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What Is House Poor and How Can You Avoid It?

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Published on December 18, 2019
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You’ve typed your information into one of those online calculators that tells you how much house you can afford, and you start looking at houses within the range it gave you. The houses on the lower end of the range are OK, but they aren’t nearly as nice as the ones at the high end. Sure, maybe your budget will be a little tight if you purchase a house for that much, but the math says you can afford it.

But can you really? Lots of people fall into this trap. They’re told – by an online calculator, a mortgage banker or a real estate agent – that they can afford a certain amount of house. But just because it technically fits their budget doesn’t mean it’s advisable.

Spending too much on housing can lead you into a situation that’s known as being “house poor.” What does that mean, and how can hopeful homeowners avoid it? Let’s take a look.

What Does It Mean To Be ‘House Poor’?

“House poor” describes the situation of a person who spends such a large portion of their income on housing expenses, including mortgage payments, insurance, taxes, maintenance and utilities that they have trouble affording much else. To avoid this, financial advisors have long recommended homeowners spend no more than 30% of their gross income on housing expenses.

Think you might qualify as house poor? Here are some indicators that you’re spending too much on homeownership at the expense of your overall financial health:

  • You regularly worry about whether you’ll be able to afford your monthly mortgage payment
  • You frequently have to dip into savings to cover the full monthly payment
  • You don’t have an emergency fund saved up and you don’t have enough money left over each month to start contributing to one
  • You don’t have the space in your budget to contribute to a retirement fund
  • You have other wants or goals that you feel the cost of homeownership prevents you from pursuing, such as attending concerts, traveling or engaging in a hobby
  • You spend a large percentage of your income on housing

How To Prevent Becoming House Poor

Buying a home, especially if you’re a first-time home buyer, is a huge financial step, and not one you should dive into without first doing a lot of careful planning and assessing whether your finances can handle it.

Often, the problem isn’t that hopeful home buyers can’t afford homeownership, period – it’s that they get too caught up in the idea of owning their “dream home,” or giving off the appearance that they can afford more house than what is actually advisable for their income level.

When calculating how much house you can afford, it’s always a good idea to err on the side of caution and look at houses on the lower end of the spectrum of what your budget can handle. Just because a lender is willing to give you a lot more money doesn’t mean you have to find a house that costs the maximum of what you can borrow.

Because a home can be such a long-term investment, it’s natural to want to spend a little more to get one you like and that you think is likely to hold its value. However, if you’re a first-time home buyer, you might be better off looking at starter homes rather than a “forever” home. Starter homes are smaller and cheaper than the average house, thus making them a great option for first-time home buyers who typically have smaller incomes and are more at risk of being house poor.

You should also think seriously about what would happen if you were to lose your income or suffer a pay cut sometime in the near future. While you might be able get by right now making large monthly housing payments, will you be able to keep up with those payments if you temporarily have to cover them using the money you have in your savings? Will you be able to put aside money just in case this happens with such a large portion of your income going to your mortgage? These are some of the things you’ll need to consider.

To avoid getting yourself into a situation where you’re at risk of becoming house poor, you should try to find a reasonable housing cost range that your budget can handle.

Not sure what that might look like? There’s all different kinds of advice for how much of your income you should spend on housing. Some financial experts say no more than 30% of your gross income, others say no more than 25% of your take-home, after tax income. However, it really comes down to your own individual financial situation. When determining what you can afford, consider all the items currently in your budget, such as regular costs and other debts.

Don’t forget that even if you can comfortably afford the regular mortgage payment (plus taxes, insurance and utilities), there are also plenty of unexpected costs that come with homeownership, and some of them can be fairly expensive. A leaky roof or burst pipe could end up breaking the bank if you aren’t financially prepared.

Waiting a bit and saving more for homeownership before buying a house can also help you avoid becoming house poor. By putting down a larger down payment, you’ll decrease the amount you need to borrow for a home, lowering your monthly payment and making your mortgage a bit more manageable.

What To Do If You Are House Poor

If you’re having trouble affording things after you’ve made your monthly housing payment, there are ways you can ease the burden and ultimately get to a more financially healthy spot.

The first thing you should do, if you don’t have one already, is create a monthly budget. Simply being more conscious of what you’re spending your money on can help you identify areas where you can cut back or eliminate unnecessary expenses.

You might also consider looking into ways you could increase your income. Picking up a side hustle or gig work can give you a little extra cushion for those high monthly mortgage payments.

If you’re looking for a more serious and permanent solution, you may need to consider selling your home and buying a less expensive one. Though selling a home can be a stressful process to have to go through, it may ultimately be your best way out of this situation.

Getting in over your head can happen to the best of us. If you find yourself feeling “house poor,” the most important thing is that you take steps to remedy the situation and get your finances back on track.

If you’re ready to begin the home buying process, you can get started online with Rocket Mortgage® by Quicken Loans®.

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