What Does it Mean to Be “House Poor” and How to Avoid it?

If you're a first-time buyer who's only just started your house-hunting journey, you might have heard the expression, house poor. Many of us are familiar with the term and understand it carries negative connotations, yet we do not know what it means. 

Read more to find out what it means to be house poor and avoid getting into that situation. So you can live your homeownership life without regrets and become proud and happy with your investment.

While there's no official definition of the term house poor, it describes the situation in which a homeowner spends a large portion of their monthly income on housing expenses. Aside from mortgage payments, this also includes other costs such as homeowners insurance, property taxes, utilities, and even maintenance.

Even if they’re building equity with their home, their budget is stretched thin, with a little left over for other important expenses. Being house poor makes it difficult or impossible for them to achieve their other financial or personal goals, such as building a retirement fund, paying off debt, or enjoying life in general.

In a recent survey by ConsumerAffairs, 69 percent of homeowners consider themselves house poor. The survey defines house poor homeowners as having little savings left after paying their mortgages and associated monthly expenses. Moreover, 54 percent reported that house-related expenses were their largest financial burden.

You may end up being house poor for many reasons. For instance, many first-time homebuyers fail to understand and consider the costs associated with buying and owning a home. They get caught up in the idea of owning their dream home without taking into account other expenses beyond the down payment and mortgage payment.

Maybe you and your spouse decided that one of you will quit your job to become a stay-at-home parent. This setup could significantly change your financial situation since you're dependent on one income source.

Likewise, a major change in your circumstances, such as a loss of a job or an unexpected illness, may stretch your budget to the max and make it even more difficult to pay your housing expenses.

Regardless of your median household income, you can be house poor if you're spending too much on your home. Here are some indicators that this is you:

• You spend a significant part of your income on housing costs.

• You regularly worry about whether you’ll be able to afford your monthly mortgage payment.

• You keep tapping into your savings to cover your mortgage payments.

• It’s becoming difficult for you to cover other expenses, such as groceries and transportation.

• You don’t have an emergency fund and can’t afford to start one because there’s no space in your budget.

• You feel that the cost of homeownership prevents you from pursuing your other wants and goals, such as traveling to new places or even engaging in a new hobby.

1. Know how much house you can comfortably afford.

Before shopping for a home, it's important to figure out how much house you can comfortably afford, which may be a different number from the maximum mortgage you can get approved for depending on factors such as your credit score and debt-to-income ratio. Even if you can qualify for a higher mortgage loan, this doesn’t mean you have to accept the full amount. Experts advise buying less house than you can afford but still meets your needs. Likewise, remember to never go beyond your price range and stick to your home buying budget.

2. Do your homework before buying.

Before plunging into homeownership, educate yourself about the various expenses associated with owning a house. Aside from calculating the down payment, closing costs, and your expected monthly mortgage payment, don't forget to also consider these costs:

• Utilities (water, gas, electric, trash, etc.)

• HOA dues

• Property taxes

• Maintenance, including gardening, pool service, snow removal, house cleaning, tree removal service, etc.

• Any potential repairs, like a leaky roof or water damage after a storm

Especially if you will be transitioning from being a renter to a homeowner, remember that there won’t be a landlord who will cover many of these costs. 

3. Plan for repairs and maintenance.

Even if you purchase a house in very good condition, it will inevitably need big-ticket repairs over the years. A home warranty may be helpful to cover any unexpected breakdowns, but you probably can only rely on it during the first year or two. Moreso, if you've got your eyes on a fixer-upper. You’d need to get estimates and bids to plan ahead, plus prepare an extra budget for unforeseen expenses. 

This is another reason to never skip a home inspection. Some buyers in crazy markets have been waiving property inspections to be able to sweeten their offer and shorten their closing date. However, a home inspection is highly recommended since it will help you discover all the current problems and potential issues before you sign on the dotted line. The seller might get the issues fixed before closing, or you will receive a price reduction to cover those repairs yourself. But if not, at least you have an estimate for repair expenses and can determine whether they fit comfortably in to your budget. For example, you can figure out if the roof is nearing its lifespan, or maybe the cracks in the foundation are early signs of structural damage.

4. Make a larger down payment if you can.

Although many loans and homebuyer assistance programs allow you to make smaller down payments, waiting a bit and saving more before buying a house can also help avoid becoming house poor. By making a larger down payment, you'll be reducing the amount you need to borrow, therefore lowering your monthly payment. This also makes you considered a less risky loan, which results in a lower interest rate.

Moreover, there’s no need to pay for private mortgage insurance, which lenders use to protect themselves in the event you default on the loan if you can put 20 percent down. This can save you thousands of dollars over the life of the loan. You just need to make sure that this option doesn’t deplete your savings.

5. Build a housing emergency fund.

Aside from your savings, it's a good idea to put aside money every month strictly for housing expenses. Your housing emergency fund will provide you with a cushion to cover unexpected circumstances; for instance, if you lose your job or if something breaks, that leaves you with a hefty home repair bill that warranties or insurance won’t cover.

Bottom line

Despite the difficulties, 53 percent of correspondents from the ConsumerAffairs survey said that homeownership is difficult but better than other options, including renting. This shows that even though buying and maintaining a home can be costly, for many, homeownership is still the right decision over the long term, and is still worth it in the long run. Remember to do your research before stepping into the frenzied real estate market. By understanding the pros and cons of homeownership by hiring a local and experienced real estate agent to help you get the best deal, you can enjoy the long-term benefits of owning a home and be proud to call yourself a homeowner.