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Why So Many People Are House Poor and How You Can Avoid the Same Fate


Wouldn’t it be nice if buying a home were as easy as walking into a store and out with a new smartphone? Unfortunately, it’s hardly so simple. As I’m finding out, getting ready to buy a home requires a ton of preparation (not to mention saving). But as I give this decision a lot of thought, I’m still amazed by all the people you read about who bought way too much house.

Although it seems like common sense, perhaps I need to restate this cardinal rule of home buying: Before you even start seeing properties, know how much house you can afford.

Fail to heed this advice, and you’ll wind up house poor.

House Poor: A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations… — Investopedia

Some people become house poor when their income plummets and they stay in an expensive mortgage payment. Others create the problem by buying too much house to begin with. Whatever the cause, the financial consequences of being house poor are dire and often include creeping credit card debt and an inability to save enough for retirement.

So how can you avoid the situation altogether? 

KNOW THE REAL COSTS OF OWNING

The best way is to keep that mortgage payment in check.

The rule of thumb is that your entire mortgage payment should be no more than between 28 and 33 percent of your income.  In addition, you want to keep your total debt to income ratio (your monthly debt payments, including the mortgage, divided by your income) below 40 percent.

Second, it’s important to realize the financial difference between renting and owning that almost everybody overlooks: A home requires maintenance and upkeep!

The contributing costs range from the trivial, like leaky faucets and torn screens, to big replacements like a new AC or roof. But just how much does home maintenance run? Ilyce Glink, author of 100 Questions Every First-Time Home Buyer Should Ask warns, “You can expect to spend anywhere from a couple thousand dollars to more than $10,000 per year, depending on the size and condition of the house, on general maintenance.”

That’s a big difference from what you’ll spend on upkeep as a renter (zero).

ENSURE YOU’RE  (REALLY) READY TO BUY

The best way to avoid becoming house poor is to only buy a home when you’re honestly ready. Just because you can doesn’t mean you should. A bank will likely approve you for a mortgage for up to 35% of your gross (before tax) income if you 1) have good credit 2) have held a job for two years and 3) have cash to use as a down payment.

But a house is a big commitment, and there are good reasons not to buy a home. For example:

  • You think you might want to move in less than five years.
  • You’re unsure how long you’ll earn as much money as you do today.
  • You don’t want to be bothered by home maintenance.
  • You want to spend money on other big things, like travel, education, or a wedding.

And if you’re worried that you’re throwing money away on renting, consider this: Any return on investment you may be losing by renting really isn’t a loss if you factor in possible credit card debt and defaulting on your mortgage if you become house poor.  And in this economy, your house probably wouldn’t be an investment anyway. According to this article at the Wall Street Journal blog, home prices have plummeted to 2002 numbers.

Living house poor not only hurts your finances, it takes a toll on you mentally and physically.  Knowing that your income and your home expenses rule your life can be a great source of anxiety. Being house poor removes the liberating feeling of being in control of your finances. Ironically, we Americans view home ownership as the ultimate symbol of financial security and success, but if you’re living house poor, your finances are anything but secure.

As I’m finding, it’s better to make slow, thoughtful moves towards home ownership instead of jumping in too early and becoming house poor. When you’re really ready to own a home, the experience will be that much more sweet.

What about you? Are you or have you ever lived house poor? How’d you get there, and what strains did too many housing expenses put on your finances?

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About Amber Gilstrap

Amber is a twenty-something CPA from Kansas City, Missouri who loves writing, working out, and---of course---finding fresh ideas for saving money. Follow her on twitter @ambergilstrap.

Comments

  1. Dave Ramsey’s rule of thumb is to have a 15-year mortgage no more than 25% of your income. If you’re married, I would even recommend a 15-year at no more than 25% of ONE of your incomes in case one of you loses a job. While you both have jobs pay extra on the mortgage at the full 25% or more and you’ll probably have the house paid for in about 5 years. At that point you can sell the house, buy a house worth double the original house and you’ll own the second home within about 10 years when you started and you never would have experienced house poorness.

    Disclaimer: I can’t actually say I did this, but looking back, I kinda wish I had.

    • I’ve heard DR’s advice before about the 25%, but I didn’t know he meant that for 15-year loans. I think we’ll be able to make that and I would LOVE to be able to make that goal on one income, but I don’t think we’ll reach that, unfortunately. You make really good points, Chase.

    • Yup, Dave Ramsey recommends that your mortgage payment be no more than 25% of your AFTER TAX pay on a 15-year fixed rate mortgage.

      http://www.daveramsey.com/article/how-much-house-can-you-afford/100362/

      That’s a huge difference from 28% of your BEFORE TAX pay on a 30-year loan!

    • I think 25% on after tax pay for 15 year fixed rate would be pretty tough. Sure house prices are low, but that’s really low and you have to start giving up some wants/needs…like a good/safe neighborhood (I think this is a NEED for everyone).

      The smallest house in a good location is still a lot of money.

    • Obviously this isn’t a DR site and it’s more of a rule of thumb, but the idea is to save the money you would throw away toward interest so that you can build equity in the home quickly. So that first house you get might not be 100% of what your looking for, but if you’re only there for a few years, then you can probably “suffer” for a little while.

      Now, on the other hand, moving and selling a home costs money and takes a lot of effort so you don’t want to be jumping around a whole lot. Also, because home prices and interest rates are both extremely low right now, it’s probably worth it to get a house that’s a little over than 25% because you really won’t be losing too much on interest and if you move again in 5 years, interest rates will be significantly higher.

      So, there’s a lot to think about in making these decisions. The last place you want to be is in a situation where you lose half your income (for whatever reason: loss of job, mom staying home with baby, etc.) and suddenly you can’t make ends meet.

      • I apologize ahead of time for over-posting, but I ran some numbers. Say you get $200k mortgage at 5% interest for 15 years. You would pay about $1,582/month on P&I. That would result in a total of $84,686 in interest.

        Now, if you first got a $100k house at 5%, but paid the same $1,582/month, you would pay off that house in 74 months (6 yrs 2 mos) and pay $16,414 in interest. You could then take out another $100k mortgage to buy that $200k house, but in 6 years the interest rate might be 8%. Paying the same amount, you’d pay off the house in 82 months (6 yrs 10 mos) and pay $30,136 in interest. The total interest paid in this situation is $46550.

        So by breaking it up, you save $38,136 in interest, you own the home 2 years sooner and you never had to worry if you significantly lost your income because you could always cut back to the minimum payment of about $800 (5%) or $1000 (8%). The cost, however, is that you had to spend 6 years in that $100k house that you didn’t really want. But then again, maybe that would provide you with motivation to pay it off even sooner.

        • I am enjoying your comments, so keep posting as much as you’d like! :)

          I think you’re right on and it’s important to make well-planned decisions — like buying the $100k house first, and then buying the $200k house — instead of making hasty decisions. Waiting is tough, but enjoying a house that you know you can afford is worth it in the end.

        • This is something close to what i want to do. My wife right now just goes to school but I make $45,000 a year looking at getting around a $100k house on a 15 year loan. Trying to pay it sooner than that especally once the wife gets her degree and career on track. Than once i own it rent it out and get another home for a little bit more on another 15 year loan. This way i would be making income off of renting it and paying on another home that i live in for not many years. Once again only living off of one income this is not hard to do. Than use the wifes income to pay down the house/invest more. Once that house is paid for talk about doing the same to a 3rd house. Evenutally we would own around 3-4 homes by the time or a little after i retire. Also we would have more income with renting them out for a little less than the average rent in that area. I know some times I could not rent them out but thats why i would have money to cover that on the side for taxes and upkeep. Like i said i don’t make that much and me and the wife live nice. We both have nice cars, we eat out and go shopping. I usally buy things that i want like my Mackbook computer. We all most max out our Roth IRA. Right now we rent a 3 bedroom 2.5 bath house and have just a dog. Soon we will try for a baby. So I don’t see why people can’t do this or say it’s hard to live on 1 income. I have what seems to be plenty of money and am not all that frugal. But than again me and my wife are very simple people that enjoy are selfs watching movies at night and going to the park with are dog. Love life and enjoy family and friends that is what helps you make money. I also need to start giving back some of my money.

  2. Wouldn’t plummeting home prices make them a MORE attractive investment?

    • Yes, you can definitely get a house for a great deal right now! First-time homebuyers are in an awesome position right now.

      However, your house won’t be a ‘good investment’ (as in, the value goes up after you buy it) until the market stabilizes. And, who knows how long that could be…

  3. I bought a house and rent a room out to my brother. So if I happened to lose my job I’ll still have enough to cover my mortgage. Once I get the basement fixed up I can rent it out to a friend. The house is a huge liability right now for someone with shallow pockets like me, but I’m doing my best to turn it into an asset. I’m very glad I didn’t buy a “starter home” with no extra room, then I wouldn’t be sleeping so soundly.

    • Of course if your brother can’t pay (for same reason you may not be able to) then you are in a bad situation…

  4. When we bought our first home, we were house poor and it was ok. We bought a duplex at the highest amount we could. Things were tight, we could pay for repairs but we were only saving $50/month towards retirement. But then we worked hard, got the place fixed up and got renters. Then we had another $525 coming in per month, and then my husband got a 7% raise. We funneled $400 of the $525 towards retirement, $25 towards taxes and $100 towards repairs around the house. The raise gave us some breathing room in the budget. Thinking back, it was hard but I am glad we bought when we did and we learned to be frugal. I don’t regret it.

  5. Right now I’m looking to buy my first home. However, I hope I’m never house poor.

  6. This might sound crazy but at 29 and 30 years old my husband and I have moved in with his parents for the year prior to building our first home. We both have good jobs but they offered their basement apartment to us for free so we took them up on it. We purchased 2.5 acres two months ago and we plan to put 30%-40% down on the home when we build in August 2012. By doing this we can avoid paying PMI, pay the home off in 10-15 years and drastically cut the cost of our mortgage payment. I really enjoyed this article and this site in general!

    • That doesn’t sound crazy at all! It sounds smart and I am impressed! 30-40% down is an awesome accomplishment.

      As Chase mentioned earlier, sometimes you have to sacrifice certain things to make the right decisions for the long-term.

    • Wow. Good job. I should have done that! Like Amber said, that is quite the accomplishment.

  7. My mortgage to after-tax income percentage is 25.8%. Before tax it is around 20%. I am not house poor, thankfully.

  8. I had the option of stretching to buy a 2 bedroom condo for 165,000.00 and i decided to buy a one bedroom fixer upper for $120,000…

    I spent a lot of money out of pocket to make the place really nice ($17k and I did that with cash), so my lower monthly payments have been a blessing when my now husband (then fiance) couldn’t find a job for about 6 months and our bills were just getting larger with more groceries, larger utilities, etc.

    I’m so glad I chose the option I did. Sometimes we feel our home is a bit small… but never when we have to clean it.

  9. According to Dave Ramsey’s rule of 25% after tax income on a 15 year mortgage, I could really only afford a $60,000 house. How depressing.

    • It’s actually a $60,000 mortgage. This isn’t including the amount you have to put down in cash.

  10. I just purchased a home and went with a 15 year my payment is 1600 with everything and will go down to 1400 when the homestead tax credit kicks in. I make approximately 4200 after tax income per month which would put me in the the 38% bracket right now and 33% when the tax credit kicks in. I have a 700 per month in other debt payments and I would say that I live like a want. I really believe it comes down to how much sacrifice you want to make, I was living in an apartment and hated the noise so getting a place that was quiet and my own was very important to me so I was willing to cut back each month to buy a home. Don’t get me wrong though I wouldn’t want to give up yearly vacations or some other things but there were things I gave up buying my house.

  11. Super simple formula: whatever amount the lender says you are qualified to borrow, don’t take out more than half that.

  12. A big problem is that people seem to think that a home is something special and different, where emotions take hold and logic takes a back seat. Getting emotionaly attached to a specific home or neighborhood is ludicrious.

    Rather, view a home an expense first and foremost. Buy what’s affordable. Speaking of affordable, the definition of what one could afford is different based on who you’re talking to. Taking out a big loan or “stretching” to get a dream home is what gets people in trouble. Remember, a mortgage is debt – just that it’s way, way more than a credit card payment, albeit with a much lower interest rate.

    If we think logically when buying a home, from a vantage point of minimizing expenses, avoiding too much debt, and looking at needs vs. wants – then, we can learn to love the house we have. The house we can truly afford.

  13. My wife and i are about to buy a house on the ocean. It is one a fixer upper and two more than we shoud really aford on one income (84k). We also have a rental property (paying 800 after bills) and I have a pension ( we are mid 30’s) Although I expect her to work and bring in money (teacher) their is no garuntees in life. How bad can house poor be and should I avoid it? My traditionally frugal instinct says avoid house poor but this is an opportunity to get a great piece of land at a realtivly lower cost as it is a bit of a need to sell situation. We have squirled away money from multiple home buy and sells and savings and look to put 130k downon this one but that drains us and we are left with a 300k mortgage. Can anybody give me a reality check? i tried my financial advisor but he seems pretty excited to beef up the bonus with this mortgage

  14. Personally, when we started thinking about buying (which we’re hoping to do next year), I started with the budget. I fudged in some increased utility and maintenance costs. Then, taking into consideration other goals like retirement savings, I figured out the most I could afford to spend on housing (leaving a little wiggle room)- which ended up being just a bit more than half of “35% our gross income” – a rule of thumb which is absolutely INSANE. Anyway, I did some research on insurance and taxes in the area we’re looking and figured out how much of a mortgage payment we could afford and from there the max house price I’d want to consider. I plan to give the realtor a range that caps out at $25k less than we COULD afford, so hopefully we won’t be tempted to stretch too far. Judging by all the mortgage payment calculators out there, most people do it the other way around, which seems really silly.