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?
When you spend a lot of your income on things like your mortgage, property taxes, insurance, utilities, and repairs, you’re said to be “house poor.”
After paying for housing, someone who is house poor has a hard time paying for other things they need, like food, transportation, medical care, and savings. They live from paycheck to paycheck and don’t have much extra money to spend on fun things.
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?
It is suggested by experts that you should not spend more than 18% of your gross monthly income on housing costs. Your mortgage payment, property taxes, insurance, utilities, and HOA fees are all part of this.
Your total debt payments should include things like rent, credit cards, student loans, car loans, and so on. 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. Still, things can quickly go bad if you run out of money and don’t plan for the extra costs that often come up when you make 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:
- A rough idea of how much a house costs is 2 5 times your gross yearly salary, though this number usually needs to be a lot higher. Sure, you might earn more in five years. However, you might also find yourself out of work.
- The down payment amount, the mortgage interest rate, the property taxes, and other things are also things to think about. So, a better way to figure out how much you should spend is to figure out what percentage of your monthly gross income will go toward housing costs. This is called the debt-to-income (DTI) ratio, or front-end DTI. This number shouldn’t be more than 208, which is the rule.
- Make sure you choose the right mortgage. If you don’t want your payments to go up every month when you least expect it, get a mortgage with a fixed interest rate.
- Set some money aside in case something unexpected comes up, like repairs that need to be done or sudden changes in your finances.
What Is House Poor?
“House poor” refers to someone who spends a big chunk of their income on home costs like utilities, mortgage, and property taxes. 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 person is considered “house poor” if their housing costs take up a huge chunk of their monthly income.
- People in this situation don’t have enough cash for extras and often have trouble meeting their other financial obligations, like car payments.
- People who are house poor can get help with their money problems by cutting back on unnecessary spending, getting another job, using their savings, selling assets, or downsizing.
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. Some experts say that you shouldn’t spend more than 20% of your gross monthly income on housing costs and no more than 36% of your total debts. This will help you figure out if you can afford a mortgage.
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.