How not to be house poor

Home ownership can be a financial disaster if you’re not careful, and one of the ways to prevent disaster is to make sure you don’t become “house poor”.

Most people want to own a home. Or rather, they’ve been sold a story about what home ownership means (security, safety, status, wealth), and it’s that meaning that they are looking for.

Now, I own a home, so I’m not saying anything bad about it. But it’s important to go into such a big purchase with your eyes wide open. After all, for most people it is the largest purchase they’ll ever make. Something that big can’t be propelled by feelings and the naïve belief that it’ll all work out.

If you want something to work out, you need to make it work out, and not wait for fortune to look out for you.

And for far too many Americans, they aren’t making it work out.

A new report, as referenced in the New York Times, mentioned that more than one-quarter of homeowners in the United States are “house poor”.

What does this mean, how can you prevent it from happening to you, and what do you do if you’re already house poor?

Read on for more.

What does it mean to be house poor?

To be “house poor” means that you are spending more than 30 percent of your income on housing costs.

Before you ask, this is 30% of your gross income, not net. And as for housing costs, this generally refers to the mortgage costs, but since you can view that in a few different ways, I say we use the “PITI” costs: Principal, Interest, Taxes, and Insurance, and not worry about other home maintenance costs.

So, let’s assume that your household makes $90,000 a year, or $7,500 a month. 30% of that is $2,250, so, in order to be not considered house poor, you should be spending less than that for your housing.

What’s the problem with being house poor?

The problem with being “house poor” is that if you spend too much on your housing, you don’t have enough money for anything else.

Our income needs to balance many competing needs: living for today and saving for tomorrow. And right now, living for today is more expensive than ever, and frankly, saving for tomorrow isn’t cheap either.

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For example, I recommend 15% of your income to go to investing for the future, at least once you’re (non-mortgage) debt free. And if you’re not debt free, well, that 15% should be going there.

If your housing costs are starting to creep up past 30%, you’re going to find it very difficult to meet those competing needs, unless your income is way above the median.

Why 30%?

There isn’t a rigorous definition for “spending too much” on housing. However, this 30% rule can be traced back to a law passed in 1969.

This law, the Brooke Amendment, based on the 1968 Fair Housing Act, originally stated that the poorest people shouldn’t pay more than 25% of their income for housing. And Congress raised this to 30% in 1981.

Now, you can argue that it’s meaningless, that it’s too income-dependent, and more to the point, location-dependent. And it’s true that living in rural Tennessee doesn’t have the same income calculations as New York City.

Nevertheless, this is a rule of thumb. Feel free to add a few percentage points if you live in a particularly expensive area.

How can you prevent yourself from being house poor?

Being “house poor” isn’t an inevitability.

The simplest, if not the easiest, way to avoid this is to not buy a home that you can’t afford.

More specifically, it means that when you are looking at purchasing, to really dig into the specifics of your potential mortgage options, as well as to learn about what your taxes and insurance are likely to be.

Many people, when they are on the threshold of home ownership, can let themselves get deluded with a belief that it’ll all just work out, because the place is “perfect”. I’d reckon that “House fever” is one of the leading causes of being house poor.

Another suggestion is to make sure that when you’re calculating what you can afford, that you try to come in under that 30% value. After all, I can assure you that even if you have a fixed-rate mortgage (which is the only kind I recommend) your taxes and insurance will almost surely go up each year.

If finding a more affordable home isn’t panning out for you, you may wish to take time off from the process and focus on increasing your income instead, which will have much the same effect.

And finally, realize that if home ownership is going to put you over this threshold, then maybe now is not the best time to buy a home.

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But don’t worry, it’s not too late. Homes aren’t going anywhere.

What to do if you’re already house poor?

If you’re already one of the 25% of Americans who are now considered “house poor”, you’re not out of luck.

The simplest way to look at this situation is that you either need to reduce your costs and/or increase your income. (Easier said than done, I know, but those are your options.)

If you already have a mortgage, you probably can’t do much about it. (I wouldn’t refinance in all-but-the-best situations, and this is not that situation.) You may wish to work on increasing your income.

You could also take on a roommate to reduce your costs. Not optimal, of course, but that’s real money in your pocket.

And finally, if you find that you’re struggling to afford your home, then this home may not be the best use of your time and money, and you might consider moving. You don’t need to own a home to become wealthy, after all, and a home you can’t afford will prevent you from ever becoming wealthy.

You have more options than you think

Housing is expensive, and it’s not getting cheaper any time soon. But you’re not stuck without options. The most important trait in people who navigate this system successfully is that they are mindful, intentional, patient, and don’t give into “house fever”.

And also, I have to mention that I don’t like the phrase “house poor” anyway, because it implies that everyone who owns property owns a house.

Despite the “real estate industrial complex” trying to push everyone into houses, you can own property without living in a house. You can live in a condo or townhome, for example. That’s what I do. And you never have to worry about mowing the lawn, which is an inestimable bonus. And it might just be cheaper too.

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