Avoid Being “House Poor” By Taking These 4 Steps
Buying a home is a major milestone, but it can also come with significant financial risks. House poor means spending so much of your total income on mortgage payments and related homeownership costs that you have little left for other expenses or savings.
Many homeowners find themselves in a situation where they’re struggling to afford their homes, often struggling financially as a result. And, if there’s one thing you don’t want to do as a buyer, it’s to find yourself in a similar position. There are several warning signs that you may be house poor, such as experiencing financial stress, relying on credit cards to cover basic expenses, or being unable to save money.
Being house poor can lead to ongoing financial strain, especially when a significant portion of your total income goes toward homeownership costs, making it difficult to cover other essential expenses and impacting your overall well-being.
How to avoid becoming house poor
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. But in reality, they’re struggling to afford their homes and live their lives comfortably. When you overextend yourself financially, you may not have enough left for discretionary spending, travel, or to truly enjoy life. And, if there’s one thing you don’t want to do as a buyer, it’s to find yourself in a similar position.
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:
1. Shop below your maximum pre-approval amount
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 a monthly payment that makes sense in your budget. 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, and loan terms until you find a scenario that works best for you. 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.Underestimating renovation or closing costs can quickly turn your financial situation into a financial nightmare, especially if you haven't planned for all expenses.
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.Sometimes, you may need more money than anticipated, leading some homeowners to tap into their home equity or even take a second job to cover unexpected expenses. Be realistic—investing too much in renovations can leave you house rich but cash poor, with little liquidity for other needs.
Building an Emergency Fund
One of the smartest ways to avoid becoming house poor is to build a solid emergency fund before and after you buy your home. Life is unpredictable—unexpected maintenance costs, a sudden job loss, or even a temporary reduction in income can quickly turn your dream home into a financial burden if you’re not prepared. An emergency fund acts as your financial cushion, giving you peace of mind and the ability to comfortably afford your housing costs even when things don’t go as planned. Experts recommend setting aside at least 3-6 months’ worth of living expenses in a separate, easily accessible savings account. This fund should be enough to cover your monthly mortgage payments, property taxes, and other essential living expenses if you hit a rough patch. By having this safety net, you’ll be able to keep up with your mortgage and other bills without dipping into retirement savings or taking on more debt. Building an emergency fund isn’t just about protecting yourself from worst-case scenarios—it’s about giving yourself breathing room so you can enjoy your house without constant financial strain. Start small if you need to, but make regular contributions until you reach your goal. This simple step can make all the difference in avoiding the stress of becoming house poor and ensuring your home remains a source of comfort, not anxiety.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.
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. In addition to renovation costs, ongoing home expenses such as home maintenance and homeowners insurance are key components that can significantly impact your budget over time.
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.
When budgeting for these costs, keep in mind that many homeowners underestimate ongoing expenses like home maintenance and homeowners insurance, which can affect their long term financial stability if not properly planned for.
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.
