How to Avoid Becoming House Poor

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When the housing bubble burst in 2006-2007, and housing values hit even newer lows in 2012, America’s homeowners felt the impact on their wallets big time. Home foreclosures spiked from roughly 885,000 in 2005 to 1,259,000 in 2006, an increase of approximately 42%, according to Wikipedia’s timeline of the U.S. housing bubble.  The experts tell us that nearly half of Americans are what is described as “liquid asset poor“, meaning that, essentially, they are living paycheck-to-paycheck. A big reason that so many folks are living paycheck-to-paycheck is that they are, in all reality, house poor.

What is “House Poor”?

House poor is when your house payment exceeds 40% of your monthly budget. What’s interesting about this number is that many mortgage companies today will happily lend a borrower with good credit and minimal debt a housing loan with a payment equal to as much as 45% of one’s gross monthly income. So, in many ways, the industry sets borrowers up for failure.

Therefore we as consumers must take control of our own financial decisions and destinies to and determine for ourselves what size of house payment we are comfortable with and what size of a house payment can potentially put us in a difficult situation in the future should our financial situation change. should will put us in a position to weather financial storms so we can and come out financially safe on the other side.

That being said, here are some things you can do to avoid becoming house poor or to change your housing situation if it is already leaving you financially strapped.

Beware of Variable Loan Rates

The ARM, or “adjustable rate mortgage” loan, grew immensely in popularity before the housing bubble burst as people searched for ways to get the most house for their buck.  This was one of the biggest reasons for the housing meltdown in the first place.

Housing rates had been at historic lows for several years, and as is customary, Americans grew overly comfortable with the good financial times. When the bubble burst and interest rates began to rise, people’s ARM loan rates began to rise as well, adding several hundred dollars a month to many people’s house payments. Talk about paying an “ARM and a leg!” As a result, many people became “house poor” seemingly overnight and what was once an affordable house quickly became an unaffordable burden.

When you’re looking at a long-term loan that won’t be paid off quickly, it’s usually safer to go with a fixed rate so you always know what your house payment will be.

If you made the mistake of taking out a variable rate loan, see if you can refinance to a fixed rate mortgage with a company like SoFi.

They don’t just refinance student loans, but other types of loans too.

Determine a Budget Limit on Your Housing

Many finance experts say it’s safe to go up to 40% of your monthly budget for housing costs. Financial guru Dave Ramsey sets an even more conservative housing budget of 25%.  You know what’s most comfortable for you as far as setting budget percentages for housing costs, but it’s safe to say that the lower the percentage of your income that goes toward housing costs, the more aptly you’ll be able to handle a shift in income, whether it be due to a job layoff, divorce or some other reason.

When setting the percentage you’re comfortable with for a housing budget, be sure to leave room for income variance factors so that a sudden or unexpected change in income won’t leave you struggling to make your house payments. The more wiggle room you leave in your budget as you plan for housing costs, the better able you will be to handle income changes, rises in property taxes, home repairs and the like so that you can avoid being “house poor”.

The Importance of an Emergency Fund

Another way to avoid becoming house poor is to make sure you’ve established a healthy emergency fund. Six to twelve months of income is ideal, especially if you’re taking on a larger house payment, but at a minimum, you should consider having three months’ worth of income in your emergency fund.

The bigger your savings cushion, the more options you’ll have should you face a loss of income for some reason. So before you buy that house, make sure you set aside a nice emergency fund cushion to prepare for unexpected expenses or a decrease in income. If you’ve already purchased your home, make accumulating a healthy emergency fund a priority by selling unneeded items on Craigslist or temporarily getting a second job.

Get Uncomfortable Being Uncomfortable

If you’re not already a homeowner, here’s how you can avoid becoming house poor from the start. First you need to build up a considerable down payment which will help lower the percentage of your housing costs for your monthly budget.

Second, you may also consider downsizing your current lifestyle which is the easiest way to help sock away more cash for a more sizable down payment and build your emergency fund much quicker. 
Compound that with either a part-time job or other side hustle and you can see how an extra $300-$1000 per month can drastically speed up your timeline on the path to homeownership.

If you’re already in a house poor situation…

Know When it’s Time to Sell

If you’re already in a house poor situation, take the time to analyze your situation honestly and make a determination about whether or not it’s time to sell and move into something more affordable. Many individuals and families have testified to the fact that the reduced stress about money is well worth giving up your dream house for.

If you’re in a situation where the stress of your house payment is becoming too much to bear, consider selling the house for something less expensive, even if that might mean a move to another city.  

No material item is worth the difficulties that a financially stressed situation bring to one’s life.

If you’re looking to buy a home, it’s wise to research and plan carefully before you sign on the dotted line and commit yourself to 15 or 30 years of loan payments. The resulting financial security that will be yours when you choose to avoid a house payment that’s too large for your budget will be well worth the time and effort you put into making a sound budgeting choice for your home purchase.

Also Consider selling, renting the house out and living elsewhere, getting a roommate or some other form of increasing your income or reducing your payments so that you can be more comfortable with your housing expenses. The rewards and peace of mind that come with financial security is well worth the sacrifice of not having to live “house poor.”

Did you purchase the right size house or are you house poor and looking to sell? Let’s continue the conversation in the comments!


3 responses to “How to Avoid Becoming House Poor”

  1. Brian @DebtDiscipline says:

    Not buying too much house or house payments is the key. Don’t fall into the “you’ll grow into the payment as your salary increases over the years” trap. What if the unexpected happens like a job loss or when things break. It’s always important to leave yourself some wiggle room in the budget.

  2. Laurie @thefrugalftarmer says:

    That’s a great comment about leaving some wiggle room in the budget, Brian. That can remedy so many situations!

  3. Laura Harris says:

    Those were great points, Laurie. I heard a ton of wisdom in your advice – like making sure YOU figure out how much percentage of your income you can afford to spend on a house payment. I’m not mad at banks, but they do qualify people for more house than what they probably should buy. Of course, every situation is different, and it’s ultimately up to the people to use discretion. I’ll be sharing your post to help spread the word!

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