Being a homeowner is a great opportunity for most. It means that you are investing money into the equity of the home you own. It also means you have the freedom to choose how to decorate and renovate your home. However, buying before you are ready can mean becoming house poor . Homeowners become house poor when they spend a large portion of their income on housing expenses including mortgage payments, homeowner’s insurance, property taxes, home maintenance and utilities. After meeting all of these obligations homeowners have little to no money left over as discretionary income. This removes any freedoms and traps homeowners at home.
1- Don’t Buy More Than You Can Afford
The very first way to prevent yourself from becoming house poor is to stay within budget during the purchase process. It is recommended that total monthly housing expenses (mortgage payment, insurance and taxes) do not exceed 25-40% of your take home income. By following this guideline you will allow yourself to have some breathing room after you’ve paid your bills. Keep in mind that your mortgage pre-approval is based on your gross income, not your take home pay. Determine how much monthly housing expense you can afford based on your take home pay.
2- Build up a Savings Account
Aside from purchasing a house you can afford having a good savings account established is the best way to avoid becoming house poor. Having a healthy savings account will allow you to make home maintenance repairs as needed and have a cushion in place in the event of an emergency. Be sure that your monthly housing expenses will not slowly drain your savings account as this can lead to you eventually becoming house poor.
3- Avoid Lifestyle Inflation
As your income increases it is very tempting to start living larger. A raise that felt like a windfall in the beginning will slowly wash away as you sign up for an expensive housecleaning service start to eating out more often and finance an upgraded car. Try to put any “extra” income into savings as an safeguard and resist that temptation of inflating your lifestyle.
4- Minimize Your Consumer Debt
Most often homeowners that carry a significant amount of consumer debt quickly become house poor. They find themselves in the situation where they have little to no money leftover after making their house payments and credit payments. This is a dangerous situation that can lead to a financial crisis if not resolved. Be sure to keep your consumer debt as low as possible to avoid being house poor.
5- Prepare for Income Changes
Before buying a home have a clear picture of how long you plan on living in the house. Try to forecast what your income may look like over time. If you anticipate a drop in income at any point consider this while buying a home. Should your household transition from two incomes down to one you will already be prepared for this change.
6- Budget for Home Maintenance
A guaranteed part of homeownership is home maintenance and repairs. Not staying on top of home maintenance is a quick way to end up being house poor. Include home maintenance in your budget to easily cover small home repairs like a leaky sink or plan for a large expense like a new roof. Set aside a specific amount of money each month into a home maintenance savings account so the money is readily available when it is needed.
Follow these tips above to avoid becoming house poor. Allow homeownership to be enjoyable for you and your family and not a prison sentence of being stuck at home.