Earlier this year, I published the post Is Being House Poor Limiting You? While no one ever thinks they will fall into being house poor, it does happen to some. Due to this, when asking yourself the question “how much home can I afford,” it's best to think about ALL of the expenses that go into homeownership.
There are many “hidden” costs that go into homeownership that many do not think about when buying a home. While some homes may seem affordable, there are many factors and expenses to think about.
According to recent data from Zillow:
- U.S. homeowners on average spend more than $9,000 per year in hidden homeownership costs and maintenance expenses
- U.S. homeowners pay an average of $6,042 per year in unavoidable hidden costs: homeowners insurance, property taxes and utilities
- U.S. homeowners pay an average of $3,435 per year in annual optional costs including house cleaning, yard care, gutter cleaning, carpet cleaning, and pressure washing.
That’s a lot of extra money each year that many homeowners do not realize that they may need to pay for.
By not knowing about these costs, a person may become stressed due to the amount of debt they may rack up from being house poor. It may also delay retirement, lead to a house being empty (there might be no money left to decorate), and more.
There are things you can do though so that you can make sure you don’t fall into a house poor situation, though. When pondering the question “How much home can I afford,” think about the many tips below.
Add up all of the costs.
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 everything else if you don’t do your research.
Before you say “yes” to a home, I recommend you add up all of the extra costs that you may have to pay for if you decide to buy a specific home.
Other homeownership costs include:
- Gas. Many homes run on gas in order to have hot water, to use the stove, and so on.
- Electricity. Generally, the bigger your home then the higher your electricity bill will be.
- Sewer. This isn’t super expensive, but it is generally around $30 a month from what I’ve seen.
- Trash. This isn’t super expensive either but it does cost money.
- Water (and possibly irrigation). Water bills can vary widely. I know many who live in areas where the average water bill is a few hundred each month.
- 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 $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 for 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 may be rules you don’t like as well.
- Home furnishings. Furnishing your home can 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 own a $500,000 house if you don’t have any furniture?
Buy for less than what you are approved for.
Many potential homeowners are approved for home loans that are somewhere around 30% to 35% of their salary before taxes.
That’s a lot of money. This amount is before taxes as well, which means that your actual monthly home payment would be a significant portion of your take-home income each month. Many who buy at the full approval amount cannot afford their homes due to the fact that it is such a significant percentage of what they earn.
If you don’t want to be house poor, then you should make sure to buy a home that is less than what you are approved for. You should also add up all of the costs of owning a home and make sure it is an amount that you are comfortable with.
Related posts:
- Renting Out A Room In Your Home For Extra Money
- How To Live On One Income
- Ways To Make An Extra $1,000 A Month
Have an emergency fund.
An emergency fund isn’t just to protect you from your job. They also exist to help you in case something goes wrong with your home.
Your roof could spring a leak, a tree may fall on your home, a pipe may burst, there may be an electrical problem and more. Homes have many things that go into them and you never know if something may need to be fixed.
By having an emergency fund, you will have a fund that will help you if something were to go wrong. It will be you be more prepared so that you don’t have to take on any debt in order to help pay for an expense.
What would you say to someone who asks “How much home can I afford?” Do you know anyone who is house poor?
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House poor is definitely trending in our area. It’s important to identify why you actually want things in your home. Everyone tried talking is into a four-bedroom “in case we had company”. We have no kids currently and our families live 15-20 minutes away. Who exactly was going to fill up that many guest rooms? People were really just advising that we do that since that is what they had done. Don’t get roped into adding a cost into your 15-30 year mortgage if there’s not a good reason for it (even if you pay it off early!).
So many people give bad advice!
I don’t really think about insurance and taxes, since they’re built into our mortgage payment, but you’re right that they’re a big chunk of change above just the mortgage payment. For us, propane is a huge expense we did not foresee/appreciate when we bought our house. This year we’re buying our own propane tank, (for about $2,700), which will enable us to shop around and get much better prices on propane.
I’m sure I’ve seen stats on what percentage of the house purchase price one should add to the cost for maintenance. I would encourage anyone wondering how much house they can afford to follow this advice, since most of those additional costs are unavoidable.
Oh yes, propane can be such a large cost!
People moving from mild climates like California to the Midwest sometimes completely miscalculate heating costs.
Yes, heating costs can add up!
With the purchase of our first home, we made the mistake of letting the bank tell us what we could afford and outside influences tell us what we need. With our new home, we focused on what we truly need to avoid ending up in the “house poor” situation again. It has been interesting seeing the reactions of others when we talk about our downsizing efforts because many are not receptive to the notions you discuss in your post!
Good job Claudia!
Its crazy how many people believe in buying the biggest house the bank will loan you money for. We bought a condo and live below our means. We could “afford” to buy a much bigger place but we would rather be less stressed financially.
Great job!
I agree. Many people make the mistake of buying for what they are approved of, when really they are just giving the banks exactly what they want…
Yes!
I have so many friends who are house poor! This is why I haven’t bought a house – I would definitely be house poor. I think you have to plan ahead and make the right choices before you buy in order to avoid actually being house poor.
Good job on waiting!
This is a tough topic because it’s easy to get caught up in the excitement of the home-buying process and not think about how much you can afford. It’s VERY easy to get caught in the higher end of your budget. I think anyone who is house poor should look into working a side hustle, as it can make up that extra income that will make your home truly affordable.
Yes, a side hustle can really help!
We definitely experienced some house poorness when we first got into this one. And our mortgage is pretty low!
A couple of things broke, and we were still trying to get back to normal after the closing and moving costs. Plus the $1,500 we fronted my in-laws to get them down here. Which they could only pay back incrementally over time.
I’ve gotten some raises since then, and the number of things needing fixing/replacement has quieted to a dull roar. So now, it’s about the house either keeping us from putting money in savings or having to dip into savings. The latter being the $3,500 of insulation last year and the $3,500 A/C unit for the in-laws in the guest house this year.
Still, it’s better than going into debt. Is what I keep telling myself whenever something breaks.
Things breaking are the worst!
These are all really great points that many first time buyers do not think about. Some will just use a basic calculator and figure out the “mortgage payment” without considering homeowner’s insurance, PMI if they don’t put down 20%, HOA fees if applicable, increased utilities and maintenance costs.
We were really intentional about figuring out as much as the costs as possible when purchasing a home. We only spent about 1/2 of what we were approved for and still ended up with a beautiful, affordable new build home. Fortunately, because it was new, we had no maintenance costs for the first year and so far so good.
Home ownership can quickly become very expensive and stressful and it isn’t for everyone. We love owning a home and have been fortunate to only spend about 22% of our take home pay on our home. However, there are days when I think back to being a renter and appreciated not having to fix things, mow a lawn or be responsible for potential breaks/repairs.
Thanks Brittney!
I’ve been wanting to buy a house for a couple of years now. I am not planning on buying for another couple of years. But, I hadn’t even thought about those hidden yearly costs! Thanks so much for sharing all of this info. I’ll definitely have to factor it into my house hunting research.
Welcome Gina!
We know some people that are house poor and they are so stressed out. They have this nice house but it seems unfinished because they can’t afford to decorate or furnish all rooms. Like you mentioned, all of those little expenses really add up.
Ugh, that is always so sad!
I always try to point out these hidden costs to prospective home buyers because I so often hear that having a mortgage will be cheaper than rent. That may be true but often the hidden costs make it more expensive and there’s the added responsibility of owning the property. I’d add that it’s ideal to buy a home you can afford on one spouse’s income. Even if you don’t want one spouse to stay home with future children, it’s really nice to have the flexibility to do so, or to weather a lay-off or unpaid time off gracefully. You just don’t know what life will bring and building in some wiggle room in your fixed expenses is a great plan.
Yes, that is a great way to buy on what you can afford!
The key is definitely borrowing less than the bank is willing to loan you. I know from experience, lenders will let you have a lot more than you really should spend. You have to know what you feel comfortable with and resist the urge to buy bigger and better.
Yes!
I think that it is important to realize that while the mortgage payment is manageable right now with the insurance and property taxes included that taxes and insurance generally increase every year. That being said it is important to prepare yourself for a mortgage payment that will continue to increase to cover these increasing costs that we rarely think about.
Cherri
Yes! What some people also don’t realize that just because the previous homeowner may have paid a certain amount for property taxes, there are cases in which the amount the new homeowner may pay may actually be 3, 4, or 5 times higher.
It drives me crazy when I see the home buyers on those reality shows stretching the upper limits of their budget. There are just SO many other costs to consider.
Yes, same here!
I’m holding off on buying a house now to avoid becoming house poor. I definitely need more savings and I think it’s a great idea to always spend less than what you are approved for.
Good job! Always a great idea 🙂
My $02: I would only buy with a 15-year mortgage or less term length, 20% or more down payment, and the total mortgage with interest payment no more than 25% of your gross income.
I think staying within those guidelines keeps you from overspending, over financing, and tying up to much of your income.
All great things to think about!
Another hidden cost is possibly car insurance which can increase just from moving across the street. My last move was a bit further than that but thanks to the insurance areas my rates when up $400 per year. Something to at least be aware of when buying a new home.
Oh yes, that’s a great thing to remember!
RE: “Many potential homeowners are approved for home loans that are somewhere around 30% to 35% of their salary before taxes.”
Just curious, what do you think a better number would be?
That’s a hard question to answer. I think potential homeowners need to be more aware, as some may be able to afford that amount.
I still do not understand why some people plan to buy a house they couldn’t afford. Their expectation is high that made them a house poor. This is why I and my wife haven’t bought a house yet. We’re making sure that we have enough or more savings first before buying our dream house.
Good job on waiting!
So many people do it because the banks approved them for more than they can afford. People assume that lenders are responsible… And they’ve improved a little since the crash of 2008… But they are still not lending responsibly in my opinion. People don’t understand the true cost of owning a home until they have actually done it. Also, most people do not understand basic budgeting and don’t have the patience to save up for a down payment, etc.
Our first condo (in Japan) was also me being tricked into following whatever the bank told us was good. We ended up selling as we left Japan, but I’ll be sure to be more careful next time. There surely were lots of hidden costs involved (property tax being the big one).
One big “plus” in Japan was that the loan rate was insanely low (0.9%) so that was practically free money.Which is also why so many people take insanely long mortgages there for expensive houses. Mine was on 35 years.
Wow that is a low rate!
Whoever thinks renting is “throwing away money” hasn’t done any math. “Oh, I’m gaining equity!” Woohoo.
We budget 21,500 per year for our house (including everything you’ve mentioned). That doesn’t include 5,500 on doors.
On top of that (we knowingly) had PMI and aggressively paid of 10%. This gave us another 21,000 that we’ve paid off on our loan to get out of that state. Just waiting for the bank to remove it now.
Once that’s done, we’ll probably pull back some from the extra payments and up everything else retirement wise.
Even ignoring the extra principal payments, we spend an extra couple grand a year just on maintenance stuff alone!
I agree!
It’s true we recently bought a house and the hidden costs were too much to handle. The total expenses estimated were much more than what we were expected. The problem is while buying there are many expenses that are not clearly stated as a result we make the calculations likewise. However as you pointed out its necessary to keep a buffer amount to pay those extra expenses.
Being house poor can really suck. The sad thing is that so many people are in this exact situation and while they know how to get out they don’t want to lose their home or live in a smaller place or even get an apartment. Cars and homes can be our biggest expenses. Just getting rid of those huge monthly payments can make a big difference in lifestyle.
We screwed up by looking at houses within our budget and then looking at JUST ONE house slightly higher than our budget. Of course, the more expensive house stood out compared to the others and we put in an offer. Thinking about it now, we never looked at any other homes in that higher price range so we had nothing to compare it too! I would do it differently now.