house poor

Are you House Poor? Here’s What it Means and How to Escape!

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When I bought my first home in Southern California, I was house poor for a long time. Don’t get me wrong, I got extremely lucky to be able to buy at the time that I did. But it was a struggle to keep up with the costs of housing and the rest of my bills, especially in year two when the property taxes skyrocketed.

I did get through the period of being house poor though, and I have some tips to not only help you avoid it if possible, but get through it as well.

What Does House Poor Mean?

Being house poor means that after you pay your mortgage, taxes, insurance, and anything else that you need to pay to maintain the home that you bought, you don’t have much money left over for anything else. You can’t say you’re poor though, because property ownership is a staple of the middle class, and most of your money is going towards improving your net worth.

However, you are strapped for cash. You might even be living paycheck to paycheck, because there isn’t much left over after the major bills are paid. Being house poor can be a tough situation to be in.

Why Do People Become House Poor?

With property values being what they are, it’s tough to not spend all your money on a house. It’s hard to become a property owner without being house poor. I’ve done it twice – the first time in California when I could barely keep up with all my bills, and the second time more recently in Pennsylvania, when I spent all my savings to buy a house in cash.

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It’s incredibly easy to become house poor. Banks will offer loans that are just at the cusp of what borrowers can afford, and realtors push for the most expensive home they can sell. Homebuyers get caught up in the excitement of buying an amazing new home, and are being told from all ends that the higher end loan is affordable. They decide to buy the dream home at the high end of their budget, and only after the bills start pouring in do they realize how much of a struggle it will be.

How Can you Avoid Becoming House Poor?

There are a few things you can do to avoid becoming house poor during the home buying process. Finding a great realtor, exploring your loan options, being realistic about what you can afford, and ensuring that you are well prepared to buy are all great ways to avoid that house poor feeling.

Finding the Right Realtor

A great realtor will listen to you and talk with you about your budget. A not-so-great realtor will push you to buy a home at the high end of your budget.

I had this exact problem when I was searching for a home in Georgia. It’s important to find a good real estate agent who will meet your needs, so I reached out to a few in the course of my home search. The first one was one of the top realtors in Savannah – she had great reviews and sold a ton of homes. During my first conversation with her, I explained my reasons for moving and told her my budget. I didn’t want to spend more than 200K, and I was hoping to stay well under that.

The first list of homes she sent me had two homes under 200K on it. The rest were all in the 210-230 range. Now, this would be reasonable if I was buying in an area that didn’t have any homes under 200K, but that’s not the case. Savannah is still a very affordable market, and there are tons of homes available at the price point I was looking for. The realtor heard 200K budget, and she wanted to maximize her revenue by selling me something at the top of my budget.

 

The other realtor I reached out to sent me a list of homes between 150 and 200K. He sent me a few that were above 200K, but said we could probably negotiate them down if I was interested. He listened to me and helped me find homes in the budget I was comfortable with. This is the realtor I chose to go with.

The point of all this is that you don’t need to stick with a realtor who is pushing a sale that benefits them more than it benefits you. That’s how you become house poor.

Explore Your Loan Options

There are a variety of loan options available, and what you chose can make a difference in whether you are house poor or not.

For example, if you chose a conventional loan, you will need to provide a 20% down payment, but you also won’t have to pay PMI. This loan option can lower your mortgage payment as well, as your total loan amount will be less.

Specialty Loans

There are also a variety of special loan options for different types of people. Veterans can get a no-money-down loan without having to pay PMI, which is how I was able to afford a house in the first place. USDA also offers specialty loans to first-time homebuyers and undeserved communities. There are a plethora of options available, and it’s smart to explore all of them before even beginning to shop for a new home.

A final thing you can do is shop lenders. You absolutely do not have to go with the first bank or lender that you find. If you shop around, you can find the best interest rate, which will lower your overall monthly payment. It won’t affect your credit score if you price compare for the same type of loan multiple times in the same month – so don’t let the worry that your score will be affected prevent you from finding the best lender!

Be Realistic About What You Can Afford

Before you even start the home-buying process, you need to have an honest conversation with yourself about how much you can realistically afford. Use a mortgage calculator to find out exactly how much you will be paying each month, and make sure it’s affordable. The standard convention is that no more than 30% of your income should go to housing, and you may get pre-qualified for that much.

Standard doesn’t work for everyone though. Take a hard look at your current bills and make sure that adding a mortgage payment, home insurance, property taxes, and maintenance costs won’t destroy your budget.

 

Be sure to include payments to yourself in the form of emergency fund payments, retirement account payments, and general savings in your budget. This will ensure that you are still able to put money into savings after you buy.

A final thing to consider is that taxes and insurance rates might go up. Leave enough wiggle room in your budget to account for possible increases in the mortgage payment.

Prepare Yourself for Buying

The last thing that you can do to prevent yourself from becoming house poor is to prepare yourself well for buying. This can be accomplished by saving a substantial down payment, ensuring that you have an emergency fund, increasing your credit score, and even waiting to buy.

Down Payment

The standard down payment needed in order to qualify for a conventional loan is 20%. Saving 20% for a down payment is nearly impossible in some markets, but even if you can’t save that much, having more than the FHA required 2.5% will be a huge help.

Having a larger amount saved will allow you to put some extra money towards the down payment, but you could also opt to buy “points” which will reduce your interest rate. Compare all of the options to determine which will save you the most money over time.

Emergency Fund

Having an emergency fund will prevent you from being house poor because it will give you leverage to tap into whenever a random maintenance emergency pops up (which trust me – is more often than you realize!). A mistake people often make is including their emergency fund with their down payment. Both are savings, right? Why not use the E-fund for the house?

The reason is that if you spend all your savings on a house, you won’t have anything left in case you need to make repairs. I made this mistake and ended up having to put a few thousand dollars on a credit card to cover a plumbing emergency. Having that extra savings to back me up would have prevented this.

Credit Score

A great way to get the best interest rate and reduce your monthly expenses is to improve your credit score before you start shopping for a loan. Having the best possible score will ensure that you get a great deal from a lender, and can potentially save you thousands of dollars over the life of the loan.

Waiting

They say that waiting is the hardest part – and it’s true. One of the best ways to accomplish the three other things on this list is to wait.

If you don’t need to buy a house right now, wait a few years and focus on building that emergency fund, fixing your credit score, and saving for a down payment. Yes, it sucks to live in a cramped apartment when homeownership is in reach. However, sometimes giving yourself another year or two to build a solid foundation is best. It will ensure that you are well prepared for any curveballs that homeownership throws your way.

Is it Ever Okay to be House Poor?

As you read this, you might think that I’m telling you to never be house poor. But that’s not exactly the case. Of course, it’s better to wait and make sure you are in the best financial position to be able to afford your home. But unfortunately, it’s not always realistic to wait for the “best time”. Sometimes we have to strike when the time is “good enough”. Maybe the market is down and houses are affordable – but you aren’t sure how long it will last. Or maybe you need to buy a more expensive home in a better neighborhood due to school options. There are plenty of reasons why you might need to jump in as soon as you can.  That’s perfectly okay! Waiting until you won’t be house poor is ideal, but we don’t live in an ideal world.

Being house poor can make things difficult for a little while, but there are ways to dig out.

You’re House Poor – How do you Fix it?

Being house poor happens to the best of us. If you are in this position, it’s not the end of the world. There are ways to dig out and improve your overall financial health. You can refinance, save more money, increase your income, or consider geoarbitrage.

Refinance

If you’ve held your mortgage for a few years, compare current interest rates to what you are paying. You might be able to save a ton of money by refinancing to a lower rate.

There is a lot involved in the refinancing process. You need an excellent credit score to get the best rate, and sometimes you need to pay a hefty processing fee. Check out this post on refinancing to see if it’s the best option for you.

Save More Money

Saving more money is one of the best things you can do to fix that feeling of house poor. There are ways to save money on big picture expenses like living expenses, and ways to save on the small things that could add up over time.

Even small changes and small savings can help alleviate the pressure. Putting a few dollars aside in an emergency fund can make all the difference when a maintenance issue comes up. It will prevent you from relying on credit, and give you peace of mind knowing that you can handle anything that pops up.

Increase your Income

I understand that some folks don’t have much wiggle room in their budgets for finding ways to save money. Sometimes, there just isn’t enough money coming in.

If you are in this situation, the best thing you can do is find ways to increase your income. This could be best accomplished through attempting to get promoted at work, changing careers, or starting a side hustle.

Geoarbitrage

One final (and hardcore!) way to get out from under feeling house poor is to move. Sell the house and use the equity to move to cheaper pastures. Obviously, this isn’t possible for everyone, but finding a cheaper place to live is a great way to achieve financial independence. Read this for more information on geoarbitrage.

A Final Word

Being house poor isn’t the end of the world. Sometimes there are ways to avoid it, but sometimes it’s the only option if you want to be a homeowner. That doesn’t mean you are stuck though. Hopefully this post gave you the tools you need to dig out and have more financial freedom!

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