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How to Avoid Being House Poor

By Forrest | Last Updated: April 10, 2020

How to Avoid Being House Poor

Imagine this, you are just approved for a nice house with a big yard, pristine interiors, with a multiple car garage! It sounds like the ideal way of living, right? Well, maybe not. Mortgage brokers are likely to approve you for a home with the potential of stretching your budget as much as possible. People who accept these loans can be known as “house poor”. They might scrape by to pay their mortgage each month, trying to live frugally in other areas to keep their lifestyle afloat.

Keep reading to learn how you can avoid being house poor and ways you can save money when purchasing your next home!

House Poor: Do You Qualify?

Being house poor is a relative term. There is no dollar amount that automatically qualifies you as being house poor. You must understand your income and your monthly expenses to decipher whether or not you may be house poor.

It’s a good rule of thumb to never spend more than 30% of your monthly income on your mortgage. This means that those spending more than 40 or even 50% might be suspect of being house poor.

Below are a few questions that can help you determine if you might be house poor.

Related: Cheapest Way to Live in 2021

Do you struggle to pay bills on time?

If you’re struggling to pay any bills, including your mortgage, on time you might be considered house poor. Or if you consistently delay payments or only pay portions of your payments, you might be headed down the wrong path of becoming house poor.

What portion of your budget is dedicated to your mortgage?

As mentioned above, if your mortgage constructs more than 40% of your monthly budget, you might be on the verge of becoming house poor.

Do you cut costs considerably to pay your mortgage?

Some people might live extremely frugally to pay their mortgage. If you find yourself cutting costs extensively, you might be on the verge of being house poor.

Do you have an emergency fund?

Those without any sort of emergency savings are more likely to be house poor. How is your savings looking?

NOTE: These questions do not directly indicate whether you are house poor. Some might have difficulties paying bills on time for other reasons. These questions should be used as a guide for your finances.

How to Create a Budget

Create a Budget Before Purchasing a Home

Many people will become house poor as a result of poor planning. If you do not currently have a budget, you should try to create one before buying a new home. This will help you to understand how much you can truly afford without stretching your finances.

If you haven’t created a budget, you can learn how to create a budget and tips to improving your budget here.

Purchase a Home Within Your Means

Whenever purchasing a new home, you should ensure that your mortgage payments will make up less than 30% of your overall monthly budget.

Some banks will allow you to spend more than this, but it can put you in risk of being house poor.

Some financial advisors recommend not spending more than even 20% of your monthly income on your mortgage. Below are some tips to help you save on your next home purchase!

Buy a Distressed Property

One of the best ways to save money on your next home is to purchase a home that needs some TLC. You will pay a premium for homes that come fully renovated, making it an inferior investment.

If you have the skills and equipment needed, consider purchasing a home that requires a few upgrades. You’ll end up saving thousands of dollars that you can complete for a fraction of the cost.

Completing small renovations is easier than you might think and with many online resources to help you, there’s no reason not to give it a try. Below are some of the top upgrades you can complete on your next home.

  • Give a new coat of paint
  • Consider new flooring
  • Upgrade your appliances
  • Refresh the landscaping

Offer Less Than the Asking Price

We’re not suggesting a lowball offer, but you should consider offering less than the asking price to lower the cost of your next home. Many times, realtors will price a home at a slightly larger price than it’s true value to maximize their commissions and appease their client.

Speak with your realtor about a realistic offer before committing to the asking price. You can easily save thousands on the purchase price of your home.

Use Home Inspections to Your Advantage

Whenever purchasing or selling a home, you’ll need to have a home inspection completed to ensure no piece of the property is fragmented. Home inspections are extremely thorough, marking even the smallest of blemishes on the property.

You can use the outcomes of your home inspection to your advantage. Depending on the size of damages, if the sellers are unwilling to complete any requested fixes, consider negotiating the terms of closing costs. Closing costs will typically amount to around 3% of the homes purchase price, adding up to several thousands of dollars. You can ask the seller to pay half, or all, of your closing costs so that you can complete the fixes as desired.

Set a Price and Stick to It

Home shopping comes with a lot of stress and depending on the market, you might be tempted to spend more on your next home to get what you want.

Be sure to set a maximum price you are willing to spend on your home and do not even look at homes above that price point. By looking at homes above your price range, you’ll be tempted to spend more money than you initially planned.

Know Your Situation

If your finances are going to change in the near future, you should know this before purchasing a home. Additional family members, income growth, and several other factors should help guide your decision making.

If you expect larger than normal expenses occurring in the near future, it’s probably wise to spend slightly less on your home.

Increase Your Income

If you’ve already purchased your home and are struggling to keep your mortgage paid, boosting your income is the best way to keep your finances in check and avoid being house poor.

There are many different side hustles or part-time jobs you can consider to build an additional stream of income, regardless of your skills. Below are some great options for those looking to grow their income.

Conclusion: Stop Being House Poor

Becoming house poor can be easier than you may think and is completely relative to your situation. Banks and mortgage brokers are willing to lend money at a despite the realities of your finances.

You should always aim to spend as little as possible on your home to cut expenses, with many financial advisors recommending spending no more than 25 to 30% of your monthly budget on your mortgage.

From purchasing distressed homes to negotiating terms based on home inspection results, there are plenty of methods for reducing the costs of your home.

Do you know someone or have you ever classified yourself as house poor? We’d love to hear! Comment your experiences below!

Forrest is a personal finance, entrepreneurship, and investing enthusiast dedicated to helping others obtain life long wealth. He owns several different blogs and is also passionate about health and fitness.
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