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You’re shopping for a new home.
You visit two properties, but they aren’t what you’re looking for. Then, you visit a third property. The house is more than your dream home — it’s a home from your fantasies.
The kitchen, the floor plan, the backyard...it’s all exactly what you were looking for ... and so much more!
But it’s expensive — just outside of your budget.
You and your realtor crunch the numbers and find that you can afford it — but it’s a stretch.
It’s a stretch that you’re willing to take.
For the first few years, living in the house works great. But then, you start to notice your other bills — your car payment, recent medical bills, even your monthly mortgage payment. So you start accruing debt.
Your fantasy home turns into a nightmare.
This is an example of how someone, with so much of their income tied up in their house, becomes “house poor”.
If you're house poor, what can you do?
Here’s the good news: you have options.
In this article, we’ll break down what it means to be house poor — and the options you can take to get out of it.
What Does it Mean to Be “House Poor?”
“House poor” is a term that means you’re spending too much of your monthly income on the expenses associated with home ownership, leaving you unable to purchase other necessary goods and items.
When purchasing a house, you will receive your mortgage pre-approval. Keep in mind that you don’t have to spend the full amount that you’ve been approved for.
When purchasing a house you are responsible for a downpayment, closing costs, and other fees.
But there are other costs associated with homeownership that need to be budgeted for, including:
- Monthly mortgage payment
- utilities (gas and electric)
- maintenance costs
- repairs and/or renovations
- hoa fees
- property taxes
- And more
Besides these expenses associated with your house, you still need finances for medical bills, car payments, groceries, an emergency fund, and more.
By not budgeting for the additional costs of homeownership, or not factoring in your other expenses, you may begin to live paycheck to paycheck. If anything unforeseen changes — your employment, the economy — you could be in financial distress.
So how much of your income should be paid towards housing in the first place?
What Percentage of Your Income Should Be Paid Toward Housing?
The best way to avoid becoming house poor is to ensure you’re spending a maximum of 28% of your gross monthly income on housing expenses.
If You’re House Poor, Here Are 5 Ways to Get Out of It
If you’re currently house poor, the good news is that you do have options.
Here are 5 things you can do to escape being house poor.
Option #1: Refinancing Your Home
Since interest rates are currently at an all-time low in 2021, refinancing your home is one option to avoid being house poor.
While refinancing does mean that you will be paying a mortgage for a longer period of time, you can obtain a lower monthly payment that can help you escape a house poor situation.
Option #2: Downsizing Your Home
Are you house poor because you purchased a home that you simply can’t afford?
If so, another option is to downsize.
While it may not be the most fun option in the short term, it can lead to escaping being house poor and debt, which will be worth it in the end.
Option #3: Boost Your Income
If you’re house poor and in need of additional income, here’s another option: make more money.
This doesn’t mean that you have to quit your job and find new employment.
Keep your current job and, in your free time, create a side hustle.
A side hustle is more than just a few extra bucks. Adding an additional income stream and applying that to your house payments can help you escape the shackles of being house poor.
Did you know that you can earn anywhere between $100-$1,000 — or even more — per month with a side hustle?
- Start a vending machine business
- Sell your (excellent) credit history
- Host Trivia nights
- Walk Dogs
- Rent out cars
For a list of 101 side hustles, click here.
Option #4: Tap Into Your Emergency Fund
Though a short-term solution and not a long-term fix, if you are suddenly house poor because of an employment change or another circumstance, utilize the cash in your emergency fund.
Remember, an emergency fund is three to six months of income kept in a savings account reserved exclusively for emergency expenses.
Option #5: Reducing Monthly Bills
If you’re house poor, it’s important to reduce your monthly expenditures.
- Save money by cord cutting
- You can save $1,222 by packing a lunch
- Use these strategies to save money on gas if you commute to work
You can then allocate that additional money to your bills.
The Bottom Line: Avoid Being House Poor
Ultimately, the best way to get out of being house poor is to never get in that situation in the first place.
When purchasing a home, ensure that you crunch the numbers within your budget to ensure that it is affordable now and into the future.
If you are struggling to make a budget, here are a few additional resources:
- Learn how to create a simple and easy to follow budget
- Find out how to stop spending money that you don’t have
- If you’re a restaurant server, here’s how to create a budget when living off tips
- Learn how to create a budget even if you’re bad with numbers
- Discover ways to improve your personal finance education