How to avoid being “house poor” with rising costs in 2023?

So, you have decided that it’s time to buy a house? That’s great and is one of the biggest financial decisions you can make for yourself and your family. You have been pre-approved by the bank and know what you qualify for, so you start house hunting. But this is where you can potentially dig yourself into a hole. Although many Canadians and Americans have realized their dreams of home ownership, they soon realize that they may have bitten off more than they can chew, as their monthly expenses start to creep up on them.

What exactly is “house poor”?

House poor is when homeowners spend too much of their monthly income on their house and associated monthly expenses. The problem is that many people pre-qualify for a mortgage and then buy right at their affordability limit. This is where the trouble starts. There are other expenses to consider when owning a home. Aside from the mortgage payment, additional costs include property taxes, maintenance, utilities, and insurance. Many people fail to account for all these expenses, or they underestimate their impact of them. This leaves very little room for any discretionary spending in their budget, and all their income, and sometimes more, is spent on their housing expenses.

Now that we’ve established what being “house poor” is, how can this be avoided? We will look at three simple keys when buying a home to avoid falling into this trap.

1. Put down a big down payment

There is a saying, “pay now and play later,” or “play now and pay later.” Indeed, when it comes to a home purchase, this is an excellent way to look at things. The bigger the down payment you can put down upfront, the lower your monthly costs will be. If you can put a bigger down payment down, do it! You will be happy you did.

2. Keep your expenses to a percentage of your income

The most common rule is keeping your housing costs to no more than 30% of your income. Some conservative experts suggest keeping your expenses at 25% of your monthly income. Still, by locking your expenses as a percentage, you are giving yourself more wiggle room to cover your expenses and have some extra cash for fun.

3. Have an emergency fund in place

An emergency fund is a cash reserve set aside for unforeseen expenses. This could be such things as house repairs, maintenance, or any other unplanned expenses. Most experts recommend setting aside at least three months’ worth of expenses in cash. Holding six to twelve months of expenses is highly recommended, however. This way, when there is an unplanned expense, it will not affect your monthly income and expenses.