Buying a home can be amazingly exciting. For most of us, it’s a huge step that will affect the rest of our lives. Unfortunately, it can also be stressful, looking for that perfect house for months before you finally find something you want. Now you’re faced with likely the most significant debt you’ll face in your life, your mortgage. Your agent will tug on your emotions and get you to want what you think is your dream house. Your bank will smile and approve you for a loan, but little do you know, you’re heading toward a nightmare. You’ve done all the paperwork, moved your stuff, now the bills start coming, reality sets in, and you suddenly realize… you’re house poor.
What is House Poor?
So what does it mean to be house poor? Essentially, being house poor means a disproportionate amount of your income goes towards owning your home, leaving you with very little left over for your other expenses or activities. Simply put, you are paying too much for your house and don’t have any money left over for the rest of your life.
After adding up your mortgage, property taxes, HOA’s, insurance, and any other home-related expense, if you are left with little to nothing else to spend, then you, my friend, are house poor.
What else does it affect?
The better question is, what doesn’t being house-poor affect? When you’re house poor, you’ll need to siphon a bit off the top of other import money matter. You might start contributing less to retirement accounts, which could be tens of thousand less come retirement. Emergency funds might not get funded, which will be a double whammy if something were to happen, as, for one, you won’t be able to afford a repair, and you won’t have the backup you need.
Some of your other debts could be affected as well. You might have been aiming to pay them off faster but won’t be able to with the large house payments. Maybe you can’t afford to pay them at all. Likely somewhere in between, but with a large house payment, other debts could start to pile up faster than initially planned.
Your life in general suffers. Without extra funds, you won’t be able to do the things you want to do, no matter what they are.
Avoid Becoming House Poor: Take All Home Costs into Consideration
There are a ton of considerations to thinking about before buying a house. However, money should be your top priority. Buying a home is a considerable investment and one that can be difficult to reverse or correct. Taking your time and considering everything is the best way to make sure you make the right choice for your situation. Below are the top financial aspects to think about before taking the plunge into homeownership.
Your Debt-To-Income Ratio
Debt-to-income ratio (DTI) is pretty much what it sounds like. DTI is the ratio of the amount of debt for both the potential mortgage and revolving debt (credits cards, etc.) versus your income. Basically, it determines how much of your income will need to go toward your mortgage payments. This ratio will determine how much of a loan the banks or lenders will give you for your home purchase.
Most often used by mortgage lenders is back-end DTI. Back-end DTI takes all your minimum debt payments each month and compares that number against your gross(not net, which is what you come home with after taxes) income. The other type of DTI, front-end DTI (or housing expense ratio), only looks at your monthly mortgage payments against your monthly income.
Both of these figures are important when determining if you can afford to buy the home you want. Most experts recommend that your back-end DTI be no higher than 36% and front-end DTI no higher than 28%. Both versions of DTI are a good start when determining if you are buying too much house. It’s essential to make sure you stay well below these numbers, though as lenders, for one, are looking at gross income, not net income. In addition, they only look at the actual mortgage payments, and many other expenses come with homeownership; more on that soon.
Updates and Repairs
Some of the highest costs that come with homeownership will be any updates that you’d like to do and many, many repairs. Most of these repairs will be an unexpected expense, but you should expect to have them, that make sense? Also, some of the repairs may be covered by your homeowners’ insurance, but many smaller ones are not. Before buying a home, make sure to account for both of these costs, as either one can add up quickly.
Property Taxes Almost Always Go Up
Most homeowners pay their property taxes through their mortgage companies. When determining the final mortgage payment, it typically includes both the principal and interest portion, plus the property taxes. The trouble is, property taxes have this tendency to go up. Suppose you are looking at a home, and it’s already at the high end of your budget. In that case, rising property taxes should certainly be considered.
Don’t Forget About Utilities
Utilities aren’t an expense that should be written off when it comes to home expenses. Many people think they are minor and don’t need to be accounted for, but they can become a significant expense. Cable, heating, cooling, water, and other monthly costs will not be getting any cheaper. Cable\Internet alone can easily be over $100 a month. Depending on where you live, heating\cooling can cost you over $100 as well. Add in other a quarterly water bill and others, and you’re looking at a few hundred a month that needs to be budgeted for.
You’ll Need Furniture
Now that you have a new home, you’ll need to furnish it too. Gone are the days where you could get away with a couple of milk crates and a futon and call it a day. Instead, you’ll need to get couches, chairs, tables, beds, bookshelves, entertainment units, etc. The initial purchase of all of these will be the most considerable expense, but many will need to be replaced as the years go by.
Your Property Needs Maintenance Too
When it comes to budgeting for a new home, don’t forget about the outside too. Of course, the house itself will need to be maintained outside, but so will the property. A ton goes into maintaining your property, such as lawnmowers, snowblowers, grass seed, rakes, etc., and it can get pricey. So when figuring out a home budget, remember that the whole property has costs associated with it.
Live On A Home Budget Before You Buy
A good way to tell if you can afford the home you want is to create a budget using your expected expenses associated with living there. If you can live comfortably on your current income level within that budget, then you’ll likely be fine once you move into a home. Remember to take into account everything that comes with buying a home, not just the mortgage payment.
Circumstances Can Change
There are many aspects to owning a home that can cost you money, but what about other aspects of our lives. What if you lost your source of income, or you have a kid? How long would you be able to get by? Many times our circumstances can change without any warning whatsoever. Have an emergency fund ready before you move into a new home, or at least have it well on its way to being four to six months of expenses. Don’t let the move stop you from finding it, either.
House Poor Tips: Before You Buy
You can do many things before you buy a home that will help prevent you from becoming house-poor. When done correctly, you can be ready for your first home with confidence, even if it is at the higher end of your budget.
Make A Larger Down Payment
Making a larger down payment will make a lasting difference when it comes to budget for a home. For one, by putting at least 20% down, you’ll be avoiding paying PMI (Private Mortgage Insurance). This is an extra charge you’d need to pay until you reach a certain equity level in your home, but it’s something you avoid needing to do at all costs.
Secondly, the bigger the down payment on your home, the lower the monthly payment. Even an extra $50 a month can go a long way in monthly budgeting.
Already Have an Emergency Fund
As mentioned above, circumstances can change without warning. Don’t start an emergency fund when you first move in. Already have it fully funded before you buy a new home. This will have several benefits. Obviously, with the emergency fund ready, you’ll be good for a few months if something does happen. With a fully-funded emergency fund, you’ll be able to use that money for other aspects of your home and will be that much less of a strain on your budget.
Buy A Starter Home
A great strategy to not becoming house poor is to buy a home well below your income level. I’m not talking about buying a shack that’s ready to fall down, but you don’t need to buy your forever home right away. A starter home is basically that a home you start out in order to build up some equity that you can then leverage into buying a bigger house. Buying a home when you are single or newly married will allow you to buy smaller. Instead of paying rent and getting nothing back, now you’re gaining equity in your home. Then, when the time comes to move up to a bigger house, you can use the proceeds from selling your home to put in as a down payment (along with what you’ve saved up, right?) for your next house. Consider the starter home and investment property.
Pay Off Other Debt First
There are a million good reasons to pay off your debt, one of which is to avoid becoming house poor. If you already have several other obligations to pay off, adding a mortgage on top of that typically isn’t the best of ideas. At the very least, higher interest loans\debts should be completely paid off before going into a new home. If possible, consolidate any other remaining debts into a lower monthly payment overall. The best way to go into a new home is with no other debts at all, if possible. This will leave you with the most amount of your money available to go into the house.
You’re Already House Poor, What Can You Do?
Okay, so maybe you’re reading this a bit too late. Unfortunately, you’re already in a home that makes your house poor. The good news is, although not easy, there are plenty of things you can do to improve your situation.
Create A Budget
Many times people just don’t realize where their money is going. If you haven’t already done so, create a budget that will help you figure it out. The simple realization of what you are spending your money on will often help get everything back on track again. Don’t let yourself spend on unnecessary purchases when there are more important things like keeping a roof over your head and food on the table. Make sure money is being allocated wisely.
Well, this shouldn’t come as much of a surprise, but one way to stop being house poor is by raising your income level. Unfortunately, most of us can’t simply walk into work, demand a raise, and get it, so you’ll have to do other things if that’s not an option.
Obviously, something else you can’t just wake up one day and do is find a higher-paying job, but that doesn’t mean it’s not possible. The sooner you start looking for another job, the sooner you’ll find one.
Maybe finding a second job is a better option. No one likes the idea of working more, but if it can help you pay off debts or other expenses faster, getting a second job and be an excellent way to back on track. Once you have your finances under control, you can think about leaving the second job, but only if your primary income can comfortably cover all your expenses.
Another option is to start a side hustle. Similar to getting a second job, but with side hustles, we are typically able to work when convenient for us and not on a set schedule or for a “shift” per se. There are tons of options out there that you can do right in your own home. Still, there are obviously other very popular options like Uber, Lyft, Instacart, and other similar apps.
Rent A Room
Maybe you have an extra room in your house; try renting it out. With the rise of popular sites like Airbnb and VRBO.com, you can rent your space out for just a few days a month and make a nice chunk of change. However, if you are looking for a more permanent source of income, turn to a site like craigslist for someone looking to live there for a longer term.
Again, not exactly rocket science, but worth mentioning. If your home is costing too much, you’ll need to reduce expenses in other aspects of your life until things are under control. Cut back on any unnecessary expense until you can comfortably pay off other debts or keep up with the costs of homeownership.
Sometimes the best course of action is to refinance your home (in conjunction with budgets and cutting back, of course). If you’ve been in your home for a few years, you’ll have some equity built up. Hopefully, interest rates have gone down too, but if not, refinancing can certainly still help. Shop around to find the best deal, and you might find you can take hundreds of your current monthly mortgage payments. Yes, you’ll be starting the 30-year clock over again, but at least you’ll have some breathing room in your finances.
Sell Your Home
It’s not the solution you’ll likely want to take, but if all else fails, bite the bullet and sell your current home. Find a home that suits your needs, but more importantly, is within your budget. If you are downsizing, the sale of your existing home should cover the down payment and then some. You could reduce your mortgage payments by hundreds of dollars easily, especially if you move to an area with lower taxes as well. Smaller homes cost less to maintain, heat, cool, and the overall savings could be in the thousands if done right.
There are a lot of costs associated with owning a home other than the mortgage payment itself. If they aren’t all taken into consideration, you could easily find yourself being house poor. When you are unable to have a social life or do the things you want to do because of your home, is it worth it? There are many ways to avoid being house poor long before you buy a home, and if you are currently house poor, there are ways to correct it. Take the steps necessary to ensure you don’t become house poor, and your future self will thank you.
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.