Don't Let Your Dream Home Turn Into a Financial Nightmare
The term "house poor" is used to describe people who have overextended themselves financially in the purchase of a home. This often happens when individuals buy a house they can barely afford and then find that their other financial obligations quickly add up to an amount greater than what they are able to pay each month. As a result, these individuals become “house poor” — unable to save for retirement or even enjoy life because all of their income goes toward housing-related expenses.
Unfortunately, this situation isn't just limited to those with low incomes; it affects people from all walks of life. By understanding how being house poor works and becoming aware of the warning signs before it's too late, you can avoid this costly mistake and keep your finances healthy. In this article, we'll discuss what it means to be "house poor", the problems associated with it, and how to avoid or get yourself out of the situation.
Key Takeaway
Being "house poor" can be a debilitating and costly mistake that affects people from all walks of life. When buying a home, it is important to understand what kind of financial obligations may result from the purchase and plan accordingly. Individuals should ensure their expenses do not exceed their income, so they are able to save for retirement and have enough money to enjoy life. With proper planning and budgeting, it is possible to avoid being house poor while still being able to own a desirable home.
"House Poor" Defined
Being house poor is a situation in which an individual has overextended their finances in the purchase of a home. This occurs when an individual buys a home that they cannot adequately afford, and then quickly find that their other financial obligations are greater than what they can manage each month. As a result, these individuals become “house poor” — unable to save for retirement or even enjoy life because all of their income goes toward housing-related expenses.
Problems with Being House Poor
Being house poor can lead to a number of problems, both financial and emotional. Financially, it can be difficult to keep up with mortgage payments and other bills when your income is stretched too thin. If a homeowner can’t make their mortgage payments, they are at risk of foreclosure and possibly losing their home entirely. On top of this, people who are house poor may be unable to save for retirement or other long-term goals.
On an emotional level, being house poor can be extremely stressful. When so much of your income is devoted to housing costs, it can be difficult to enjoy any other aspects of life. Individuals in this situation may feel trapped and helpless, unable to make ends meet no matter what they do.
How Do People Become House Poor?
People become house poor when they purchase a home that is too expensive for their current lifestyle and financial circumstances. This often happens when people overestimate their future earnings or underestimate the amount of money that will be needed to maintain the property. It can also occur when individuals take on excessive debt, such as with an adjustable rate mortgage, and are unable to keep up with the payments when interest rates rise.
Becoming House Poor: The Costs of Homeownership
Now that we know what is means to be house poor, how do people get that way in the first place? Many first-time homeowners may not plan beyond the costs of buying a house - and the down payment and closing costs are just the start of the lifelong expenses of owning a home. But, the costs of owning a home are significant, and buying a home is more than just a monthly mortgage payment.
Homeownership Costs- Homeownership costs go beyond just the monthly mortgage payment. Homeowners must also consider the additional costs associated with maintaining their property, such as utilities, taxes, insurance, and repairs. These costs can quickly add up and should be taken into consideration before making a purchase.
Utilities are often an unexpected expense for first-time homeowners. These costs can vary greatly depending on the size of the home, location, and other factors. Additionally, taxes and insurance can also be significant expenses for homeowners and should not be overlooked when calculating total cost of ownership.
Property Taxes- Property taxes are another significant cost associated with owning a home and must be taken into consideration. Property taxes are assessed by the local governing body on real estate and can vary greatly from state to state, county to county, or even city to city. In some states, homestead exemptions can provide tax relief for certain individuals, such as those who
Homeowners Association (HOA) Fees- Homeowners Association (HOA) fees are a common cost associated with owning a home. These fees are typically paid to the HOA of a development or neighborhood and can range from small, flat rates to monthly payments that cover maintenance and other services. HOA fees can vary greatly depending on the size of the development and services offered. Common services that may be included in HOA fees include landscaping, snow removal, trash pickup, and maintenance of common areas.
Maintenance Expenses- Something is eventually going to break in your home. While it’s impossible to say when, you can make some educated guesses based on how old the home is and when major systems, the roof and any included appliances were last replaced. Maintenance costs are often between 1 – 3% of the purchase price of your home each year. Whether you can expect to be at the low or high end of that range often depends on the age of your home.
If you’d prefer to have a stable home maintenance cost that handles unforeseen contingencies, you may want to consider a home warranty or, in a buyer’s market, ask the seller to include a home warranty with the purchase.
Becoming House Poor: Changes In Cirumstances
No one ever plans for it, but the fact is that one day we may all lose our jobs unexpectedly, or we could become ill or disabled and unable to work. These things can ruin your best-laid plans. Whatever the case, you’re going to be in a better position for the future if you’re not stretching your budget to the max in order to pay housing expenses.
How Can I Avoid Becoming House Poor?
The best way to avoid becoming house poor is by being aware of your financial situation and understanding what you can comfortably afford before making a purchase. It's important to get an accurate estimate of your current income, expenses, and debts so that you can accurately assess how much you can realistically spend on a home. Additionally, it's important to remember that housing costs will increase over time due to taxes, insurance, and other expenses. Therefore, it's important to factor in these additional costs when determining what you can comfortably afford.
If you already find yourself in a house poor situation, there are still steps you can take. One option is to work with a financial advisor and develop a plan to pay off debt and get back on track with your finances. Additionally, it may be possible to refinance your mortgage or sell the property in order to free up some of the money that is currently going towards housing-related expenses.
Avoiding The Poor House: What Percentange Of My Income Should Be Allocated Toward Housing?
There are a variety of methods you can use to help determine how much you should realistically spend on a home. We'll cover a couple of them here, but the most important rule of all is to create a budget before buying that is realistic and reflects your lifestyle priorities and finances.
The 28% Rule Of Thumb- The 28% rule of thumb states that an individual should not spend more than 28% of their gross monthly income on housing costs. This includes mortgage payments, property taxes, insurance and any HOA fees. This rule is designed to ensure that individuals are able to cover other necessary expenses such as food, healthcare, transportation and savings.
Debt-To-Income Ratio (DTI)-
The debt-to-income ratio (DTI) is a measure that compares an individual’s total monthly debts to their total monthly income. It is important to know your DTI when determining how much you can afford to spend on a home, as lenders use this ratio to determine if an applicant has the ability to cover their housing expenses. Generally, the DTI should not exceed 36% of an individual’s gross monthly income.
What Should I Do If I'm Already House Poor?
If you're already house poor, the first step is to create a budget and plan to get your finances back on track. Start by assessing your current income, expenses and debt to determine how much of your income should be allocated towards housing. This will help you understand how much you can afford in terms of mortgage payments, property taxes, insurance and other housing expenses.
No matter what your circumstances are, it's important to make sure you're not becoming house poor. When in doubt, always be on the side of caution and take into consideration all aspects of your financial situation before deciding how much to spend on a home. By understanding your current finances and creating a realistic budget, you can ensure that you are making smart and informed decisions about housing.
Refinance Your Home- Refinancing your home can be a great way to save money on your mortgage payments. When you refinance, you are essentially taking out a new loan with a lower interest rate and replacing the existing mortgage with it. This can significantly reduce the amount of money you have to pay each month, which can help you avoid becoming house poor.
Sell Your Home- Selling your home may be the best option if you are struggling to make payments. By selling the property, you can free up money that would otherwise be going towards housing expenses and use it to pay off debt or invest in more affordable housing. Additionally, selling a house can help you avoid foreclosure and damaging your credit score.
Limit All Discretionary Spending- Limiting discretionary spending is one of the best ways to avoid becoming house poor. Discretionary spending includes items like dining out, entertainment, and luxury goods that are not necessary for living. It’s important to take a hard look at your finances and make sure your discretionary spending is within a budget that you can afford.
Use Your Savings- Using your savings to avoid being house poor is an excellent idea. Not only will it help you keep expenses down, but it can also offer financial stability in the long run. Saving up for a home before buying can give you more negotiating power with lenders and potentially get you a better interest rate. Additionally, having a cushion of money saved up can provide peace of mind in case unexpected expenses arise.
Raise Your Income- Raising your income is an important way to avoid becoming house poor, as it will give you more funds to work with and increase the chances that you can afford a mortgage payment. There are a variety of ways to increase your income, such as taking on additional jobs, pursuing promotions or raises at your current job, or starting a side business.
Conclusion
Ultimately, how much of your income you allocate toward housing is up to you, but it's important to be realistic and consider all factors so that you do not become house poor. With careful planning and budgeting, you can ensure that your housing expenses are manageable and won’t break the bank.
