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When purchasing a home, it’s easy to fall into the trap of financially biting off more than you can chew. But no one wants to buy a house only to realize a year later that they can no longer afford to take much-needed vacations or to enjoy dinners out.

What Does it Mean to Be House Poor?

house poor

When homeowners end up with all of their fun money going into their house, that’s what we call being “house poor.” If the ownership and maintenance of a home are taking every spare penny, leaving the owners with no extra cash for other things in life, they are house poor.

When purchasing a home, there are plenty of ways to prevent this phenomenon. The first step is knowing how it happens in the first place.

How to Become House Poor (Not That We Recommend It)

house poor

No one ever intends to become house poor, but it’s very easy to get in over your head with a new home if you aren’t careful. Those who have become house poor will vouch for that. Let’s look at some common problems that can lead to this problem.

1. Buying a Home at the Very Top of Your Budget

This is a problem for people who have just enough money to purchase the house, with no reserves for emergencies. A sudden furnace failure, a car repair, unexpected medical bills, and more can wreak havoc on a budget that has no wiggle room. Unplanned home expenses are particularly common in older properties. Everything may have been working at the time you purchased the home, but the odds are appliances will fail sooner rather than later. And Murphy’s Law dictates it will happen at the worst possible time for the homeowner.

2. Underestimating the Expense for Repairs and Updates.

Often, new homeowners go into the purchase fully expecting to do some repairs and upgrades once the transaction closes. They may have been eager to have their offer accepted and so didn’t ask the seller to do any repairs. Unfortunately, once the projects begin, they are often more extensive than originally thought, quickly costing more money than expected.

3. Furnishing the House

New homeowners are excited to get settled into their space, and for many, a home purchase means having more square footage to fill. Owners can get in too deep financially just from trying to fill the new home with adequate furniture for the space. They may start out shopping only for a new sofa, but come home with a new living room and bedroom suite, as well. It’s easy to talk yourself into thinking you need all the new things you want to make your house a home, but when the bills start coming in, will you have buyer’s remorse?

How to Prevent Getting in Over Your Head

house poor

So, you know you don’t want to be house poor, but you really want to buy a home. No problem. Follow these tips to be sure you can have your cake and eat it too:

Get Pre-Approved and Then Aim Lower

When you fill out a loan application, your lender will tell you the amount for which you are pre-approved, but that doesn’t mean you should spend up to the last penny you can borrow. Once you are pre-approved, be sure you understand what the total monthly payment will be.

The full payment, or PITI, includes:

  • The principal
  • Interest
  • Taxes
  • Insurance

Scrutinize your spending habits and discuss your budget thoroughly and candidly before sitting down with a loan officer or mortgage professional. Don’t plan to use the full amount for which you qualify.

2. Estimate the Utility Expenses For a Home

Since most home buyers are looking for more square footage than they currently have, that means the utilities will be higher as well. If possible, get an idea for the cost of utilities for homes in your range, so you have a rough idea of how to plan for that in your new budget as a homeowner.

Try making those payments for a few months. If your current rent and utilities come to $1500 per month, but you’re looking at houses that put you in the $2000 per month range, set that extra $500 aside for a few months. Can you live with that? Are you still able to enjoy the things you want to do?

3. Build up Your Savings

Having money set aside softens the blow of unexpected expenses and is the best way to prevent surprises from eating into your lifestyle. If you have the funds planned for such emergencies, it is much less stressful when you find out you need a new water heater or roof. Be sure that when you use money from this fund, you work to replace it as soon as possible. Rainy day accounts only work if you have money in them.

The Bottom Line

The bottom line is, just because your lender tells you that you qualify for a specific dollar amount, that doesn’t mean you have to find a house that uses every single cent of your lending possibilities.

If you have other things you love to do, like yearly trips to Disneyland, or Friday night take-out, make sure you can still afford them before committing to your mortgage. Regardless of the economy or your circumstances, that mortgage is still due on time every month, so be sure you have the flexibility and resources to meet that demand.

I’m in Over My Head, So Now What Do I Do?

At some point in their lives, most people run into a time when money gets tight. What you do next will determine whether you can put a lid on the damages rather than exacerbating them.

If you’ve gotten into a pinch financially, it’s time once again to take a look at your monthly spending. Determine where you can cut some expenses until you are back in the black. Make the hard decisions as soon as possible so that you do not find yourself behind on your mortgage.

If that happens, you may be looking at more drastic remediation measures such as short sales and foreclosures. While these options temporarily solve your financial difficulties, it will take years afterward to rebuild your credit and enable you to purchase a new home.

Talking about money can be tough, but when you start your path of homeownership with a sincere and honest look at your finances, you have a much better chance of finding the right home for you, your family, and your budget.

At Solarity we are ready to help you on this journey. Call today to speak to one of our professionals; we are here to serve you.