Being "house poor" means that a significant portion of your take-home pay is spent on housing expenses such as your mortgage, property taxes, utilities, homeowners insurance, maintenance, repairs and any remodeling. To avoid becoming house poor:
- Research what it will cost to be a homeowner.
- Come up with a homebuying budget and stick to it.
- Budget one percent of the cost of the house and squirrel it away in a savings account to pay for home maintenance and unexpected repairs.
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What Exactly Is Meant by Being House Poor?
Being "house poor" means that a significant portion of your take-home pay goes towards housing expenses such as the mortgage payment, property taxes, utilities, homeowners insurance, maintenance, repairs and any remodeling. Too much spend in these areas leaves you with very little to cover all the other areas in your budget— from food, clothing and transportation to saving and entertainment. Spending too much money on the roof over your head can leave other areas of your life exposed. For instance, saving for retirement, putting children through college and paying for emergencies are made more difficult when your financial spending is out of balance.
How Can You Avoid Becoming House Poor?
Fortunately, there are several steps you can take to avoid becoming house poor:
- Before putting all of your savings towards a down payment, ensure that you will still have money in your account to cover day-to-day living along with retirement and emergency savings. If your bank account will be down to nickels and dimes after making your down payment, then reconsider whether the house is too much of a stretch, budget-wise. If the house is within your budget but you were hoping to lower your mortgage payment by increasing your down payment beyond the typically-required 20%, you may want to consider reducing it so that you can preserve liquidity-- or cash on hand-- to pay for budgeted and unbudgeted expenditures.
- Take into account all of the expenses of owning a home. Your mortgage lender will calculate three of the largest expenses of homeownership— the mortgage, which includes principal and interest, property insurance to cover damage to your home and its contents, and property taxes payable to the county and city for school and other local services. Other expenses, however, will come into play. Some will be predictable and routine such as monthly power, gas and water bills. Others will be sporadic and often ill-timed, such as a leaky roof or fussy furnace needing repairs or replacement. A good rule of thumb to budget for maintenance and repairs, is to set aside one percent of the cost house each year in a savings account earmarked for maintenance and repairs. If the cost of your house is $250,000, then set aside one percent of this figure, or $2,500 each year, to pay for planned and unplanned maintenance.
- Appeal your property taxes with your local property tax assessor, if your property taxes appear to be higher than comparable homes in your neighborhood. The property tax bill that your neighbors' pay is a matter of public record, just as your own property are. Your tax office can direct you to the online portal where you can find property tax records for all houses in their jurisdiction.
- Stick to your homebuying budget and avoid being tempted by houses that are a little higher. While a $300,000 home may seem only marginally higher than a $250,000 house from a principal and interest perspective, the expenses can quickly add up on other fronts, from property taxes to homeowners insurance to an emergency housing fund.
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And if You're Already House Poor, Now What?
If you're already in over your head, or are struggling to make ends meet on the housing expense front, here are some tips to help turn things around:
- Increase your income: seeking out opportunities to increase your income can help you balance the challenges of homeownership. However, it can also help you meet other goals, such as funding retirement or chipping away at credit card debt. Income-generating options range from taking on gig work or a part-time job, to turning a hobby— for instance, baking pies and cakes for others during the holidays— into a business. Additional income can also come from the job you’re at, through asking for a raise or applying for a higher position in another department.
- Trim spending in other areas: take a magnifying glass to your current spend and separate out those items that are in the want-to-have bucket versus those that are more of the must-have variety. For instance, groceries are a non-negotiable, while going out to lunch, less so.
- Lower the cost of homeownership by bringing in a tenant: Renting out your basement or a spare bedroom can lower the cost that you now must cover for your mortgage and other expenses. If you’re not sure that a year-round tenant is for you, start off with something more temporary such as renting out a spare bedroom or your basement through a short-term rental platform.
- Put your home up for sale and move into something more affordable: selling your house can be a tough pill to swallow, especially if it’s your dream home. However, if, after evaluating all your options, from cutting back on non-essential expenses to becoming a full-time or part-time landlord, you find that you’re still coming up short each month, then selling might be the best solution for your situation at this time. If you're house poor, you might consider buying a more affordable home or even going back to renting, to give yourself some time increase your savings and strengthen your finances.
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Can Being House Poor Affect Your Credit?
In a word, absolutely. It's important to avoid becoming house poor in order to insulate yourself from financial shocks, such as an emergency car or roof repair, that can suddenly leave you unable to make a mortgage payment. Missed or late mortgage payments, just as with missed credit card payments, can be reported to the three major credit unions, Equifax, Experian and Trans Union, stay on your credit report for up to seven years, and cause your credit score to drop. And, if you miss four mortgage payments in a row, your lender may foreclose on your home, forcing your hand to sell your dream home anyway. Worse still, missed and late payments can make it tougher to qualify for another mortgage to enable you to buy a home down the road.
The Bottom Line
Becoming house poor is a risk that can be avoided at the front-end by sticking to a homebuying budget, and on an ongoing basis by finding ways to increase your income and trim your expenses. And if you find that you're already house poor, there are steps you can take to alleviate the financial burden, from taking on a roommate to finding a more affordable home.