Choosing to live a lifestyle you can’t truly afford can lead to some serious financial consequences, like being house poor.
Being house poor is a form of lifestyle inflation where you develop housing costs that take up a large portion of your income and prevent you from being able to comfortably meet your other expenses for the month.
A good rule of thumb is to never allow your total housing costs to exceed 30% of your take home income. This includes your rent or mortgage, and utility bills.
A good example of house poor would be a family who just bought a spacious 4-bedroom house and can’t afford to pay their credit card bill each month.
It’s a sticky situation to be in, which is why you never want your housing expenses to take over most of your income.
You still have other bills to pay and don’t want to get pressured to work more. That means spending even less time in your home just so you can afford it.
Your best bet is to avoid being house poor at all costs, and you can do that by following the advice below.Thanks to our friends from Guitarable.com for contributing with some ideas.
1. Stay a Renter for the Time Being
Buying a house and maintaining it is not cheap, no matter how you look at it. If you don’t feel like you’re ready to buy, or the housing market is not good in your area, continue to rent.
This is the situation I find myself in currently. My husband and I were able to secure a pretty nice apartment at an affordable rent rate.
My portion of the rent only comes out to $430 per month, and while there are a few hidden costs of renting, we do a pretty good job avoiding them and keeping our expenses low.
Plus, we haven’t even started saving for a down payment yet, so I know if we tried to buy a house tomorrow, our housing expenses would increase no matter what home we chose.
I’m also not interested in covering all the maintenance and repair costs of owning a home, so for now, renting is cheaper and allows us to avoid being house poor.
If you are still renting and find it affordable, start saving up any extra money you can to build up a nice savings buffer to have when your housing expenses increase.
2. Put at Least 20% Down When You Purchase a Home
When you do decide to purchase a home, aim to put at least 20% of the purchase price down as a down payment. Not only does this help you avoid private mortgage insurance (PMI), but it also gives you more equity in the home and can possibly lower your monthly mortgage payment.
I know a 20% down payment may seem like a lot, but that’s where you need to be a little patient. Buying a house is nothing to rush into and whether you’re choosing a 15-year or 30-year mortgage, you want to start out with payments you can feel comfortable making each month.
You can also work extra hours or pick up another job to speed up the process of saving for your down payment.Is a large portion of your income going toward your mortgage? Here's what to do Click To Tweet
3. Determine How Much you Can Borrow on Your Own
One of the main factors that contribute to being house poor is taking out a loan for a home that is too expensive for your budget.
Lenders will often assess your income and debt to determine how much you can borrow for a home, but you must come up with your own solution as well.
If a lender says you’re approved for a $285,000 loan, that doesn’t necessarily mean you can afford that. You must run the numbers on your own and consider all of your expenses and financial obligations, including the ones your lender doesn’t know about.
You most likely need to cover expenses like food, fuel for your car(s), childcare, utility bills, pet expenses, retirement contributions, savings, etc.
If the mortgage payment seems it would be a stretch with your current income, search for a home that is more affordable. No matter how nice a home is, you don’t want to be stressed out paying for it or even run the risk of losing your property.
4. Eliminate your Debt ASAP
Whether you rent or buy, you should get into the habit of making extra payments on your debt to get rid of it ASAP. Debt payments are just another monthly expense that can be avoided.
Sometimes I think about what I could do with the extra money I’m putting toward debt instead, and that motivates me to eliminate my balances to free up more of my income.
If you don’t have any debt, you may be able to afford slightly higher housing costs without a strain. While I’m not sure that my husband and I will have all of our debt paid off by the time we purchase a home, we plan to have a big chunk of it eliminated. This will help our debt-to-income ratio.
Lenders will not grant you a home loan if your debt-to-income ratio is too high, meaning the minimum payments for your debt take up too much of your monthly income.
If you have too much debt, lenders will have a hard time believing that you can also afford timely mortgage payments. Even if you can, it’s best to have no debt so you can cover your housing expenses without a problem and save more for unexpected expenses.
5. Reduce Your Expenses and Increase Your Income
If you’re already stuck in a mortgage or a lease for some time and you feel house poor, there are still a few options to consider. To start, you should run through your budget and decrease any of your other expenses to free up some more income.
Consider cutting the expenses you don’t need or could live without. For example, you may not be able to skip your credit card payment each month without hurting your credit, but you can downgrade your phone service or cut your clothing budget to save more money.
Some people who want a nice house choose to sacrifice other wants and expenses so they can afford their home. If having a specific home is something you value, this would be an ideal option for you. Some people choose to put off expenses like traveling and dining out regularly so they can afford their homes and live comfortably, which is not a bad trade-off if that is your priority.
On the other hand, and in some rare cases, being house poor is not about your choice to live in an expensive home or area, but your income. Let’s say you live in a pretty modest town with average home and rent prices, but still can’t seem to make ends meet. It may be time to increase your income so you can afford all your expenses.
Start by asking your current employer for a raise, then look for another job if that doesn’t work. You can also pick up side gigs to bring in extra money like freelancing a service you are good at, babysitting or dog walking for friends or family, or even getting a second job temporarily.
The main idea is to find an employer or clients who can pay you more money so you’re not just working more hours for the same pay. You can also find a roommate to share housing costs with if that’s an option.
Whichever path you choose, don’t give in to lifestyle inflation or settle for being house poor because that’s no way to live. Your housing expenses should never dominate your budget and you should seek out balance between your income and financial obligations and expenses.
Have you ever been house poor? How do you avoid becoming house poor?