We tend to have a “bigger is better” mentality when it comes to homes. We’re taught to buy the biggest home we can possibly afford. The problem with this approach is that, too often, homebuyers find themselves overwhelmed by the costs of homeownership, resulting in a situation that is know as “house poor.”
What Does it Mean to be House Poor?
When you spend a large portion of your income your home, you are considered house poor. Costs of homeownership include mortgage payments, property taxes, homeowners insurance, maintenance costs, repairs, and utilities. Because you spend so much on your home, you have little left over for other costs. After taking care of your housing costs, you might have trouble meeting your other financial needs, such as buying groceries, making your car payments, or being able to do things you enjoy, like going on vacation.
There are two main ways to become house poor:
- Purchasing a home that you can just barely afford: When you push your home payments to the limit by getting the biggest home you are approved for, it’s easy to become house poor. Since there are some lenders that will approve you for loan payments of up to 40 percent of your monthly income, getting the maximum you are approved for can mean a quick road to becoming house poor. This is especially true once you factor in utilities, maintenance, taxes, and other costs.
- A change in financial situation: In some cases, you become house poor due to a change in your financial situation. Perhaps you or your life partner has lost a job or had hours cut. Maybe you have children and one of you decides to stay home. Now, you don’t have the same income, but your home costs are the same, and that means that you have less discretionary income for other expenses.
No matter how you ended up in this situation, being house poor can be very disheartening. You might have a nice house that you are proud of, but you might have to sacrifice other things that you enjoy. In many cases, house poor homeowners aren’t able to spend as much as they would like on entertainment, recreation, and travel.
Avoid Becoming House Poor
The best way to avoid becoming house poor is to consider how much house you really need before you buy. Don’t borrow the maximum that you are approved for. Instead, think about how much of your monthly income the home is going to require each month. Then, consider what other ways you would like to use the money. Be realistic about your situation, and don’t forget to estimate increased utility costs and taxes on a larger property.
It’s also a good idea to look ahead. Discuss your future plans with your partner. If you know that one of you will eventually quit work (or cut to part-time) to stay home with your children, base your home purchase on a single income. It also makes sense to prepare for an emergency. Think about what would happen if you lost your job. How easy would it be to make your housing payments? It’s not pleasant to consider these possibilities, but you should think about what it would mean for your financial situation. If the home you are contemplating is on the edge of affordability, consider stepping back and looking at a less expensive home, just to prevent a house poor situation.
If you are a homebody and prefer staying at home, then you might not mind spending a little bit more on your house. However, if you want discretionary income enough to enjoy life outside your home, and if you are interested financial stability, purchase a less expensive home that won’t suck up all of your discretionary income.