Will You Be House Poor After Your Home Purchase? Here’s How to Tell

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

If you spend more than 25% of your income after taxes on a home, you may find yourself house poor. Find out what you need to know to avoid this fate. 

When you buy a house, you’ll want to make sure that it is affordable. If you commit too much of your money every month toward housing payments, you could find yourself unable to do other things that are important to you, because all the spare cash in your bank account is being sucked up by your mortgage.

So, how can you determine if you’ll be able to comfortably make your mortgage payments so you don’t become “house poor,” or left with too little due to your big housing commitment? Here are the consequences of being house poor and what you need to do to avoid it.

Avoid becoming house poor

Devoting too much of your income toward your house could mean:

Being unable to save for retirementHaving a hard time saving an emergency fund (and needing a larger emergency fund due to your big monthly payment)Being unable to make any career changes that could leave you with less money to pay your housing costsNot having enough money to save for big purchasesConstantly feeling like you have to skimp on spending and having too little money to do other things you enjoy

Remember, you will have your mortgage for decades to come and you don’t want to struggle and have to sacrifice other important goals every single month just to be able to pay your housing bills.

This simple calculation will tell you if you’ll be house poor

To determine your risk of ending up house poor, here’s what you need to do:

Figure out your post-tax income. This is the money you bring home in your paycheck each month after taxes are accounted for by your employer (or you, if you’re self-employed).Determine your total housing costs. This is the amount you can expect to spend each month. It includes your mortgage principal and interest, but also property taxes, insurance, HOA fees, routine upkeep, and utility costs. You can find out a lot of this information by looking at the house listing, which should detail your HOA costs and taxes. You can also ask the current owners what they pay for utilities and get quotes from some home insurers.Make sure your total housing costs are 25% or less of your post-tax income. So if you bring home $4,000 a month after taxes are taken out, you’d be able to comfortably afford monthly housing costs of $1,000. If you spent any more than that, you would be house poor and could find yourself struggling to meet your financial obligations.

By doing this math, you can avoid a potential financial disaster that could result if you overcommit yourself to a house that costs too much.

What should you do if you discover that you’ll be house poor?

If you do this math and find out that your housing costs will equal too large a percentage of income, you have a few options.

One solution is to increase your income. This can take time, though, as you’ll likely need to take on a side gig, look for a new job, negotiate a salary increase, or expand your skills to qualify for better paying work. And you wouldn’t want to commit to a high housing payment based on your new income level unless you were certain that you could consistently make the extra money for years to come.

Another option is to try to decrease your housing payments. You could do this by shopping around for a cheaper house, finding a mortgage lender that will charge you a lower interest rate, or making a larger down payment so you don’t have to borrow as much.

It may seem disappointing to have to pass on a house because it would leave you house poor. But it’s a lot worse to find yourself saddled with a home you can’t comfortably pay for that’s nothing more than a major source of financial stress for years to come.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Christy Bieber has no position in any of the stocks mentioned. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

 Read More