Have you ever heard the phrase that someone is “House Poor?”
It doesn’t take a ton of thinking power to iron out the meaning of the term house poor:
People who have a house, but it breaks their bank account and lifestyle to afford the said house.
Another way of explaining the meaning of house poor is someone who spends the majority of their income on their home. But what do you do if you think you might be house poor?
Here is why should quickly figure out how to stop being house poor and 6 steps to help.
My Personal Experience With Being House Poor
The saying that kids don’t pick up on things is completely fabricated.
I don’t really know why this sticks with me, but I remember in elementary school hearing my mom talking about not “Wanting to be house poor.”
It wasn’t a term I heard one time, I actually heard her talk about being house poor quite often. Even at a young age, the comment resonated with me. Ultimately, my mom did downsize in an attempt to live more comfortably, but even that wasn’t always easy.
Witnessing the real struggle of trying to afford a home, raise a family and save first hand made me come to realize:
Never, will I put myself or family in a spot where most of our income is going to a mortgage, resulting in scarcity in other areas.
In other words, I will never be house poor. But the question is, how do people become house poor?
How do people become house poor?
The easy answer to the question to how people become house poor is pretty simple – they buy a house they can’t really afford.
Time and time again, new homeowners buy their first house and most of the time it is just too much money. While yes, the lending process is stricter now because of the mortgage crash from 2008, but even with a stricter emphasis on debt to income ratios, homebuyers still slip through the cracks.
In order to afford a home some people will:
- Move back home
- Live WAY below their means
- Stop eating out
- Stop traveling
- Save like they have never saved before
- Payoff debt
Which in theory all the above is a great idea and truly honorable (And most will encourage just that including myself). But here is the catch, they do this temporarily just to afford a home that honestly might be out of their price range.
But they scratch and claw. The new home buyers figure out to get the house they want. Yet, when the dust settles and they are in their new home they find themselves in between a rock and hard place.
On one hand, they have their dream home, but on the other, they are trying to resume their previous lifestyle prior to buying their home. And in a matter of months, they’re house poor.
Eating out, traveling, saving for the future, and a plethora of other things are given leftovers because the house payment is eating up the majority of the take-home income each month.
As a real estate agent, Matt Lama put it,
Being house poor is not only mentally taxing, ultimately it decelerates the initiative and ability to build wealth.”
So in the event, you think you or house poor, or maybe you just want to make sure you avoid it altogether, here are 6 tips to help end being house poor (Or preventing it).
6 Tips to Help You Avoid Being House Poor
Use these tips to help you avoid ever being house poor, they work!
1. Your House Budget Should Be 30% (At the most).
Chat with most traditional financial planners and they will recommend never typing up more than 30% of your gross salary with a house payment.
This means if a couple brought in $100,000 combined each year, they would not want to spend more than $2,500 per month on housing. Reason?
For one, you want to make sure you don't have your discretionary income tied up. Secondly, your debt to income ratio, an article from Realtor.com put it this way,
The DTI ratio is essentially a way for you (and lenders) to compare how much money you make with how much you owe—and how a house can fit into that picture. While mortgage lenders typically advise borrowers to keep their DTI ratio below 36%, most planners suggest keeping it under 30%”
But truth be told, the goal is to NOT be house poor! While most planners will say 30% of someone’s gross income is a solid start, to avoid being house poor, use the 25% net income rule… just look at the side by side comparison below:
|30% Gross ($60,000)||25% Net ($48,000 after 20% tax)|
|Affordable Payment Maximum:||Affordable Payment Maximum:|
|Annually = $18,000||Annually = $12,000|
|Monthly = $1,500||Monthly = $1,000|
See the issue?
The 30% gross rule is a full 50% more each month than the 25% net rule.
To avoid being house poor, it is always wise to base monthly payment numbers off of your net income, not gross. No matter what the experts might say, doing this is a more conservative and affordable approach to home buying.
Don’t just live on a budget for just the six months prior to buying your home, always operate on a budget.
For starters, having a budget is key to just about every financial goal, yet most stats indicate only 4 in 10 adults actually even attempt to make a budget. Yet, other than securing lending and closing costs funds, there are no strict rules when it comes to buying a home.
The decision to own a home is as much of a responsibility as it is an American dream. With that being said, operating on a monthly budget that takes into consideration fixed expenses, variable expenses and savings goals is highly encouraged.
Think of it this way – whatever you do before buying a house, you should keep those same habits once you purchase a home… or even improve them!
Save your desired or estimated mortgage payment for 1 year before ever buying a home (If you are renting, add the additional estimated payment into savings).
After one year assess whether or not the lifestyle you lived to be able to that was one you enjoyed. If yes, then you have a good number.
If in the event the answer is no, then you need to adjust your number because chances are trying to afford that mortgage payment monthly will lead to the dreaded house poor feeling.
3. Pay Off Your Mortgage Quicker
If making the payments on your home is already breaking the bank each month, paying off your mortgage might sound a bit contradictory.
However, let’s assume you go back to the frugal lifestyle prior to buying your home and for 2-4 years you make as many extra payments as possible. This will not only get you ahead of the amortization schedule for your home, but it will provide flexibility and options.
With more accrued equity in your home you can now:
- Refinance to a lower rate and payment
- Refinance with a short term like 15 years
- Leverage a HELOC payoff model
Depending on your living situation a quick way to do this is to actually rent out the basement or a room. By doing this, you can now use that extra money to pay down the mortgage quicker.
If paying extra isn’t in your deck of cards and just making the minimum payment is hard enough, it might be time to reconsider relocating.
While jobs, family, and schooling play a heavy hand in relocating, if you find yourself living in an expensive area such as the Washington D.C. suburbs, relocating might prevent you from remaining house poor.
Check out this list of the 2019 most affordable places to live in the US, just be sure to keep in mind job possibilities. One of the quickest ways to go from being house poor to house rich is to relocate to a more affordable area.
5. Sell Your Home
Relocating is out of the picture. Paying extra won't work and you already followed the 36% DTI gross rule when you bought your home, to stop being house poor it might be time to sell your home.
As discouraging as this may sound, downsizing and selling your home is not as bad as it might seem. Just look at the pros of selling a home:
- Downsizing means more affordable
- Less stress because of house poor lifestyle
- Less to clean and maintain
- More freedom to do what you want
6. Have House Poor Awareness
At the end of the day, make sure you are simply aware of the fact that many adults struggle with buying too much house, thus leaving them in a serious financial bind!
Whether you are in the process of buying a new home or you already own, don’t always listen to the lenders, banks, or mortgage advisors. They have their numbers, but you should too.
This is not that their advice or products are bad, but their goal is to sell a product. And before purchasing a home, you should know how much house you can comfortably afford!
Using the budget tip from #2 above you should know what you can afford before ever buying a new home.
If you are someone who already owns a home and you don’t have any intentions of moving, but you’re feeling the money crunch, don’t panic the first step to solving any problem is awareness.
See what short term adjustments you can make and then reassess in a few months.
Final Thoughts on Being House Poor.
What is the purpose of a home?
Is it to show off or is it to keep a roof over your head?
Depending on who you are, how you grew up and what you are accustomed to, the definition of what a home’s purpose might vary.
Someone who grew up in a third world country without running water might be grateful to have a roof that doesn’t leak and a toilet to use. On the other hand, a minimalist might just want a plain apartment they don’t have to worry about that can hold their 14 belongings.
But in reality, a home is where you and your loved ones can gather, live and enjoy life together. A home is where memories are made, kids grow up and a safe place to rest your head each night.
So while having a nice home is absolutely something I personally want to own, I also want to always act on the side of reason. To put it differently, if the math doesn’t work and we don’t hit our number, then it is not in the cards for us.
Being house poor does not make someone a bad person.
Unfortunately, like most American consumers, buying a house is a sign of success, status, and prestige. Therefore we tend to overspend on things that really don’t matter.
Maybe you really want to just spend your money, or maybe you love traveling, being house poor hurts the ability to do the things we love.
On top of not being able to truly, 100% enjoy the things that matter like travel, fun activities, living in the moment and just relaxing with family being house poor leads to one bigger issue:
Statistics consistently show that 80% of Americans live paycheck to paycheck, with the majority of their income going towards housing.
However, just start by making a few simple adjustments. Start with recognizing that teetering on the line of being house poor can lead to bigger problems down the road.
Then start taking action to curb being house poor, which will lead to a much happier financial future! Because remember – you would rather be mentally rich and live in a small house than be house poor and live in a big house!
Question: Do you have (or know of) personal experience with being house poor?
(Hope you enjoyed and feel free to share this post as many Americans struggle with being house poor. ~Josh)
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! I got serious with money when I used Personal Capital to track my finances.