What does that even mean? There are some very well off people out there that are living like they are poor because they got in over their head with their house/rent payment. Trust me I get it. When Lauren and I started thinking about buying a house it seemed daunting. How could we ever afford it? Everyone around us seemed to be okay buying a house. Were they irresponsible? They seemed okay.
The first step we took was to get pre-approved for a mortgage. To give you a frame of reference this was in 2012. So it was after the housing crash and after lenders had started “tightening” their requirements on loans. We made a combined $90,000 or so per year and had no other debts outstanding. But we were young and both pretty new into our careers.
We thought that a responsible budget would be around $250-$300k MAX. (We live in an expensive area that has gotten CRAZY expensive since we bought) The reason we settled on that budget is because your monthly “Housing” costs should be no more than 25-35% of your take home pay. Given the interest rates at the time and our down payment the monthly payment plus taxes fell right into that range.
Following me so far? Seems reasonable right? Guess what our lender said? They pre-approved us for… $650,000. WHAT!? Were they crazy? Two kids in their mid-twenties, that were just starting out, and had no assets to speak of and you are going to hand them $650,000!? That is insane.
Thankfully we knew it and laughed at the number, we had predetermined our budget already. We didn’t need a crazy bank telling us what we could afford. We were lucky to have some good advice from friends and family. But so many people out there go into a home purchase and they trust their bank or lender to pre approve them for an amount that should be affordable.
Most people are excited to hear how much they “can afford” and when that number comes in higher than expected guess what, their budget is set at that lofty number.
But the end result is house payments that take up 40%, 50%, or even more of their take home pay. When you start to break down your budget it starts to become almost impossible to live at those numbers.
But what if that isn’t you. Maybe you did everything right. Maybe you got the mortgage that was right in the sweet spot of 25-35% of your budget and you had a good down payment. Everything looked great. But then it all got derailed. Someone got laid off, or sick, or you had another big financial set back. Now suddenly that house you had no trouble paying for before is now a huge burden that is eating up your budget every month.
Or what if you haven’t purchased a house at all. This same philosophy applies to rent as well. Rent shouldn’t be more than 25-35% or your take home pay. (To make that easy add up your monthly take home pay. Then take your rent or mortgage plug it into your phone’s calculator. Now hit divide and enter your take home pay. The number should be between .25-.35.) If it’s more you are probably feeling the effects of being house poor.
Good News! If you find yourself in the category of “house/rent poor” there is a way out. And if you aren’t here is how you can avoid getting there in the first place:
You could: Sell your house. Crazy… I get it. But why live your life constantly stressed over every bill, never able to take those vacations, live your dream, or help out your family. Instead downsize, find something you can afford. Some people owe more on their home than it’s worth so this might be tough. I get that. But most people as of this writing are not in that spot. The housing market is actually pretty good. In fact if you downsize you might just find that you have some home equity that you can roll into a down payment on your next house.
You could: Make more money. Take on a side job, work hard for a promotion, ask for a raise (if it is deserved), sell something. Anything to up your income level is what you are looking for here. This is a great option if you can’t bear to imagine selling your place or moving to a cheaper apartment.
You could: Buy what is in your budget. Don’t sign an apartment lease if you know it’s going to be more than 35% of your budget. And why not strive for 25% just to give yourself extra money to have fun with or invest into your future. Don’t get that mortgage that will push you beyond your limit just because it’s “the house of your dreams.” Lots of people have bought the house of their dreams only to find out that it is a monthly nightmare trying to hold onto it.
Financial balance is key. Don’t sink too much into one budget category or another. You have hopes, dreams, goals, and a life to live. Don’t let your rent/mortgage take those from you. And if you are stuck in that spot remind yourself that you are not stuck. There is a way out. Go after it!
Has anyone found their way out of being house poor? How did you do it? Is anyone in that spot right now? What is your plan forward? It can be done, reach out if you have questions or need support.
[mc4wp_form id=”304″]
SafeRest Queen Size Premium Hypoallergenic Waterproof Mattress Protector – Vinyl Free
Inspirational Money Coaching may have financial relationships with the merchants and companies mentioned or seen on this site. We are not responsible for any actions taken by users. For more information see our Privacy Policy & Disclaimer.