What is House Poor & How You Can Avoid It

Owning a home is a major contributor to building your net worth. In fact, the median homeowner’s net worth is 46x the median renter’s net worth. While owning a home is crucial, you need to make sure you don’t pay too much and end up house poor.

What is House Poor?

A person is house poor when they spend a large portion of their income on home ownership. This includes mortgage payments, property taxes, maintenance, and utilities.

You can become house poor by buying too big of a house to begin with. This can also happen if your income plummets while you’re stuck with the same mortgage payment.

The financial consequences can be dire. By dedicating so much of your income to a housing payment, you’re not able to save for retirement.

We recommend spending no more than 30% of your take home pay on housing. Doing so gives you the financial flexibility to max out all of your hierarchy of savings, and also provides a cushion if you do experience a drop in income.

Know the Costs of Owning

Homes are more than just the mortgage payment, they also require maintenance and upkeep. Aside from this, they don’t perform well as an investment.

Maintenance costs can range from minor things like putting out a new welcome mat, to expensive projects like replacing your central air conditioning system. Maintenance can cost anywhere from a few thousand to over ten thousand dollars per year.

Make sure you’re factoring all costs in your housing budget, not just the mortgage.

What If You’re Already House Poor?

Being house poor is like having the flu – it’s better to just not never have it than to treat it. If you are already in this situation, you should ask yourself the following to get out of it.

Is this Situation Temporary?

If you know that the situation is temporary, say two or three years, you may be able to pull it off.

Maybe you took a salary cut, or maybe one of your income sources disappeared. If you’re able to increase your income levels back to a healthy amount, you may be able to cut vacations and other luxuries to get by in the meantime.

Are You Able to Find More Income?

If you love your home and absolutely cannot sell, there may be some ways to boost your income. You may be able to take on a job or find some freelance work. Another idea is to Airbnb a room in the house you bought!

Finding more income will ensure you continue investing in all of your savings accounts, while building a buffer to make your housing payments.

If the situation is not temporary, and you’re unable to find more income, you’ll likely need to sell your home and downsize.

When You Should Sell Your Home

After working so hard to find the right home, it can be hard to downsize and move. Changing neighborhoods can also be difficult socially. But doing so can open up options for you, and ensure that you’re saving enough for your future self.

If you determine to sell your house, you should contact a realtor and put the house on the market as soon as possible. The last thing you want to do is wait until the last minute when you’re most desperate. Doing so will limit your negotiating leverage.

Make sure you give yourself a few months to a year so you can be patient and wait for the right price. Keep the market cycle in mind as well, it’s a lot easier to sell when the market is trending up.

The Bottom Line

Living house poor is mentally exhausting. On top of this, it hurts your finances because all of your money is going towards your mortgage payment. While owning your home is a key to wealth, spending too much on a home will have the exact opposite impact.

While many Americans view homeownership as the symbol of financial security, being house poor has the exact opposite impact. Instead, you’ll be spending time worrying about how you’ll continue making your mortgage payments.

Make sure you have a plan to spend no more than 30% of your take-home pay on housing, and stick to that budget. If you believe you are house poor, we recommend selling the house sooner rather than later so you can negotiate for the best price.

By removing this burden, you’ll alleviate a lot of personal and financial stress.