Avoid Being “House Poor” By Taking These 4 Steps

Being “house poor” is a situation that can describe homeowners who are financially overextended, struggling to balance their housing costs with their overall budget and expenses. What does it mean to be house poor? It means that a large portion of your income is going toward your home, leaving little left for other needs and financial goals. This can impact your financial stability and make it difficult to cover daily expenses or save for the future. Start with a Budget That Works for You The first step in learning how to avoid being house poor is to create a realistic budget. Track all your home expenses, including mortgage payments, homeownership costs like maintenance and repairs, utilities, and daily expenses such as groceries and transportation. Don’t forget to include other recurring bills and discretionary spending. When budgeting, make sure that your housing costs do not take up a large portion of your monthly gross income. The general rule is to keep your total housing costs below 30% of your monthly gross income, so you have enough left for other priorities. Setting clear financial goals and regularly reviewing your budget can help you maintain financial stability and avoid becoming house poor. This approach ensures you’re balancing your spending and saving habits effectively. Build an Emergency Fund Unexpected repairs or job loss can quickly strain your finances. Having an emergency fund with extra money set aside for these situations can help you avoid financial distress and keep up with your home expenses. Understand All Your Housing Costs When calculating your monthly mortgage payment, remember to factor in the role of an escrow account, which helps manage property taxes and homeowners insurance as part of your payment. This ensures you’re prepared for all homeownership costs and not caught off guard by additional bills.

Creating a Budget and Emergency Fund

One of the most effective ways to avoid becoming house poor is to take control of your finances before and after you buy your home. Creating a realistic budget and building an emergency fund are essential steps to ensure your dream home doesn’t turn into a financial burden. Start with a Budget That Works for You Begin by tracking your monthly income and all your expenses, especially your housing costs. This includes your monthly mortgage payments, property taxes, homeowners insurance, private mortgage insurance, HOA fees, and ongoing maintenance costs. Don’t forget to factor in other living expenses like utilities, food, and transportation, as well as non-essential expenses such as entertainment and hobbies. A good rule of thumb is to keep your monthly mortgage payments and other housing expenses below 30% of your gross monthly income. This helps ensure you have enough money left over for other bills, debt payments, and discretionary spending. It’s also wise to keep your total monthly debt payments—including car loans, credit cards, and your home loan—under 36% of your gross income. Regularly reviewing and adjusting your budget will help you stay on track and avoid the financial strain that comes with being house poor. Build an Emergency Fund for Peace of Mind Life is full of surprises, and unexpected expenses can quickly throw your finances off balance. That’s why it’s crucial to build an emergency fund with enough money to cover 3-6 months of living expenses, including all your housing-related costs. This safety net can help you handle sudden repairs, medical bills, or even a temporary loss of income—without dipping into your retirement savings or taking on more debt. Keep your emergency fund in an easily accessible savings account so you can get to it quickly if needed. Having this extra cash on hand will reduce financial stress and help you avoid becoming house poor, even when life doesn’t go as planned. Consider All Your Housing Expenses When creating your budget, make sure to include every cost associated with homeownership. Beyond your mortgage payments, remember to account for property taxes, homeowners insurance, private mortgage insurance (if applicable), HOA fees, and regular maintenance costs. These ongoing costs can add up and impact your monthly cash flow, so it’s important to be thorough. It’s also a good idea to review your debt-to-income ratio before making a home purchase. A mortgage lender can help you determine how much house you can comfortably afford and guide you toward the right mortgage for your financial situation.

We’ve all heard cautionary tales of new homeowners who have ended up “house poor.” Yes, their homes may be gorgeous and enviable, but that asset is all they have. In many cases, these homeowners become 'house broke,' meaning their housing expenses dominate their budget, leaving them in a 'house poor situation' where they struggle to cover other financial needs. When housing costs are too high, there is less money available for other expenses, savings, or emergencies. But in reality, they’re struggling to afford their homes and live their lives comfortably. And, if there’s one thing you don’t want to do as a buyer, it’s to find yourself in a similar position. It's important to remember that being 'house rich'—owning a valuable home—doesn't always mean you have financial flexibility or enough cash flow for daily living. Here are the steps you can take during your home search to ensure you find a home that works with your wallet and keeps you comfortably in your budget. As home buyers, it's crucial to consider not just the mortgage, but also other expenses that come with homeownership, to avoid becoming house poor.

1. Shop below your maximum pre-approval amount to avoid becoming house poor

Once you go through the process of getting pre-approved, you’ll receive a letter that states how much money the lender is willing to loan you. Many buyers, especially those who haven’t bought before, make the mistake of shopping for homes up to that amount. In reality, this figure is not a suggested price range. It’s the absolute maximum you’re allowed to borrow. You don’t have to spend that much, and in fact, we suggest that you don’t. A smarter plan, especially if you’re concerned about taking on a mortgage, is to work backwards. First, find monthly payments that make sense in your budget. A good rule of thumb is that your total housing costs, including your monthly payments, should not exceed 28-30% of your monthly gross income. This helps ensure you don’t become house poor. Then, see how big of a loan that payment will allow and use that as your maximum. To do this, you can use a mortgage calculator to play around with different loan amounts, down payments, loan terms, and interest rates. Remember, the interest rate you secure will directly impact your monthly payments and overall affordability. After you’ve found your sweet spot, don’t forget to see how a payment of that size affects your monthly budget as a whole. Ideally, you’ll land on an amount that allows you to become a homeowner while still being able to fund the other aspects of your life.

2. Don't forget closing costs

Remember, your monthly mortgage payment and initial down payment aren’t the only costs that you have to shoulder as a buyer. There are also closing costs to consider. These fees account for all of charges incurred during the course of the transaction and cover anything from the cost of inspections, to title insurance, or the cost of retaining an attorney. Traditionally, these fees will amount to around 1%-2% of the home’s purchase price and will be split evenly between the buyer and the seller. However, in some cases, the seller will agree to take care of the upfront costs and allow the buyer to tack his or her portion onto the mortgage, which means repayment can occur over time. In either case, it’s still an additional cost to consider as you budget for your new home. Keep in mind that property values can influence both your property taxes and closing costs, as higher property values often lead to higher tax assessments and increased fees at closing. 1%-2% of the home’s purchase price may not sound like a lot at first, but it typically ends up amounting to a few thousand dollars. It all adds up.

3. Be realistic about renovations

When you’re shopping for a home, buying a home that needs a lot of work can seem like a great idea. While the idea of purchasing a bigger house may be appealing, it's important to remember that a larger home often comes with higher costs, which can impact your ability to save for retirement or maintain long-term financial stability. For one thing, properties in need of TLC often come with a much lower - and more attractive - sale price. For another, undertaking these projects offers you the chance to put your own personal stamp on the home. However, be aware that renovations often come with a much bigger price tag than you might think. If you’re not particularly handy, you’ll likely need to hire professionals to handle both of the work. That alone will inflate the cost. Not to mention that any estimates you get are just that: estimates. Often, extensive renovations will come across an unexpected detail that ends up costing more. When all is said and done, renovations can sometimes end up costing more than just buying a turn-key home in the first place. To keep yourself from getting in over your head, it’s important to be realistic about the size and scope of renovations that you’re prepared to handle. Ask yourself: Do you have the funds to start these projects immediately or does it make more sense to find a home that’s livable and renovate over time. Then, search accordingly.

4. Factor in upkeep & maintenance costs

Realistically, settling into your new home is just the start of the costs. As you live in it, you’ll undoubtedly encounter recurring costs for its upkeep that you’ll have to pay. If your goal is to avoid becoming “house poor”, your best bet is to think long-term and account for these costs from the start. Taking on a second job or finding ways to generate extra income, such as freelancing or renting out part of your property, can help you manage ongoing homeownership costs. Having more money available through these strategies provides a buffer for unexpected maintenance or repairs. In this case, you should focus on both annual fees like property records and monthly ones like utilities. Here, the seller is your best resource. He or she should be able to provide you with estimates of these costs to factor into your budget.