Don’t Be House Poor


A little while back, I was fully engulfed in the rent or buy debate. I had decided on the rent route for a handful of reasons. I explored the neighborhood and I am back to looking at buying with a realtor. I am not sure where I will end up, but I have to look to make an educated decision.

Becoming House Poor, Or Not

According to “experts,” most people can afford to spend about 30% of their income on housing. I believe that it is important to live below your means, so I am looking at spending closer to 20% of my gross income on a mortgage payment.

House poor is defined as:

A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations like vehicle payments.

There are two main factors that you can control that contribute to your monthly mortgage payment. Those are your down payment and the cost of the home. Insurance, PMI (if you have a down payment below 20%), and taxes are largely beyond your control.

Based on the down payment I have saved up, using the 20% rule, I can afford a house that costs about $220,000. Less the down payment, that makes my monthly mortgage payment about $900-$1,000 per month depending on taxes and insurance.

My current rent is $770 per month (up from $615 due to rent increase and going month to month). At that rate, I have plenty of disposable income. In fact, I use my budget more as a guideline than a strict framework. If my rent goes up due to a mortgage, I will have less disposable income, but as long as I buy within my price range, I would be far from house poor.

Ways to Avoid Being House Poor

Don’t Buy a House You Can’t Afford

I did the math to see what I can afford. The easiest way to avoid this situation is to avoid it in the first place. Think through your finances, job security, income, expenses, and only buy what you can really afford.

Get a Roommate

I am looking at two bedroom homes to share with a friend. I would be the owner/landlord, and he would rent a room from me. If you are doing this with a friend, set clear guidelines and sign a lease agreement beforehand.

If you can get an extra $400 or more (depending on your cost) toward your payment per month, you can either pay off your mortgage early or save on your cash flow.

Ever Been House Poor?

Have you been in this situation before? Know someone who has? Please share the story, and what happened, in the comments.

Image by Images_of_Money.

Comments

  1. Barbara Friedberg says

    This is an extremely important topic. We have always bought a home for less than the amount for which we could qualify. Much less stress. If you have a down payment and steady income,  with interest rates so low, now is a good time to lock in a low interest rate mortgage. (and you’re planning on staying in the same location for more than 5 years). 

    • Eric says

      I gave it another round with the realtor and I am waiting for a little while again to see what opens up. Why do I have to have the taste for the most expensive neighborhood in town?