing costs can sometimes surpass what you think. For example, if you have a large home with a lot of space, it may soon make sense to put a swimming pool in the backyard. Or maybe you wish to have better furniture to match the nice house.
These things can easily add up and make your home expenses much higher than you anticipated they would be.
To avoid spending more money on things you don’t need, be happy with what you have and avoid lifestyle creep. In this way, you won’t be burdened with unnecessary expenses.
Avoid being house poor to become financially successful
Having high housing costs is typically avoidable, and now you know how to avoid paying too much for rent.
Just because a lender offers you a large chunk of money doesn’t mean you should take it.
If you are in this situation, take the time to find a home that costs less and fits your budget.
It’s fine to rent while you are searching for the perfect house that you can afford to purchase.
Make sure you have the right mindset, and organize your finances before shopping.
