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5 Smart Tips to Avoid Being House Poor & 6 Strategic Ways to Get Out

By Chika

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Last Updated: February 24, 2022

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Buying a house is a major life milestone, however few people factor in the costs of owning one. 

While making payments toward the ownership of a home can be a good investment in the long term, the asset can turn into a liability if you fail to account for unexpected costs that often arise when taking on such a big commitment. 

As a result, many people have found themselves house poor, as a large chunk of their income goes to paying mortgage and keeping a roof over their heads. About 20% of American homeowners are house poor. For renter households, the figure is as high as 46%.

House prices in the United States have increased by 81% over the last decade.

Within the last year, house prices have shot up by 17.6%. As home prices continue to escalate due to inflation, a lot of people will find themselves either unable to buy a home or afford the one they are living in.

In a recent survey, 28% of home buyers believe that making their monthly mortgage payments will be among their biggest financial stressors for the next two years

While the prevailing economy seems to be robbing many of their dream of owning a home, there are several tips that prospective homeowners can apply and avoid being house poor.

If you find yourself house poor, there are strategies you can consider to claw your way back to financial sufficiency. Let's have a look at these tips and strategies below. 

 

What is "House Poor"?

Being house poor refers to a situation whereby an individual or household spends more than 30% of their income on housing costs. These costs could come in the form of mortgage, rent, maintenance, insurance, or property taxes. 

Being house poor means there is little left in the budget after house costs have been settled. In essence, the income is enough to put a roof over the individual's head, to the detriment of meeting other responsibilities.  

House poverty severely limits your ability to build savings, invest, plan for retirement, pay off debt, travel or enjoy other pleasures of life. It puts a lid on what you can achieve in other aspects of your life. 

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5 Tips to Avoid Being House Poor

1. Factor in all possible costs

One of the major reasons why people end up being house poor is their inability to factor in the cost of owning a home.

Most people focus on the costs of paying for a house. They do not make provisions for maintenance, property taxes, insurance, home improvement costs, etc. as a result, they find themselves caught in a crossfire because their income can cater for these added expenses while trying to meet other responsibilities.

One way prospective homeowners can factor this is using the 28/36% rule or DTI ratio to have a proper perspective of how much it would take them to own a house without hurting their finances. 

 

2. Make a larger down payment

Putting down a large amount as a down payment for your house reduces the chances of your house turning into a liability.

First, it reduces your overall interest payment. This in effect lowers your monthly mortgage bill because the lower your debt, the less you have to pay.

You can also eliminate private mortgage insurance with a 20% down payment. This saved income can have a significant long-term effect on your finances because it frees up cash which can be channeled to other profitable ventures. 

 

3. Start a housing emergency fund

It is advisable to put some extra cash away for house emergencies.

No one knows when life decides to throw us a curveball. Though your present income can sustain your housing costs, unexpected events can make the future look gloomy.

Building up emergency savings serves as a backup plan when things go south (for example when you lose your job) which makes sustaining your present lifestyle very difficult. 

 

4. Buy a cheaper home

Your first home does not mean it will be your last.

You can always go for a cheaper home to make your housing costs more affordable. As you build up your cash reserves and the value of your home goes up, it would be easier to move to a much bigger house.

A single-family home, condominium, or townhouse is a good place to start while you build up your finances to buy your dream house. 

 

5. Pay off other debt before purchasing your home

Most people own a house by taking out debt (mortgage). Before committing to taking a mortgage whose payments would stretch for as much as 30 years, it would make sense if you reduce the other existing debts. 

By paying off existing debt, you are reducing the amount of money you would pay in interest. You are also giving your income more 'breathing space' to meet other life obligations because of the cash saved from paying off your debt earlier.

For example, you can save towards your kids' education while paying the mortgage because you have paid off your car loan or credit card debt. Setting up a debt reduction plan is a good strategy for every prospective homeowner that wants to avoid being house poor. 

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What to Do if You Are House Poor

If you find yourself house poor due to an unfortunate series of life events, there are ways you can claw yourself out of this financial quicksand.  

1. Sell things you don't need

You can raise extra cash by selling items in your possession that you don't need.

This allows you to have some money for your sustenance, it also leaves extra which can be channeled towards your housing costs. 

 

2. Start a side hustle

You can also start a side hustle to bring in some cash to augment the income from your primary source.

If you have skills or passions, find a way to monetize them. For example, you could become a professional dog walker, or sell items on eBay. You can also consider renting out your car if you don't use it much.

Since you are strapped for cash, it would be best to look for home business ideas that you can do online to reduce your business costs.

 

3. Find a second job

If you're not the business type, a viable option is getting a second job.

You can take up jobs that are closer to your home to reduce transportation costs. Perhaps you can work extra shifts in your current place of work if allowed. 

 

4. Cut back on your spending 

One of the first places to start to free up cash is from your spending.

Find creative ways to reduce your spending so that you can have some extra savings. A budget sheds light on grey areas in your spending by helping you identify expenses you don't need and canceling them out. 

 

5. Rent out a room in your house

Renting a room in your house has always been a go-to alternative for people wanting to raise extra income.

If you live alone in a 3 or 5 bedroom house, you can rent a room or two to raise some money. You also get to share utility bills such as electricity, heating, etc. which reduces your expenses for the month. 

If you don't want a long-term tenant, you can consider renting a room on Airbnb for a short-term stay. 

 

6. Move to a smaller house

This should be a last resort if other measures fail.

Owning a home goes beyond owning the building. It comes with other social perks such as the type of community, schools that children go to, social status, etc. 

As such, a home is to some extent an extension of our personality. However, when faced with dire financial situations, the best bet may be to sell your beloved house and move to a smaller, more affordable home. 

As harsh as it seems, it is better to have a roof over your head than none at all. It can also be the move you need to reduce debt stress and free up your finances for other profitable ventures. 

 

Key Takeaways About Avoiding Being House Poor

Being house poor is a completely avoidable scenario with proper planning.

It entails knowing what you can presently afford and not exceeding your limit. Just because the lender is willing to loan you a huge chunk of money does not necessarily mean you should take it. 

A house is an asset, but it could also turn into a liability if it takes a huge bite of your income. If you can't afford to buy a home, it is okay to rent, however, if you just buy one, you should make sure that you can afford it. 

The rule of thumb suggests that you should not spend more than 30% of your income on housing costs. Planning your housing expenses with this parameter helps you avoid being house-poor. 

Photo by Jordan Rowland on Unsplash

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