How to Avoid Being House Poor
- Being "house poor" means that a significant portion of your take-home pay is spent on housing expenses.
- Housing expenses include the mortgage payment, property taxes, utilities, homeowners insurance, maintenance, repairs, and any remodeling.
- The total cost of homeownership is important to know before buying a house.
What Does It Mean to Be House Poor?
Being “house poor” means that a significant portion of your take-home pay goes towards housing expenses such as mortgage payment, property taxes, utilities, homeowners insurance, maintenance, repairs, and any remodeling. Unfortunately, too much spending in these areas leaves you with little to cover all the other areas in your budget, like food, clothing, transportation, 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 is difficult when your financial spending is out of balance.
Below are a few tips to avoid becoming house poor and how to get out of being “house poor.”
How Can You Avoid Becoming House Poor?
Here are four steps you can take to avoid becoming house poor.
Step #1: Consider Daily Expenses
Before putting all your savings towards a down payment, ensure that you still have money in your account to cover day-to-day living along with retirement and emergency savings. If you can expect your bank account to be down to nickels and dimes after making your down payment, then reconsider whether the house is too much of a stretch, budget-wise.
Suppose 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%. In that case, you may consider reducing it to preserve liquidity–or cash on hand–to pay for budgeted and unbudgeted expenditures.
Recommended Read: Sinking Fund vs. Emergency Fund: How Do They Work?
Step #2: Calculate All Expenses
Take into account all of the expenses of owning a home. Your mortgage lender will calculate three of the most significant homeownership expenses—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 other local services.
Other expenses, however, will come into play. Some will be predictable and routine such as monthly power, gas, and water bills. Additional expenses 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. For example, if the cost of your home is $250,000, then set aside one percent of this figure, or $2,500 each year, to pay for planned and unplanned maintenance.
Step #3: Property Taxes
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 is. Your tax office can direct you to the online portal where you can find property tax records for all houses in their jurisdiction.
Step #4: Stick to Homebuying Budget
Stick to your homebuying budget and avoid being tempted by houses that are a bit 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.
Recommended Read: 10 Personal Finance Basics Everyone Should Know
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 four tips to help turn things around:
Step 1#: Increase Your Income
Seeking out opportunities to increase your income can help you balance homeownership challenges. However, it can help you meet other goals, such as funding retirement or chipping away credit card debt.
Income-generating options range from taking on gig work or a part-time job to turning a hobby. For example, baking pies and cakes for others during the holidays can become a side hustle or your new business. Additional income can come from your job by asking for a raise or applying for a higher position in another department.
Recommended Read: How to Negotiate Your Salary Via Email (With Examples)
Step #2: Trim Spending
Take a magnifying glass to your current spending and separate items in the want-to-have bucket versus those that are more of the must-have variety. For example, groceries are non-negotiable, while going out to lunch isn’t necessary.
Step #3: Lower The Cost of Homeownership By Bringing in a Tenant
Renting out your basement or a spare bedroom can lower the cost you must now cover for your mortgage and other expenses. If you’re unsure that a year-round tenant is for you, start with something more temporary, such as renting out a spare bedroom or basement through a short-term rental platform.
Recommended Read: 6 Ways to Make Extra Income Using Your Home
Step #4: Consider Moving Elsewhere to Afford Your Housing Expenses
Selling your house can be a tough pill to swallow, especially if it’s your dream home. However, after evaluating all your options, from cutting back on non-essential expenses to becoming a full-time or part-time landlord, if 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, consider buying a more affordable home or even going back to renting to give yourself some time to increase your savings and strengthen your finances.
Can Being House Poor Affect Your Credit Score?
In a word, absolutely. It’s important to avoid becoming house poor to insulate yourself from financial shocks, such as an emergency roof repair, that can suddenly leave you unable to make a mortgage payment.
Similar to missed credit card payments, missed or late mortgage payments can be reported to the three major credit unions, Equifax, Experian, and TransUnion, stay on your credit report for up to seven years, and cause your credit score to drop.
Also, 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. Plus, missed and late payments can make it tougher to qualify for another mortgage to enable you to buy a home in the future.
Recommended Read: Why Your Credit Score Matters When Purchasing a Home
The Money Wrap-Up
Becoming house poor is a risk that homeowners can avoid at the front end by sticking to a homebuying budget on an ongoing basis and finding ways to increase their income and trim their expenses. 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.