How to Avoid Becoming House Poor

We bought a house 2 1/2 years ago. When I say bought, I mean we borrowed a large amount of money, forked over a small amount of cash, and landed ourselves a 30-year loan with a payment that includes the cost of the mortgage, home insurance, taxes, and private mortgage insurance (or PMI).

When a lot of the money you make each month goes towards your house payment and other costs related to it, you are house poor. Here's what you can do before you buy a house, or even if you are already in a house, to avoid becoming house poor.ยฉ Iriana Shiyan / Dollar Photo Club

We did not buy a house at the right time for us. Besides that, it was a seller’s market so all the houses we wanted went like hotcakes. We put in about 5 or more offers before we finally got a house and not exactly the house of our dreams.

The biggest reason we were searching for a house in the first place was not because we were ready to buy. It was because we had a few family members who needed an affordable place to live and we thought that, by buying a house, it would ease their burden, as well as keep our own overall monthly payment fairly low.

I regret buying a house under those circumstances. I wish that we would have found other ways to help our family members so that we were not the ones stuck with a mortgage payment and excessive amounts of debt in the end.

After just 2 1/2 years of living in the house, we have become house poor. It’s not something I’m proud to admit. It’s definitely a heavy burden, and we are barely staying afloat each month because our mortgage is just too high for the income stream we actually produce each month. It was perfectly fine when we bought it, but now that my husband owns his own business and is just finishing his first year, we are in a really tight spot.

What Does It Mean to Be ‘House Poor’?

When you are house poor, it means that much of the money you earn goes toward your home. For example, if you made $3,000 and your mortgage was $1,500, that would make you house poor because 50% of your income is just to pay for your house.

The recommended percentage that should go toward rent/mortgage, utilities, and maintenance of the dwelling is just 28% (or less) of gross income. That means, from the previous example, the monthly mortgage payment (as well as utilities and maintenance) should be no more than $840 a month.

What You Can Do to Avoid Becoming House Poor

We knew what we were getting into when we bought the house, but we did not know how quickly our job situation would change after we moved in. I know that is a really bad excuse, but it’s the only one I’ve got.

I don’t wish this situation on anyone, so I’d like to give a few tips on how to avoid becoming house poor. It’s fairly simple. However, it seems like more people are treating home ownership like it’s the holy grail and that they’ve made it if they “bought” a home.

It’s definitely not peaches and ice cream when you are shoveling a good amount of your earnings each month into your home. There is so much more to life than just the roof over your head. If we were in a better situation, I would love to travel. I cannot wait to hop on the next plane and start exploring the world. I’ve always wanted to travel, but I’m not going anywhere, anytime soon because I have an obligation to pay for my home.

That being said, if you do not want to become house poor, be sure that you:

Practice Sound Financial Habits

Your habits are the backbone of your entire financial picture. You need to take a close look at your own habits and vow to change if yours have turned into bad habits. When you are looking at buying a home, be sure you areย living well below your means, saving a percentage of every paycheck, and keeping debt to a minimum or eliminating it altogether.

Buy at the Right Time

There are so many factors in buying a house that can make it the completely wrong time, that it’s hard to know when the right time really is.

At the very least, you need to make sure your mortgage payment (including taxes, insurance, interest, and PMI), utilities, and maintenance will be just 28% of your income. Even better if it all comes out to less than that.

Is your income fairly stable? Or do you plan on changing jobs in the near future? If you are sure that your position will not change anytime soon, and your income will remain stable, then it may be the right time to buy. If you are a couple and one of you plans to quit when you start a family, then only run the numbers with the income that will remain. You cannot expect to continue paying a high mortgage payment after one spouse quits their job if you can barely afford it with two incomes.

I strongly suggest that before you even think of buying a house, you have at least 20% to put down. This will help you avoid PMI, as well as give you greater equity in the home from the get-go. If you can wait a while longer until you have cash to buy a home, even better. Not everyone agrees that you should pay cash for a home, but to me that is one less payment to worry about each month and you will have no interest…ever.

Finally, take your time to find the right house for you and your family. Don’t go into home-buying with a lot of pressure (like we did) or you will forget that you are waiting for the house of your dreams.

Improve Your Credit Score

Will you be getting a loan to buy your home? If so, then you need a great credit score.

When we applied for our home loan, I was already a stay-at-home mom, so we had to use my husband’s less-than-stellar credit score to apply. I wish we had tried to increase his credit score before applying, because it affected the PMI payment we make each month, and it’s not pretty.

Take a Close Look at Other Costs

Don’t forget that your overall dwelling costs will include much more than just the principal on your mortgage. You will have interest, homeowner’s insurance, taxes, home maintenance (including yard work), and utilities. You might be able to afford the house just based on the sale price of the home, but if you fail to consider everything else that comes with owning the home, you will likely be severely shocked after just a few months or years.

Do Diligent Research

Nothing is worse than moving into your dream home just to find out soon after that you have to replace the roof or the hot water heater. Be sure you hire an inspector that will do a great job at finding anything that could possibly be wrong with the home when you have the chance. Replacing a roof would be the last thing you’d want to do after just purchasing a home.

Also, spend a little time in your dream home’s neighborhood. Go shopping. Can you afford the grocery prices or are they way out of your budget? These little things can add up and make it really hard to continue to afford living in a home that you thought you could pay for.

Is living in this part of town going to cause you to desire to keep up with the Joneses? As soon as that happens, you are going to find it harder and harder to come up with your house payment each month.

What If You Are Already House Poor?

You might already be house poor. If that’s the case, you need to find ways to cut costs in your every day life. Track all your expenses and pinpoint exactly where your money is going. You can start by examining your homeowner’s insurance, and possibly your mortgage interest rate. Move onto your home maintenance costs and utilities. After that, your grocery bill can easily be slashed. ย What about your car expenses and even spending on your children? I would ultimately suggest that you do a spending freeze until you are in a better position.

If you’ve already done all that, or even if you haven’t, now’s the time to make more money. You don’t necessarily need a new job, you just need to find something on the side, perhaps, that can increase your income. You can find plenty of ideas for making money on my Pinterest board, Money Madness.

While we have been doing our best to increase our income, some months it just comes too close. Other months we have to pull money from savings. Ideally we will be out of this mess sooner rather than later.

As a last resort, you can try and sell your home. I would suggest you do this before you are in way over your head and cannot keep up with payments.

For us, we just don’t think we want to add more stress to our already stressful situation and try to sell our house while we are just starting a business. Hopefully in a few years we can sell. I honestly don’t think I’ll buy another house until I’m absolutely ready. I think renting will suit us just fine until we can get all our ducks in a row.

When you are at a point that you think it’s time to buy a house, ask yourself honestly, “Can I afford to buy a house?” Even after running the numbers, it still may not make sense to buy. Whatever you do, learn from our poor mistake. I wouldn’t share it unless I knew it could help someone avoid becoming house poor.

What tips can you add?

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Charlee

I'm a mom of 3 on a journey to feed my family healthy-er food. Personally, I believe that you can feed your family healthy, delicious meals without spending a fortune or slaving away in the kitchen.

Comments

  1. This is a really great post, Charlee. It blows my mind how little we know when we get into these situations and how much we take for granted (for example, you just assume that a bank is not going to loan you more than you can reasonably pay back each month – but thats not really true!). We also jumped into buying a house really quickly and while I’m glad we did it, we also put a small percentage down and had to get PMI – so the loan and payments are really high!! We finally reached enough this past summer to eliminate PMI and that was a real victory for us – and an extra $100 in our pocket each month. I always thought that mortgages were “good” debt – not any more! Nothing is better than being debt free ๐Ÿ™‚ Hopefully we’ll experience it some day! ๐Ÿ˜‰
    Nikki @ MBAsahm recently posted…Seven Layer CookiesMy Profile

    • Thanks so much, Nikki! I was a little shocked that we had such a range in home prices we “could” look at. But, I knew the ballpark we could truly afford at the time and it was about $50k less than what the bank said we could borrow! Glad we went a lot cheaper, but I wish we had found a home that was even cheaper than the one we are in now. I’m so happy you got PMI off your payment. It’s the worst! I hope you can be debt free some day, too! My goal is to just get out of this house sooner rather than later. :/

  2. Alaina F. says:

    So glad I stumbled upon your blog and this post! I needed it! After crunching the numbers I realize that my husband and I now are “house poor” even though we rent our house and don’t own it. I am a stay at home mom and he just got a new job that pays double what we had before, so our financial situation will change very soon for the best. The information you shared on how to avoid being house poor is definitely useful for us now, and we do plan on buying our first home within the next few years. The tips you posted are very helpful and we will use them! Thanks so much for sharing your experience, I needed to read that before jumping into home ownership! ๐Ÿ™‚ ๐Ÿ™‚ ๐Ÿ™‚

    • Yes, you can even be house poor when you are renting! Glad you realized that. It’s great your husband got a new job with better pay! Good luck on your journey to buy a home! And thanks so much for visiting. ๐Ÿ™‚

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