New homeowners are always so excited. They just bought a new house, can picture their new lives, and start making plans for all the changes they want to make.
You feel so accomplished. I mean you saved for that down payment and are off to the races.
Its such a great season of life. Maybe you don’t have kids but can picture starting your family in your new house. Maybe you already have kids and can picture them growing up in this new house.
Over time something strange happens. The costs of this new house aren’t quite what you thought they’d be.
The stress of the big mortgage, the big utility bills, and the big remodeling costs are doing more harm than all the happy thoughts when you moved in.
Eventually, you start googling certain things and realize you may be house poor. I’m thinking at this moment you may be thinking
The stress associated with this realization can leave you feeling trapped. The good news is that there is absolutely a path out. You can do this and I think I can help you out.
Lets dive right in and see what we can do to help your situation.
What is house poor?
House poor is when a homeowner spends a significant amount of money on their house. The combination of their mortgage, property taxes, utilities, and home projects overwhelm their budget and don’t leave a lot of money for anything else.
Do you know those people that just upgraded to that huge house and probably bring in the same amount of you each year? Or do you know that young couple that lives in an extremely nice home but drives super old cars? Or what about the family that lives in a nice home but pinches every penny?
While not each of those cases is necessarily housed poor, these are the types of indicators to be looking for. Unfortunately, those that are house poor also tend to be under a lot of stress. It’s unfortunate they are in that position and they probably feel stuck from both a financial & social perspective.
How do you get house poor?
I believe there are three scenarios that can occur that can lead to someone being house poor. Some situations may check all three boxes and some may only check one. Unfortunately, it only takes one box to be checked for someone to be house poor. Let’s take a look at all three.
The simple math
When a bank makes a decision on approving a mortgage or not one of the key numbers they look at is if your debt payments make up 43% of your income. If your debt payments add up to less than this number they are likely to approve the mortgage. I always picture the banker like
What the banker doesn’t take into account are the utilities, property taxes, and insurance associated with the property. The biggest wildcard of them all, your affinity for renovations and home projects, doesn’t even cross their mind.
Add all those up and you may have 50% of your income tied up in your new house. Unless you have looked at the different types of budgets, really have the right budgeting mindset, and have an income that can grow considerably, you are likely to be under a good bit of stress.
The myth of buying a forever home
Before we dive into this one I think it’s important that this does work at times. However, those circumstances are far and few between so a good rule of thumb is to avoid it.
I almost fell for it. I remember shopping for my first home and thinking how great it would be to live in a single house for my entire life. I wouldn’t have the transaction costs of buying several houses, not to mention the renovations and projects that pop up every time you move.
I think there is a balance between buying enough house that will last you a while also not buying a behemoth of a house with a monster of a mortgage payment. While it would be nice to lock in a single mortgage payment that never goes up, it may take a huge bite of your monthly paycheck.
If a young home buyer has this type of mindset it could be very easy for them to fall into this trap.
Keeping up with the joneses
Here is one that will never end well. Trying to keep up with the joneses is a very easy way to end up house poor. If you want to keep up with the joneses I think a house should be the last thing you should buy. Why is that? It has all to do with transactions costs.
If you buy a BMW to keep up with the joneses its not too costly to get out of it (assuming you didn’t buy it brand new). You could likely take a small hit and just trade it in. However, with a house, its horribly expensive to get out of.
While none of these situations are great to get in, its important to try and get out of any situation in which you find yourself house poor.
What should I do if I’m house poor?
Being house poor is a horrible situation, especially if you want out. Oftentimes its not easy but is necessary. Its like ripping a bandaid off. Before you do it you know its going to be painful so may avoid it for a while. However, when its over you wish you would have done it sooner.
If you are house poor, just rip the band aid off. Here are a few steps that would be a good idea to do before you make any impulse moves.
Take ownership of your situation
This is the first step and its definitely going to be the hardest. Its important that you accept the fact that you made some poor decisions. The key here is the “you” part because once you accept you made some poor decisions you can become determined that you can make some good decisions to pull yourself out. Once you’ve done that you can move onto the numbers.
Run the numbers
Now that you know you can make some good decisions to get yourself out of this situation its vital you dig into the numbers. Ask yourself questions like? What could I sell my house for? What would these transaction costs look like?
If your house has appreciated you may be able to make it out of this relatively unscathed. However, it may take writing a check to get out of this situation. If it will take some money, that’s ok. Just keep focusing on the long term stress you are going to avoid. Don’t forget to take into account the closing & realtor fees.
Have a plan for your next step
Its all well and good to want to sell your house but you really need to think about what your next housing situation looks like. Are you going to rent for a while to get your feet underneath you? Are there homes on the market that would suit your needs?
You don’t need to go put an offer on a new home (I’d actually suggest not doing that) but you do need to have an idea if buying another home is possible at this point in time.
Once you’ve done all three of those things I think you need to just take a break. Emotionally you’ve been through a roller coaster and you’ve made a ton of progress. Even if the next few months don’t look all that great, know that you are putting you and your family on the right path.
You don’t have to be house poor forever
Being house poor just plain sucks. You have a feeling of being trapped and as if there is no light at the end of the tunnel.
I hope I’ve changed that even the slightest amount. Ask yourself these questions, take ownership of your situation and put together a plan. It won’t be easy but it will be worth it.
Just think about all the stress that will just wash away when you’ve gotten rid of the house. Remember a house is just a house. You are looking for a home. A home that you can make memories in for years to come.