Living beyond your means can lead to serious financial trouble, such as becoming “house poor.” This happens when your housing expenses take up so much of your income that there’s barely anything left for other monthly bills. As a rule of thumb, your housing costs, including rent or mortgage and utilities, shouldn’t exceed 30% of your net income.
A typical example of being house poor is when a family buys a big four-bedroom house and then struggles to pay their credit card bills each month. It’s a situation you want to avoid so that your home doesn’t end up consuming most of your income. You don’t want to work extra hours or sacrifice time at home just to afford it. Here are some tips to help you steer clear of this dilemma:
1. STAY A RENTER FOR NOW
Owning and maintaining a home can be very expensive. If you’re not ready to buy or the housing market isn’t favorable, renting might be your best bet. My husband and I live in a comfortable apartment with affordable rent. I pay just $430 a month for my share. Renting has some hidden costs, but we manage to keep our expenses low. We haven’t started saving for a down payment yet, and if we bought a house now, our housing costs would go up, especially when you factor in maintenance and repairs. So for now, renting is the more economical choice and helps us avoid becoming house poor. If your rent is affordable, save any extra money for future housing costs.
2. AIM FOR A 20% DOWN PAYMENT
When you decide to buy a house, try to make a down payment of at least 20% of the home’s price. This can help you avoid private mortgage insurance (PMI), build equity faster, and lower your monthly mortgage payments. Saving for a 20% down payment takes time and patience. Don’t rush into buying a house; make sure you’re comfortable with the payments, whether you choose a 15-year or 30-year mortgage. If needed, consider working extra hours or getting a second job to save up faster.
3. KNOW YOUR BORROWING LIMIT
Being house poor often happens because people borrow too much for a home, straining their budget. Lenders will evaluate your income and debt to set your borrowing limit, but it’s crucial to determine what you can really afford beyond what the lender approves. Factor in all your expenses and financial obligations. If the mortgage payment seems too high with your current income, look for a less expensive home. No house is worth the stress of unaffordable payments or the risk of losing it.
4. PAY OFF DEBTS QUICKLY
Whether you’re renting or owning, work on paying off your debts as soon as you can. Consider what you could do with the money that currently goes toward debt payments. Clearing your debts can make slightly higher housing costs more manageable without added stress. My husband and I are focusing on paying off a significant portion of our debt before buying a home to improve our debt-to-income ratio. Too high a ratio might prevent lenders from approving your home loan.
5. CUT COSTS AND BOOST INCOME
If you’re already tied down by a mortgage or lease and struggling, there are still ways to cope. Start by reviewing your budget and cutting unnecessary expenses. You might have to give up non-essentials to afford better housing. Some people do this to prioritize their home over other spending. Alternatively, your issue might be more about income than housing choice. If you live modestly but still can’t make ends meet, you might need to find ways to increase your income.
Remember, don’t fall into the trap of lifestyle inflation or accept being house poor. Your housing expenses shouldn’t dominate your budget. Aim for a balance between your income, obligations, and other financial responsibilities.