What Is House Poor? And How To Avoid It
What is house poor? The expressions “house poor” and “house broke” refer to a situation in which homeowners are spending more than they can afford on housing costs. This can include mortgage payments, property taxes, insurance, maintenance or utilities.
Being house poor can leave you with very little money for other things like food, clothes and health care. It can also make saving for retirement or a rainy day fund difficult.
In this article we will cover what it means to be house poor, how to avoid it and steps you can take if you are already house poor.
What Does It Mean To Be House Poor?
For many people, a home is the biggest investment they’ll ever make. More than that, it is something incredibly personal. A home is where memories are made and families grow.
But the dream of owning a home can quickly become a nightmare when too much of your income is going toward housing expenses.
There are several ways you can end up house poor. It could be from buying too much house, not having enough income or an unexpected job loss or medical emergency.
Think you might qualify as house poor? Here are some indicators that you’re spending too much on homeownership at the expense of your overall financial health:
- You regularly worry about whether you’ll be able to afford your monthly mortgage payment
- You frequently have to dip into savings to cover the full monthly payment
- You don’t have an emergency fund and you don’t have enough money left over each month to start contributing to one
- You don’t have the space in your budget to contribute to a retirement fund
- You have other wants or goals that you feel the cost of homeownership prevents you from pursuing, such as attending concerts, traveling or engaging in a hobby
- You spend a large percentage of your income on housing
How Does Somebody Become House Poor?
Buying a home – especially if you’re a first-time home buyer – is a huge financial step, and not one you should dive into without first doing a lot of careful planning and financial assessment.
Buying A Home That Is Too Expensive
Home buyers often get caught up in the idea of owning their “dream home,” and may buy a house way out of their price range.
Just because you’re approved for a certain mortgage amount doesn’t mean you should max out your budget.
A popular standard is that housing costs shouldn’t exceed 30% of your monthly income before taxes, so if you find yourself spending more than that, you may be putting yourself at risk of becoming house poor.
When calculating how much house you can afford, it’s always a good idea to err on the side of caution and look at houses on the lower end of the spectrum of what your budget can handle.
Underestimating The Costs Of Homeownership
Many homeowners forget about the massive costs associated with owning a home. Not only are there upfront costs to consider, but homeowners should also plan for recurring and infrequent expenses.
Some of the upfront costs to consider when buying a home include:
- Deposit or down payment
- Lender fees
- Title fees
- Appraisal and inspection fees
- Escrow fees
The costs don't end there, either.
Some other recurring, potentially rising and infrequent expenditures include:
- Property taxes
- Homeowners association fees
Changes In Cost Of Living
Your cost of living isn't always going to remain the same. Utilities may rise, the price of food can fluctuate, your bank could increase the interest rate on your credit cards or you may overspend on entertainment.
These things happen, and they can seriously impact your ability to afford your mortgage payment if you're not prepared for them.
It’s recommended that you plan for at least a 10% increase in the cost of living when creating your budget to buy a home. This will help ensure that you can meet your financial obligations, including homeownership expenses, even if there are unexpected circumstances that arise.
Losing A Job
Did you know that as much as 75% of homeowners say they wouldn’t be able to afford housing if they were to lose their jobs? That’s a startling statistic, especially if you consider that two-thirds of Americans in June 2022 said they are tapping into their savings to cope with expenses.
Losing a job can be a devastating hit to a household and can leave a homeowner more than just house poor.
If you’re worried about this happening to you, make sure to have an emergency fund in place that can cover at least 6 months’ worth of expenses. This will help ensure that you won’t be forced to sell your home or declare bankruptcy if you do find yourself unemployed.
How To Avoid Being House Poor
This has put a lot of pressure on homeowners and has made it difficult for them to save or, in many cases, afford essentials like food and electricity.
If you’re thinking about buying a home or already own one, there are a few things you can do to avoid being house poor.
Determine Your Debt-To-Income Ratio
To avoid getting yourself into a situation where you’re at risk of becoming house poor, you should first determine your debt-to-income (DTI) ratio.
Your debt-to-income ratio is a measure of how much debt you have compared to your income.
So, what is a good debt-to-income ratio? The general rule of thumb is that you should not be spending more than 36% of your income on your total debt. This includes things like personal loans, credit cards and, yes, mortgage payments.
Generally speaking, the scale looks a little like this:
- 0 – 36%: Good
- 37 – 41%: OK
- 42 – 49%: Poor
- 50 – 100%: Bad
Lower Your Loan-To-Value Ratio With A Higher Down Payment
If you’re looking to buy a home, one way to avoid being house poor is to make a higher down payment.
A higher down payment will lower your loan-to-value (LTV) ratio, which is the amount of money you borrow from the bank compared to the value of your home.
For example, if you buy a $200,000 home with an $80,000 down payment, your LTV would be 80%. However, if you only put down $10,000, your LTV would increase to 95%.
Putting a little bit more down can help in a few ways:
- You can forgo private mortgage insurance with a down payment of 20% or more.
- The smaller your loan, the smaller your monthly payments will be.
- You will have more collateral for refinancing in the future.
- There is less risk for banks, which means they may give you more favorable terms.
Opt For A Longer-Term Loan
No one likes paying interest, but sometimes you can make it work in your favor.
If you opt for a 30-year loan instead of a 15-year loan, your monthly payments will be significantly lower.
And yes, you’ll pay more interest in the long term, but you can use that extra cash flow to make improvements to your home, invest in other assets or save for your retirement.
Create An Emergency Fund
Have you ever heard the phrase “pay yourself first”? It means that before you do anything else with your money, you should set aside some cash for yourself.
This is a good practice because even if you can comfortably afford the regular mortgage payment, anything could happen. A leaky roof or a layoff could be devastating if you’re not financially repaired.
Ideally, you should have three to 6 months’ worth of living expenses saved so that if something unexpected comes up, you’re covered.
This will help you avoid becoming house poor if an emergency does arise. And even if everything goes smoothly, it’s always nice to have a cushion.
Recast Your Mortgage
If you already own a home and are worried that you might be on the verge of becoming house poor, recasting your mortgage might be a solution.
Recasting is when you make a lump sum payment to your mortgage lender toward your principal balance in order to lower your monthly payments.
The advantage of recasting is that it can help free up some cash each month, which can then be used to pay down other debts or stuffed in your piggy bank for a rainy day.
Recasting differs from refinancing, which involves taking out a new loan with different terms to lower your monthly payments.
Remember, however, that in order to recast your mortgage, you need to have the extra cash on hand to make the lump sum payment, so this option is not for everyone.
Live Within Your Means
Administrative stuff isn’t something you want to do outside of work, but it’s necessary. Understanding where you’re spending your money is critical to not falling into the house-poor trap.
There are several ways to do this, but one of the simplest is to track your monthly spending using cash envelopes or by creating a budget.
Once you know where your money is going, you can make adjustments to ensure your housing costs aren’t consuming your entire paycheck each month.
Housing costs should take up no more than 30% of your monthly income. If they’re consuming more than that, it’s time to make some changes.
What To Do If You Are House Poor
If you’re having trouble affording things after you’ve made your monthly housing payment, there are ways you can ease the burden and ultimately get to a more financially healthy spot.
Get Ahold Of Your Finances
The very first thing you should do if you’re house poor is a deep dive into your finances. Simply being more conscious of what you’re spending your money on can help you identify areas where you can cut back or eliminate unnecessary expenses.
Unfortunately, doing this may result in fewer Uber Eats orders and many more dirty dishes. But it’s for the best.
Tap Into Your Savings
If you have some extra cash set aside, whether it’s from a previous job or gifts from family members, it may be time to crack open that piggy bank.
Using your savings to pay off other debts or recast your mortgage may help you curb your monthly expenses enough to stay above water, but it does come at a risk.
House-poor people often have to spend their savings to cover essentials or unforeseen expenses, but this could put you further behind in the long run.
If you’re considering tapping into your savings, make sure you're doing it wisely.
Pick Up A Side Hustle
Sometimes, even after tightening your belt and pulling the pennies out of the couch, there’s still not enough cash to go around.
In this situation, you might consider looking into ways you could increase your income.
Picking up a second job, a side hustle or some gig work can give you a little extra cushion for those high monthly mortgage payments.
Refinance Your House
One way to get yourself out of trouble is to refinance your house. This may be an option if you don’t have cash on hand to recast your mortgage.
While it can be helpful in reducing your payments, there are a few things to consider before pulling the trigger on a refinance:
- There are a number of fees associated with refinancing.
- You may lose equity in your home.
- It might take longer to pay off your mortgage.
- Timing can be difficult because interest rates fluctuate.
- The lower payments may not be worth it in the long run.
Refinancing is a good option for individuals who purchased their homes with high interest rates or are desperate to reduce their monthly payments.
Sell Your Home
If you’re looking for a more serious and permanent solution, you may need to consider selling your home and buying a less expensive one. Though selling a home can be a stressful process to go through, it may ultimately be your best way out of this situation.
House Poor FAQs
Here is a quick list of frequently asked questions:
How much house can I afford?
The general rule of thumb is to keep your housing costs at or below 30% of your gross income, though there is some leniency. If your other obligations are low and you’ve got a significant cash cushion in the bank, you may consider a little extra debt to secure the house you want.
How much should I put down on a house?
The average down payment in the United States is just 7% for first-time home buyers and 16% for experienced buyers. This is less than the 20% many believe to be the standard. That said, there are numerous benefits to paying more upfront, like lower payments, no mortgage insurance, and more equity.
How can I avoid becoming house poor?
The simplest way to avoid becoming house poor is to plan ahead. Understanding your expenses and finances can help you stay within your budget. It's also wise to have an emergency fund to cover any unplanned costs associated with homeownership, like a broken water heater or a leaky roof.
I’m house poor. Should I refinance or recast my mortgage?
Both options may reduce your payments, though there are some key differences. Recasting is when you make a lump sum payment to your mortgage company, which can lower your remaining monthly payments. Refinancing is taking out a new loan with different terms, ideally at a lower interest rate.
If you’re struggling with payments and do not have a lump sum of money to use to recast your mortgage, you may only be able to refinance the loan.
What type of loan should I get? Fixed-rate or adjustable-rate?
There are pros and cons to both types of loans. A fixed-rate loan offers stability because your interest rate will never change for the life of the loan. An adjustable-rate mortgage (ARM) has a lower initial interest rate, but it can change periodically, which could result in a higher monthly payment.
What other costs should I expect when buying a new home?
In addition to your down payment, you will also have closing costs, taxes and even the cost of new furniture to consider. It’s important to factor in all of these additional costs when budgeting for your new home.
Don’t Hate The Home You Love
Getting in over your head can happen to the best of us. If you find yourself feeling house poor, the most important thing is that you take steps to remedy the situation and get your finances back on track.
Learn how Quicken Loans® can help you lower your payments today!