Being “house poor” is a situation many homebuyers dread but often end up in. I’ll explain what it means to be house poor, what causes it, how to avoid it, and steps to take if you find yourself house poor
What Does “House Poor” Mean?
The term “house poor” refers to spending a large proportion of your income on homeownership costs like mortgage, property taxes, insurance, utilities, and maintenance.
Someone who is house poor struggles to afford other necessities like food, transportation, healthcare, and savings once housing costs are paid. They live paycheck to paycheck with little leftover for discretionary spending.
House poor individuals may be “house rich” in that they own a nice home, but they lack expendable cash flow. Their high housing costs make it difficult to save money or handle financial emergencies.
What Percentage of Income Goes to Housing?
Experts recommend spending no more than 28% of your gross monthly income on housing costs. This includes your mortgage payment property taxes insurance, utilities, and HOA fees.
Ideally, your total debt payments including housing, credit cards, student loans, car loans, etc. should not exceed 36% of your income.
If your housing costs exceed 28% of income or total debts surpass 36%, you risk becoming house poor.
Common Causes of Being House Poor
Here are some common reasons people end up house poor:
- Buying more house than you can reasonably afford
- Underestimating total ownership costs
- Not budgeting for maintenance and repairs
- Having high interest rates, property taxes, insurance costs
- Income loss or reduction after buying the home
- Rising interest rates if you have an adjustable-rate mortgage
Tips to Avoid Becoming House Poor
Here are some tips to avoid house poor status when buying a home:
- Be conservative when deciding your price range. Consider future costs too.
- Get preapproved based on your actual budget, not the max loan amount.
- Select a fixed-rate mortgage to lock in a low rate.
- Thoroughly estimate all ownership costs, including repairs and upkeep funds.
- Have a healthy emergency fund before buying. Expect the unexpected.
- Choose a home well below your approval amount so you have financial breathing room. Don’t max out your mortgage.
What To Do If You Are House Poor
If you find yourself house poor, here are some options to improve your situation:
- Refinance your mortgage if rates have dropped to lower your payments.
- Rent out part of your home to generate rental income.
- Take on a side job or freelance work to supplement your income.
- Cut back discretionary spending temporarily.
- Tap into your home equity line of credit for access to cash.
- Downsize to a more affordable home that reduces your housing costs.
- Sell and become a renter again until you are in better financial shape to buy.
Consult An Expert Before Buying
The best way to avoid becoming house poor is to consult professionals. Speak to a mortgage lender, real estate agent, and financial advisor to assess your budget and ideal home price range. Don’t take on more mortgage debt than you can comfortably manage.
With careful planning and responsible spending, you can achieve homeownership without the financial stress of being house poor. Make sure your housing costs align with your income and lifestyle before purchasing.
How Being House Poor Works
A house poor person is anyone whose housing expenses account for an exorbitant percentage of their monthly budget. People can find themselves in this situation for many reasons. In some cases, a consumer may have underestimated their total costs. Alternatively, a change in income may be why housing expenses have become overwhelming.
Buying a home is part of the American dream and many homeowners pursue homeownership because of the many advantages it offers. Making payments toward the ownership of a real estate property can be a good investment in the long term. That said, it can also quickly turn sour if you run into money trouble and fail to account for the unexpected costs that often arise when taking on such a big commitment.
To prevent becoming house poor, prospective homeowners should not let their dreams get the better of them. They can start by considering the following unwritten rules and heuristic guidelines:
- One estimate of how much to spend on a home is 2.5 times your total gross annual salary (although this figure will often have to be quite a bit higher). Sure, you might earn more in five years. However, you might also find yourself out of work.
- Other factors to consider are the amount of the down payment, the mortgage interest rate, the property taxes, etc. Therefore, a more precise way to determine how much you should spend would be to calculate what percent of your monthly gross income will be spent on housing costs. This is called the debt-to-income (DTI) ratio, or front-end DTI. The rule is that this number should be no more than 28%.
- Make sure you choose the right mortgage. If you don’t want to be caught off guard by unexpected payment increases with a variable-rate mortgage, opt for a fixed interest rate.
- Keep some money aside for unexpected circumstances, such as maintenance costs or sudden changes to your financial position.
What Is House Poor?
“House poor” is a term used to describe a person who spends a large proportion of their total income on homeownership, including mortgage payments, property taxes, maintenance, and utilities. Individuals in this situation are short of cash for discretionary items and tend to have trouble meeting other financial obligations, such as vehicle payments.
House poor is sometimes also referred to as “house rich, cash poor.”
- A house poor person is anyone whose housing expenses account for an exorbitant percentage of their monthly budget.
- Individuals in this situation are short of cash for discretionary items and tend to have trouble meeting other financial obligations, such as vehicle payments.
- House poor individuals can consider limiting discretionary expenses, taking on another job, dipping into savings, selling assets, or downsizing to ease their financial difficulties.
What Does Being “House Poor” Mean?
FAQ
At what point are you considered house poor?
Some experts say housing costs shouldn’t exceed 30% of your monthly gross income. If you spend more than that, you may put yourself at risk of becoming house poor.
What does it mean when people say they are house poor?
Being “house poor” essentially means a significant portion of your monthly income is dedicated to housing expenses. This can cause financial strain and limit your funds for other essentials, like groceries, healthcare and savings. Being house poor can also impact both your short-term and long-term financial health.
How do you calculate house poor?
The Bottom Line. Being house poor means spending a very large amount of monthly income on homeownership-related expenses. To calculate mortgage affordability, some experts recommend spending no more than 28% of your gross monthly income on housing expenses and no more than 36% on total debts.
Can I afford a $300 k house on a $70 k salary?
Can I afford a $300K house on a $70K salary? If you have minimal debts then a $70,000 salary might be enough to afford a $300,000 house. The size of your down payment and your mortgage interest rate will be important variables. Try to keep your monthly house payments below a third of your monthly gross income.