What Is House Poor?

What Is House Poor?

Let me explain what 'house poor' means to you directly. It's a situation where you're spending a huge part of your total income on owning a home, covering things like mortgage payments, property taxes, maintenance, and utilities. If you're in this spot, you're often short on cash for things you want, and you might struggle with other bills, like car payments.

Sometimes people call this 'house rich, cash poor,' which captures the idea perfectly.

Key Takeaways

If you're house poor, your housing costs are eating up an exorbitant percentage of your monthly budget. This leaves you short on cash for discretionary items and makes it tough to handle other financial obligations, such as vehicle payments. To ease this, you can limit discretionary expenses, take on another job, dip into savings, sell assets, or downsize.

How Being House Poor Works

You're house poor when your housing expenses take up an exorbitant percentage of your monthly budget. This can happen for various reasons. Maybe you underestimated your total costs, or perhaps your income changed, making those expenses overwhelming.

Owning a home is part of the American dream, and many pursue it for the advantages, like building equity over time. Payments toward real estate can be a solid long-term investment. But it can turn problematic if you hit money troubles and haven't accounted for unexpected costs that come with such a big commitment.

To avoid becoming house poor, don't let your dreams override reality. Consider these guidelines: One rough estimate is to spend no more than 2.5 times your gross annual salary on a home, though this might need to be higher sometimes. Remember, your income could rise in five years, but you could also lose your job.

Factor in the down payment, mortgage interest rate, property taxes, and more. A better way is to calculate what percent of your monthly gross income goes to housing—this is your debt-to-income (DTI) ratio, or front-end DTI. Keep it at no more than 28%. Choose the right mortgage; if you want stability, go for a fixed interest rate to avoid surprises from variable rates. And always set aside money for unexpected issues, like maintenance or financial changes.

House Poor Requirements

Experts advise that you should plan to spend no more than 28% of your gross income on housing expenses. But you also need to consider other debts. When you add those in, the total shouldn't exceed 36% of your gross monthly income—this is the back-end DTI.

If you go significantly over these front-end or back-end DTIs, you're likely house poor.

House Poor Methods

Sometimes unexpected events make housing payments hard to manage. Losing a job or having a child can shift your household's spending completely, leaving you house poor and struggling with the mortgage.

If this happens to you, here are some options to consider.

Limit Discretionary Expenses

First, if housing costs feel overwhelming, look at your budget for areas to cut back. You might cancel vacations or switch to a car with lower payments.

Take on Another Job

If expenses have outpaced your budget, taking a second job or side gigs can help cover the housing bills.

Dip Into Savings

When you buy a home, start a savings account. Putting a little away each month for unexpected issues like maintenance or repairs can make a difference when cash is tight.

Sell

If none of these work, you can always sell your home. This might let you move to a cheaper area or rent something with lower payments. Selling isn't ideal, but it gives you funds and a chance to save for another home later.

What Are Ways of Becoming House Poor?

The most straightforward way is buying a home you can't afford, putting all your cash into the down payment and income into the mortgage. You can also end up house poor if housing costs rise sharply, like from increasing property taxes or higher interest rates on an adjustable-rate mortgage. Or if your income drops or you lose your job, that can push you into this situation.

What Are Ways to Avoid Becoming House Poor?

If you're concerned about becoming house poor or already are, you have options. Boost your income with a side job or gig work, and cut costs in other areas. Refinancing your mortgage could help, especially if rates have dropped. You might pull cash from your home's equity for other expenses. And while not always ideal, downsizing to a cheaper home or renting is another choice.

How Much Should Be Saved in an Emergency Fund?

I recommend building an emergency savings fund to cover mortgage or rent, bills, and basics in case of job loss, health issues, or other crises. There's no exact amount everyone agrees on, but a good rule is three to six months' worth of living expenses.

The Bottom Line

Being house poor means a large portion of your monthly income goes to homeownership expenses. To check affordability, aim for no more than 28% of gross monthly income on housing and 36% on total debts. If that's not feasible, options include a second job, using savings, or selling the property.

Remember, this isn't tax, investment, or financial advice. The info here doesn't consider your specific objectives, risk tolerance, or circumstances, and it might not suit all investors. Past performance doesn't indicate future results, and investing carries risk, including potential loss of principal.