Home ownership has long been considered a key component of the “American dream.” But for many folks, the reality of owning a home has been a rude awakening. Instead of enjoying the security and sense of well-being that often accompanies buying a home, these folks are struggling to keep up with too-high mortgage payments that leave them basically broke every month. These people aren’t in a position to save or build up emergency funds or even take vacations. Some live paycheck-to-paycheck or rely on credit cards to supplement their incomes.
In other words, they’re what you would call “house poor” – an increasingly common situation that arises when the costs of home ownership take up a disproportionate chunk of your income.
But how do you become house poor? And, if you’re already house poor, what can you do about it? Keep reading to find out.
How people become “house poor”
People generally become “house poor” for three major reasons:
1. They buy more house than they can afford. Typically, when you begin the home-buying process, you have to get approved for a home loan from a bank or credit union. Most financial experts will tell you to spend no more than 25-30 percent of your net income on home ownership (that’s mortgage payments plus things like taxes and insurance). Of course, your bank or credit union might approve you for a home loan that’s way higher than that. A bigger loan means a bigger house – but it also means bigger mortgage payments.
2. They buy before they’re ready. Some people end up house poor because they rushed into the home-buying process without considering all of the facts and realities of owning a home. Sure it’s great to have a place of your own – but can you afford the expenses associated with home ownership? Do you have an emergency fund? Do you and your spouse have stable sources of income, or is it possible that one of you could be laid off in the next few years?
3. Their income has changed dramatically. A mortgage payment that is easy for two working spouses may seem like a burden if, say, one spouse is laid off or unable to work.
Of course, these aren’t the only scenarios that lead to “house poor” status. Other factors – such as a lack of savings to pay for expensive home repairs/upkeep, poor money management, or high amounts of credit-card debt can also make it difficult to afford your home.
What to do if you’re “house poor”
If you’re in a situation where most of your money is going toward your house payments, it’s easy to feel powerless and frustrated – but there really are things you can do to change your situation. Here are a few things you should do if you’re feeling the pinch of being house poor:
1. Start with the facts. Any financial strategy – whether it’s paying down debt, creating a budget, or dealing with sky-high mortgage payments – should start with an assessment of the situation. Begin with the numbers: How much is your mortgage payment? How much do you pay in property taxes and insurance? What is your current household income? Do you have any debt?
Also, review your budget and spending: What are your fixed monthly expenses? What bills do you pay each month? How much, if anything, are you able to save?
2. Look at your options. After you’ve reviewed your expenses and finances, it’s time to take a (realistic) look at the things you can change. For example, is there any way to increase your household income? Is it possible for you or your spouse to find a higher-paying job or find a secondary source of income? Are there any monthly expenses you could eliminate, such as cable TV or your landline telephone? Could you tighten your grocery budget? Even small changes can add up and leave you with more wiggle room in your budget.
3. Revise your budget. Once you’ve reviewed all of your options, it’s time to make a new budget. Include all sources of income and make sure your new and improved budget reflects any changes in monthly expenses. Depending on how much you were able to adjust your income and expenses, you might find that your new and improved budget helps free up a little more of your income and leave you a bit less house poor than you were before.
4. Weigh the pros and cons of owning your home. Even if you really love your home, it might be worth it to sit down and do a side-by-side comparison of the pros and cons of homeownership. Start by writing down the things you enjoy and like about owning your home. Once you’ve done that, write down the things that you don’t like or the things that you’ve had to give up in order to afford your home. Sure, you might end up deciding to stick it out in your home – but you also might decide that you’re sacrificing too much to stay where you are. Downsizing might also be a viable option which would allow you to maintain your “homeowner” status without going broke each month.
Being house poor isn’t easy. But if you find yourself in a situation where you’re paying more than you can afford for your home, it’s important to remember that there are things you can do to make things easier.