When we were in the process of buying a home back in 2009, we were given a pre-approval amount of $150,000.
If we would have bought a house for that amount, I’m sure it would have led to us being house poor. While this may not seem like much to some, in the St. Louis area this can get you a good starter home.
This $150,000 number seemed high to us because we were quite young when we were pre-approved (we bought shortly after we turned 20) and we both had mediocre jobs. Yes, we were both working full-time but our yearly salaries put together were still very low and I definitely do not think we should have been approved for $150,000.
That being said, we thankfully did not buy a house that was $150,000. Instead, we made sure to buy a house for much less than that because we didn’t want to be stressed out by large monthly mortgage payments that we couldn’t afford.
In case you don’t know what “house poor” means, it is when you spend most of your money on your home and there isn’t much left for other expenses.
Being house poor can lead to many problems in your life. While having a roof over your head is a great thing, it can be easy to let home expenses get ahead of you if you don’t do enough research before you buy.
Many people are house poor too. Just because your neighbor has a nicer house than you does not mean that they are doing better than you. So many people see housing as a status symbol but don’t really think about how this may impact their financial situation.
Below are some of the many different ways being house poor can limit you. When buying a home, please keep the below in mind.
Being house poor may mean you can’t afford other home expenses.
Buying a home can easily lead to being house poor if you don’t do enough research. This can limit you because you may be even more house poor than you originally thought.
When some families buy a home, they don’t think about the total cost of homeownership. While you may be able to afford the monthly mortgage payment, you may not be able to afford anything else if you don’t do your research.
Some of these other costs include:
- Property taxes. Property taxes can vary widely from town to town. You may find yourself looking at two similar houses with similar price tags, but the property taxes may vary by thousands of dollars annually. That is a LOT of money. While it may seem small when compared to the actual home purchase price, remember that you have to pay property taxes annually and a difference of just $3,600 a year is actually $300 a month for life.
- Home insurance. Home insurance can be cheap in some areas but crazy expensive in others. Don’t forget to look into the cost of earthquake, flood, and hurricane insurance as well as that can add up quickly depending on where you live.
- Maintenance and repairs. Even if your home is brand new, you may have to pay repairs, which is something that many don’t realize. No matter how old your home is, repair and maintenance costs will eventually come into play.
- Homeowners association fees. This can also vary widely. You should always see if the house you are interested in is in an HOA because the fees can be high and there might be rules you don’t like as well.
- Home furnishings. Furnishing your home can definitely be done cheaply, but I know some who buy huge homes but can’t afford to put anything in them, such as a table, a bed, and so on. Why have a $500,000 house if you don’t have any furniture?
Buying a home you can’t afford may mean you can’t pay for anything else.
If a lot of your money goes towards home-related expenses, this means you have less money for other things in your life.
This can prevent you from doing the things you want in life and can stop you from being able to reach financial freedom.
Being house poor may mean:
- You can’t retire when you want to.
- You can’t go on a vacation.
- You’re stuck at your job.
- Your finances may make you too afraid to reach your dream.
- You can’t afford the other things in life you want.
- You may never feel free because you feel stuck due to the large monthly payment.
Being house poor can lead to a significant amount of stress.
Banks many times approve home loans with monthly mortgage payments around 30% to 35% and sometimes even as high as 50%, and I personally think this is too high in many cases.
While in some cities this may be normal (such as New York City or cities in California), having a monthly mortgage payment that is less than the amounts above will make life much less stressful.
This is because the lower your expenses are, the less things like a layoff, a firing, a large unexpected expense, and so on will impact you both mentally and financially.
If a high percentage of your income goes to home expenses, just think about how significantly you may be impacted if all of a sudden you made less money or if your monthly expenses suddenly increased. What if all of a sudden your home expenses consisted of 50% or more? What would happen?
Even when my monthly mortgage payment consisted of around 25% of our monthly income, I still didn’t like that. For me, I prefer to be 20% or under and I believe that is a good percentage for others as well.
Like I said, depending on where you live this might be hard but I do think the lower the percentage, the better.
If you are house poor and want to change your situation, I recommend the posts below:
- A Complete Guide To Renting A Room For Extra Money
- How To Live On One Income
- Ways To Make An Extra $1,000 A Month
Are you house poor? How much does housing consist of in your monthly budget? What tips do you have for someone who is interested in buying a home?
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Kasia says
Wow! I’d love to be able to buy a house for $150,000! Unfortunately, that is unlikely to ever happen where I live unless it’s an investment property in the sticks. A modest home costs around $400,000 in an unattractive suburb around the area where I live and closer to $550,000 in a suburb I’d actually want to reside in. Average income is around $70,000 per year. Moving to cheaper places isn’t an option due to access to work. Sure, units and townhouses can be a little bit cheaper but not by much and then you end up paying more on body corporate fees. On a dual income, 40-50% of our income would end up going on repayments. Currently, 30% of our income goes towards rent. It’s all doable but stressful.
Michelle Schroeder-Gardner says
Yeah, it’s not possible everywhere to get a house for $150K, but it is possible to not be house poor!
Christine Berry says
I’m quite glad I’m not living in NZ anymore, you need to spend around $400,000 to get a ‘decent’ house and even then it’s old, cold, needs repairs etc.
I’m thinking about investing in property this year and haven’t decided entirely what route I would like to go. I’m thinking in Guatemala could be a good start as it’s much cheaper though the airbnb rates you can collect are comparable to homes in my city, in NZ.
I like the idea of owning property as an investment, and eventually for stability if/when I have a family. But for now I’m quite happy with my $300 a month rent.
Michelle Schroeder-Gardner says
$300 is great!
Maureen @ A Debt Free Stress Free LIfe says
So many people get caught up in buying the biggest home they can because they want to keep up with their friends and family. Big mistake because when you buy something you can’t afford and forget the other expenses that you will have to pay, you put yourself in a very precarious position. Starting at the lower end of the pre-approval amount is smarter than starting with the highest amount the bank says you can afford.
Michelle Schroeder-Gardner says
Yes, exactly! Staying at the lower end is a much better decision.
Holly@ClubThrifty says
We live in an area where you can get a really nice (and I mean REALLY NICE) house for 250K. When we bought our current home, the bank said we could spend more than $600,000. In Central Indiana, that would be a starter castle!
We spent around $187,000 instead and put almost half down. I have been really happy with our home purchase. It isn’t huge, but it is big enough for us and very nice. And most importantly, it is in an awesome area and neighborhood.
Michelle Schroeder-Gardner says
Your house is nice and especially for the price. Great job!
Taylor Lee @ Engineer Cents says
2-bed condos where I live are going for $500-650K. Houses… can’t even wrap my head around it.
The banks were willing to lend me up to $550K which I thought was ridiculous. Obviously, what I ended up taking out as a loan was much less.
I set my cap at roughly 3x my gross, which though on the high side was OK for me since
1. I live in a high cost of living area with expected future appreciation due to infrastructure investments,
2. My income is expected to increase before it plateaus,
3. My mortgage+taxes+insurance+HOA is about the same as or less than rent for a 2-bed (though we get a much nicer place),
4. My monthly payments will still be roughly 25% or less than my net income.
Michelle Schroeder-Gardner says
Since your monthly payments are 25% or less, I think you are doing well. Much better than most!
Robin @ The Thrifty Peach says
When we bought our house, we bought less than half of what we were approved for. That’s a big reason we will be paying off our mortgage this year, too.
As a previous mortgage broker, I’ve seen loans get approved as high as 56% total debt ratio, which is especially crazy when you consider it’s based off of gross income and not net income.
Michelle Schroeder-Gardner says
Great job!
Kathy says
Younger buyers seem to want immediately what it took their parents 30 years to achieve. Based on some of the HGTV shows, they are unwilling to even move into a place without granite, hardwoods and a separate tub/shower. They couldn’t stand wallpaper for even a day. I’m not sure if we as parents perpetuated that sense of entitlement by giving them too much as kids, or if it is simply a generational thing. My husband and I bought a really ratty house for our first home….no shower, horrid carpet, filthy and it had cockroaches that would stand and fight if you walked in on them in the night. Our second house was much nicer, the third was bigger. We built our fourth but it was still modest. Where we are now is a duplex that was being built when we found it but this month we are digging the foundation on our dream home. This is after 38 years of marriage. Those entitled house hunters want that now.
Michelle Schroeder-Gardner says
Good job Kathy!
Amy @ DebtGal says
I can definitely relate to not thinking through other housing costs, when considering how much to spend on a house. (It would be very difficult to find a home in decent shape for $150,000 here!) A big one for us is propane heating costs. We had NO IDEA that we’d be spending thousands of dollars on it each year! We’re planning to purchase our own propane tank at the end of the summer, which will enable us to negotiate better prices, but we’ll still have to shell out cash for propane every year.
Michelle Schroeder-Gardner says
Yes, propane can be so expensive! I know someone who spends around $1,000 a month in the winter on it. I don’t even know how that’s possible!
John Wake says
I read a comment somewhere about a couple that moved from California to the Midwest and greatly miscalculated their household expenses by not checking into heating costs beforehand.
Sarah says
We bought our first house in AZ off of just my income. We paid a little less than $150,000 and sold it two years later for a good profit. Now, we’re renting in NC and will purchase a house within the next two years, most likely. I’m really enjoying renting right now, but am excited to own something so we can work at paying it off. I go back and forth between wanting a nice house in a nice neighborhood and wanting something super super affordable. Honestly, since we’re both self-employed, it will just depend on our financial situation at the time. We will put down at least 25 percent tho – hopefully more!!
Michelle Schroeder-Gardner says
That’s how we feel. We’re not sure if we want to get something nicer, or if we should stick to something more affordable.
Fervent Finance says
This article is very timely with that article floating around Twitter yesterday! I rent an apartment with two friends in Manhattan which definitely cuts down on costs. Living in a big city allows you also to not have certain expenses other homeowners outside of a city would have. I don’t have a car, so don’t pay the related costs with that. I don’t pay real estate taxes (embedded in my rent though), home owners insurance, maintenance on my apartment, heat (older building with one big furnace I’m assuming). So even though my apartment plus utilities makes up almost 50% of my expenses, it is a much smaller piece of my income since I’m able to cut so many expenses by living in a big city and walking to work. Great post – since I’m sure everyone knows that person that way outreached for a home.
Michelle Schroeder-Gardner says
Yes, the person from yesterday definitely should have bought a cheaper home. I still can’t believe that they think it’s all right!
Laura Harris says
It’s really great that you’re debunking the myth that people should buy the house they are approved for. It’s so tempting. We are a family of four on a single income. So we have to shop for less house than the bank approved. Keep spreading the word. We can all live on less and still have quite a lot.
Michelle Schroeder-Gardner says
Thanks Laura!
Money Beagle says
We aren’t house poor but we did purposefully stretch ourselves a bit when we re-financed, which moved us to a 15 year mortgage versus the 30 year payment we’d had before. By stretched I mean that we just have to be very careful and also that certain luxuries are put on hold. But, to me it’s worth it when I look forward to eliminating about 11.5 years of payment in the long run.
Michelle Schroeder-Gardner says
I think in this situation, it is fine. You have a plan!
Emma | Money Can Buy Me Happiness says
Yep we were also approved for a huge amount – 600k. That would have bought us a one bedroom unit in Sydney, Australia where we were living at the time. We decided to invest in property in my home country of New Zealand instead and so far that decision has paid off. I prefer the freedom of renting where I live and owning investment properties for financial security. And the tax benefits, of course!
Michelle Schroeder-Gardner says
It’s crazy what banks approve people for!
kammi says
I have a house(outside of the US), but I also want to continue to invest in real estate. There is a company that allows you to do this called RealtyShares, which I was looking into. You have to qualify (above income and net worth), though, but I like the concept. I have no desire to live in a big house; it can be a pain to maintain (and the value can take a dive if you don’t maintain the property). I know of a friend who had an aunt who was trapped in her elevator for a couple hours because she had an elevator in her house and it took people a while to find her (this was pre-cell phone era). I think about what sort of life I would want in the future (I’m still pretty young), and I definitely do not want a huge, sprawling house, although I like my privacy so I like gated communities.
Michelle Schroeder-Gardner says
An elevator sounds nice, but it sounds like it would need a lot of maintenance!
Beks says
Sadly, I know all about this. 20 years ago, when my parents built their house, they were both make about $50-60k/year each. They could afford a mortgage. Fast forward seven years, and my dad was laid off, fast forward another three years, and my dad had to start driving a school bus, and working at Walgreens just to pay for that beautiful house.
They’ve since downsized, having had to do a quick sale of the house, and are still recovering. We’ve been watching Property Bros on Netflix, and the amount of money people will buy a house for absolutely baffles me. And makes me a little scared to try to buy one, myself, someday.
Michelle Schroeder-Gardner says
Sadly, this has happened to many homebuyers!
cece says
I don’t think we are house poor now although if I lived in a state with a lower cost of living I’m sure we would have went with a much lower budget. I want to stay put forever because we we did really good price wise with this particular house and I don’t want to end up house poor, but my husband wants to move. I just don’t think it’s worth it to have more house than you can comfortably afford. I wouldn’t want to give up my vacations for a house.
Michelle Schroeder-Gardner says
Yep, exactly! I don’t want to give up my vacations and other luxuries.
Michelle Schroeder-Gardner says
Yes, that is the key takeaway with my post. Too many people buy homes they cannot afford and use excuses.
Anna says
Here is the situation my husband and I are in (numbers have been changed to make it “easy math”):
A couple has $60,000 saved up and want to put $55,000 as a down payment on a new home to hit the 20% down mark. This means they will not have to pay the monthly PMI for mortgages with down payments of less than 20%. Is that worth it? Or would they be better off only putting $50,000 down and having the monthly PMI for a while until they pay it down? The mortgage payment in either situation would be between 20% and 25% of their monthly income.
Michelle Schroeder-Gardner says
Hmm that is tough. Could you wait a little longer so that you can save more money? For me, I like to have a full emergency fund as you never know what can happen. There are so many factors that go into this decision though, so it is a hard one!
Michelle Schroeder-Gardner says
Yep!
Mrs. Frugalwoods says
When we bought our house three years ago, we were really careful to stay within our budget since we definitely didn’t want to put ourselves in the position of feeling house poor. We’ve been happy with the house we bought and happy with the increases in value that our area is experiencing. Since we’re planning on renting this house out in a few years, we’re keeping a close eye on rental prices right now and things are looking good! At the end of the day, I agree, I’d much rather have a smaller house that I can comfortably afford!
Michelle Schroeder-Gardner says
Sounds like you have a great plan!
Adam @ AdamChudy.com says
We bought ours at the lower end of what we considered an acceptable range 2 years ago and we don’t plan to upgrade regardless of where our income heads. Being house poor is one of the most dangerous things that can throw a middle or upper middle class family off the rails.
We also rent a room, which is a huge subsidy to our mortgage.
Michelle Schroeder-Gardner says
Great job Adam! How did you find the roommate? Is it someone you know?
Adam @ AdamChudy.com says
We’ve been super successful with finding people on Craigslist twice now. The first is still a good friend of ours that we see regularly and we are now good friends with our current roommate.
Michelle Schroeder-Gardner says
Awesome! Great to hear Adam.
Sarah says
The amount banks approve for home loans always boggles my mind. We were approved for $250,000 but told the bank NO WAY. On an air man & teacher’s salary there is no way we could afford a home that expensive. We got lucky and spent way below our budget on a great house. It is large (3200 sq ft), but we purchased it in 2010 when the market was at rock bottom in our area and our mortgage +HOA dues is less than the rent on our two bedroom apartment. We also purchased a foreclosure (which seemed to be everywhere in our area 5 years ago) and the bank let us purchase it for lower than what they were asking. Our realtor said that most banks at this point just wanted to get rid of the foreclosed homes as fast as possible. Looking at how much the cost of homes has gone up in the last five years, makes me reluctant to ever move! I doubt we’d ever get as good a deal as we did back in 2010.
Michelle Schroeder-Gardner says
Good job with staying on budget!
Kayla @ Shoeaholicnomore says
I bought my house at age 21 and I’m definitely house poor. I love my house, but I hate how much time I have to spend at work just to pay for a house I never get to spend any time in. Ugh! I thought about renting out a room, but I’d have to find the right person as I really like having my privacy.
Michelle Schroeder-Gardner says
I’m sorry Kayla 🙁 You should definitely look into finding a roommate!
Meagan @ okay now breathe says
I’m actually in the process of house hunting now, and one of my main concerns is HOA fees. I’m using trulia.com as a guide, and they break down the expected principal and interest, property taxes, and homeowner’s insurance you’ll have to pay monthly. What shocks me is that basically all of the places that I can afford have hefty HOA fees that are relatively close to the rest of the fees. It’s like I’ll be paying double my mortgage. This makes me very weary of home buying, but I’m positive I can find a diamond in the rough. I’m just trying to be as patient as I can.
Michelle Schroeder-Gardner says
Yep! HOA fees can be very expensive. We were house shopping (online only, we still own our other house and we are waiting until it sells) last summer and we fell in love with some homes that had HOA fees between $500 to $1,000 a month!
Jason Butler says
This post is the exact reason while I won’t be buying a house for a minute. I’m not ready for all those excess fees and taxes. I’m 100% fine with renting for right now.
Michelle Schroeder-Gardner says
Nothing wrong with renting! We are renting now, while also waiting for our other house to sell. I’m loving renting!
Abigail @ipickuppennies says
Yep, buying too much house is a common issue. We were pretty broke when we bought our current place. That is, we didn’t have much in savings. But his parents needed a place to live, and we were going to buy in a year anyway… This led to a very stressful 18 months for me.
But other than sporadic home repairs (which can make a huge difference, like the $7,500 we’ve spent so far this year… ouch) our housing costs are relatively low. Our actual mortgage is less than 1/10 of our income. We pay a little extra, but nothing drastic. Utilities are a bear here in Arizona. We only recently got our averaged-out electricity bill under $300.
Still, we spend less than $1,300 for the mortgage (including a little extra) utilities, Internet and phone. That gives us more money to work with on bigger projects. Like, say, home repair.
Michelle Schroeder-Gardner says
Ah $7,500? What went wrong?
Abigail @ipickuppennies says
We had an outbuilding demolished last year, leaving a gap between the masonry wall and the fence. People started wandering into it (we’re right by a park) so I prioritized getting the gap closed and extended the wall because the fence was dilapidated. So that was $1,500.
My husband was paranoid after the people-in-our-yard incident, so we got new fence doors that locked for another $650. Then a new toilet for the in-laws in the guest house: $300. And finally getting an HVAC unit for the guest house put us up to around $7,500. Whee.
But eventually this house will get paid off, making repairs much easier to deal with. So it will all be worth it in the end.
Michelle Schroeder-Gardner says
Wow that’s definitely a lot of expenses. Hopefully the rest of 2015 is cheap 🙂
Heather says
Well this post came at a good time! I was just talking to my husband about the “should we upgrade when we are done having kids” conversation today! I got my house for 112k during the market crash (2009), our house was a disaster of a foreclosure though so we are still working on fixing it up one room at a time. We have decent equity in the home and now that we are growing our family, I always contemplate if we ‘should’ look into buying a nicer home in a nicer neighborhood in the next 5 years and tag on new debt, or stick with our super cheap mortgage and be free from debt in a short amount of time… decisions decisions!
Michelle Schroeder-Gardner says
It’s a hard decision! I hope you make the best one for you 🙂
Shannyn @ Frugal Beautiful says
Being house poor isn’t worth it at all! I would much rather be able to afford a home and have the peace of mind that I could still afford it if anything went wrong.
Michelle Schroeder-Gardner says
Yes, same here!
Barry @ Moneywehave says
This story was making Canadian headlines.
http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/house-poor-couple-debt/article24370722/
In their case being house poor is hurting them quite a bit. I’m just not sure if they realize that.
Michelle Schroeder-Gardner says
Yes! I actually read that story yesterday. I already had this post scheduled so it was perfect timing 🙂
ArcaSouth says
I totally agree! Before you consider buying a house, check your budget first, not only for your prospect house but for the budget after you buy your new house.
Michelle Schroeder-Gardner says
Thanks!
Rachel says
When we first bought in 2013 we were at our maximum bank approved amount. With HOA, Interest and principal, pmi,taxes and insurance we were about 45% of our income. We did this for a few reasons, interest rates hit rock bottom, I was only working part time and my husband was full time slightly above minimum wage. We were also full time students. With all that we knew our income would increase. And we also couldn’t afford renting in our area. So we ended up in a condo with a yard.
2 years later rent in our area is becoming even more expensive for the size property we need. Interest rates have gone up. Our income has also increased. So now with everything including our electricity rates we are between. 20 and 25% of our income. And we will most likely turn it into a rental after we need something bigger and the units are renting for 30-40% above the costs associated.
I think it’s important to consider what the growth of the area is, along with the cost of living in general. Every situation is different, so I think it’s also important to talk with someone unbiased you trust financially and the choices they have made. We talked a lot with my parents prior to deciding and understood what we were taking on.
Michelle Schroeder-Gardner says
I think since you knew that your incomes would change and that you could afford what you were doing, that it makes complete sense.
Michelle Schroeder-Gardner says
It’s a hard decision! Best to take your time.
Brittney says
I completely agree about avoiding a situation of where you are house poor. We were pre-approved for $400,000, which is way more than the amount of money to purchase in our area. But we didn’t look at any homes near that amount. We settled around $250,000, which was perfect for the amount of house we needed and the area we wanted. Our mortgage, homeowner’s insurance and property taxes come to 25% of our monthly income.
It’s really easy to get caught up in your idea of a “dream house,” but what people should really focus on is their “dream budget” and finding a house that fits that.
Michelle Schroeder-Gardner says
Good job Brittney!
DC @ Young Adult Money says
When I think about “house poor,” I can’t help but think about the rising price of housing. There truly is a “minimum” you can spend on rent in Minneapolis-St. Paul, and it’s fairly high. Mortgages are typically not that much more, but again housing prices have shot up again the past few years and the cost of owning even a very modest home is getting expensive (and rents are rising right with it). I can’t imagine how expensive housing is in places like San Francisco. Anyway, kind of off topic but I think it’s important to think about the economics in these situations. WHERE you live in a metro area – and which metro area you live in – is something that shouldn’t be overlooked from an affordability standpoint.
Kim @ YourFinanceProfessor says
So many people I know are in that situation, and it brings to light one of the best piece of real estate finance advice I can give. Just because the bank is willing to lend you a given dollar amount does NOT mean that you can afford it. Go smaller and don’t be a captive to your mortgage!
Michelle Schroeder-Gardner says
Yes, exactly!
Gary @ SuperSavingTips says
Despite living in an expensive area, I definitely bought what I could afford, not what the bank was willing to loan me. After all, it’s in their financial interest to have you borrow more, and pay more in mortgage interest. I wanted to make sure that I not only had enough to pay for my other expenses (house-related and otherwise which you mentioned), but also enough to do a bit of renovating. During my time in banking, I encountered a lot of people who were house-poor with huge homes of empty rooms because they couldn’t afford the furniture. Not how I want to end up!
John Wake says
On the other hand, it’s very expensive to sell a house. A good ballpark planning number is that you’ll pay around 7% of the home’s value to real estate agents and other expenses when you sell. So if you think you’ll outgrow a house within a few years you might want to consider buying a bigger house now or continuing to rent until you can afford a house you can expect to live in for a long time.
Kimsea Sok says
Thanks for sharing Rechelle.
I would admit that I never experience with buying new house or house poor. LOl.
You know..? I’m from Cambodia, so to own a house is not really difficult like what you said above. You no need to care about paying tax since tax law is not complete implemented in Cambodia. Some houses not paid for tax.
The insurance is not really reliable service in Cambodia, sometime they the regulation thus not so many people here are using insurance.
However, it is really great to own a house because I think that everything will be different. I never own a house thus I understand about that feeling, but I’m hard to explain about it…
Nice tips..
Bonifacio says
I agree with you! Before you consider buying a house, you must have the right budget. Buy a house that you can afford.
Gloria says
Hey..!!!!
I agree that when you are able to pay the total price of the house than you should be fine with renting a house.This reduces the extra stress and tensions.Worth reading post.!!
Steps Northern NJ says
It can create an appealing image that can cater to your changing needs such as for entertainment purposes or in cases of parties.