House Poor: What It Means And How To Avoid It

You just purchased a home. Congratulations! As you begin paying your monthly mortgage and other housing-related expenses, you may realize you’re maxing out your household budget. This is also known as being house poor.

The total cost of homeownership can quickly add up. These problems can become especially evident in times of financial hardship, such as a job loss or unexpected emergency. Luckily, you may be able to avoid becoming a house poor homeowner, and there are strategies you can utilize to remove yourself from this situation if you already are.

House Poor Meaning

Unlike being “cash rich,” which means you have a large amount of money available to spend, the term “house poor” or “house broke” is often used in real estate to describe homeowners who spend a significant portion of their income on housing expenses with little money left over. These homeowners often struggle emotionally and financially and may not be able to afford paying other bills or have enough money to put into savings. 

It’s not uncommon for many homeowners to be left “house rich, cash poor” when buying a home at the top of their budget. An unexpected medical expense, unforeseen emergency or a change in income may also be the reason why housing expenses suddenly become too much to handle. To alleviate some of the stress, some homeowners may turn to credit cards or loans to pay the bills, but this can easily spiral out of control and land you in a bigger financial mess.

An Example Of Being House Poor

When searching for a home that fits the budget, a home buyer looks at the total sale price of the property as an indicator of whether or not they can afford the property. But there’s much more to affordability than being able to pay the mortgage. Buyers often neglect to factor in other housing-related expenses, such as property taxes, maintenance, homeowners association (HOA) fees, utility bills, homeowners insurance and mortgage insurance, when crunching the numbers.

When running purchase calculations, the buyer thinks they’re in luck because they can still afford the estimated mortgage payment. But just barely. After closing on the house and taking on the full financial responsibility of homeownership, they realize they’re in a budgetary pinch.

All of these costs can add up quickly, and a disproportionate amount of the homeowner’s income goes toward housing expenses. This can result in less savings or difficulty paying other bills, leaving homeowners in debt and financial hardship. This homeowner would be considered house poor.

Signs Of Being House Poor

There are ways homeowners can determine whether they’re house poor. There isn’t a definitive method, but it can help you find out if you’re financially strapped. Here are some indicators to be aware of:

• Your income doesn’t cover all of your living expenses.
• Your debt-to-income ratio (DTI) is over 36%.
• You spend over 28% of your gross income on your mortgage payment.
• You can’t meet other financial obligations, like credit card debt.
• You have little to no savings.
• You have limited disposable income, if any.
• You’re cutting back on other expenses.
• You have no room in your budget for unexpected expenses.
• You’re unable to save for retirement or other financial goals.
• You feel stressed or overwhelmed.
• You’re taking out loans and credit card debt to make ends meet.

How The Economy Can Make Homeownership Less Affordable

There are aspects of the American economy that can make homeownership less affordable and lead to a homeowner becoming house poor. Homeowners in this situation are more likely to accumulate debt and typically lack emergency funds. This may make it  more difficult for them weather market volatility. 

During periods of rapid inflation, when the price of goods and services unevenly increases in a short amount of time, purchasing power typically decreases. As prices rise, your money can buy less. Interest rates may also increase as the Federal Reserve adjusts monetary policy to curb inflation and drive down consumer and business spending. Higher rates mean it’s more expensive for banks to borrow money, driving up interest rates on consumer borrowing, including mortgage rates.

Even a 1% increase in mortgage interest rates can make a big difference in how much you pay. Depending on the purchase price of your home, your overall mortgage rate and the amount of the mortgage being financed, it can add up to additional thousands or even tens of thousands of dollars paid in a given year. 

In addition to mortgage rates, the economy can also influence home prices. For example, at the onset of the pandemic, the Federal Reserve eased monetary policy and set rates near zero. This caused mortgage interest rates to plummet to historic lows, further increasing the demand for housing amid a shortage of housing inventory. Because there were far more buyers than there were sellers, home prices increased significantly due to intense competition and demand. As a result, many buyers, especially first-time home buyers, were priced out of the market or purchased more house than they could realistically afford.

5 Ways To Avoid Becoming House Poor

There are methods a homeowner can use to avoid becoming house poor. By keeping your spending in check and better managing your money, you can prevent getting yourself into this tricky situation.

1. Figure Out How Much House You Can Afford

Before committing to homeownership, figure out how much house you can afford without stretching yourself thin. Ask yourself the following questions when determining how much house you can afford.

• Where’s the new home located?
• What are the property taxes?
• How much will home insurance cost?
• How much upkeep and maintenance will the home need?
• What are the utility costs?
• What are my existing monthly financial obligations?
• Is there an HOA and what are the fees?
• Do I need private mortgage insurance?

2. Avoid Overfinancing Your Home

Just because you’ve been approved for a mortgage doesn’t mean you need to spend the maximum amount a lender is offering you as a home buyer. Maxing out a mortgage means you’ll have less wiggle room in your budget to pay other bills. The 28% rule is one rule of thumb that advises not spending more than 28% of your gross monthly income on your mortgage payment. If your monthly mortgage expenses indeed this percentage, the odds of you being house poor may go up considerably.

Consider shopping for a home that costs less than your preapproved amount. Not only will you have more financial flexibility, but you’ll also lower your monthly mortgage payments, reduce your debt, save money on interest, avoid overextending yourself and allow you to allocate resources toward other financial goals.

3. Make A Larger Down Payment

Make a larger down payment to ease your financial burden. Putting down more money on a home can help lower your debt-to-income ratio (DTI), your principal balance and the total amount of interest you’ll owe. And if you put down at least 20% of the purchase price, you won’t have to pay private mortgage insurance (PMI) and you may qualify for a lower interest rate.

There are also downsides to consider. You’ll be delaying homeownership, which could come at the expense of other financial goals. If you put all of your savings into your down payment, it also means you’ll have fewer cash reserves. This can limit you financially and leave you unable to handle other financial obligations.

4. Know Your Debt-To-Income Ratio

Your DTI can impact your ability to obtain other forms of credit. DTI is all of your monthly debt payments divided by your gross monthly income. It helps lenders assess your ability to cover the cost of your mortgage on top of your existing debt. 

Most lenders will accept a DTI as high as 50% and sometimes even 57% – depending on your loan – but it should ideally be no higher than 36% to ensure you have enough in the bank to pay other bills or take out other forms of credit, such as a car loan, personal loan or credit card. Some expenses to include in your DTI calculations include your rent or mortgage payment, HOA fees, property taxes, homeowners insurance payments, child support or alimony payments and any loan payments

5. Ensure That You Have An Emergency Fund

Building an emergency fund can also help if you’re experiencing financial hardship, such as a job loss, without becoming house poor. Having cash reserves can make it easier to bounce back after a financial setback. Ideally, you should have at least 3 – 6 months’ worth of expenses saved.

Several strategies can help you build your emergency fund. Start by creating a savings habit for making consistent contributions. Manage your cash flow by adjusting your spending and savings and set up recurring transfers through your financial institution or directly from your paycheck. There may also be certain occasions during the year when you receive additional funds, such as a tax refund, a holiday or a birthday, that you can put toward your emergency fund. Additionally, consider setting money aside in a high-yield savings account to build the fund faster through a higher annual percentage yield (APY).

How To Recover From Being House Poor

Homeowners can apply several strategies to escape being house poor. These include:

• Borrowing responsibly: Borrow only what you can afford. Don’t take on additional debt, such as a car loan or personal loan, if you’re already struggling financially.
• Downsizing your home: If your house payments are too much, one option is to sell your home and downsize into something a little more affordable.
• Sticking to a budget: Create a household budget and stick to it. List out all income and expenses to help you cut out unnecessary costs and stay within your means.
• Earning extra income: Pick up a second job or a side gig to earn extra income to put toward household bills or building an emergency fund.
• Getting rid of PMI: You can get rid of PMI to lower your monthly mortgage payment once you have reached 20% equity in your home.
• Refinancing your mortgage: Refinancing your mortgage can save you on interest if your credit score improved or if mortgage rates dropped since purchasing your home.
• Consolidating your debt: Consolidate your outstanding debt with a balance transfer card featuring a 0% introductory APR. This allows you to save money on interest while you focus on paying down your debt.
• Getting a roommate: If you have an extra bedroom to spare, a roommate can provide some financial relief. Even a couple hundred dollars per month will help.

House Poor FAQs

Find the answer some of these most frequently asked questions about being house poor to get even more information.

What percentage of Americans are considered house poor?

According to the U.S. Census Bureau, 27.4% of homeowners with a mortgage are considered house poor nationwide.

How much of my take-home pay should go toward mortgage payments?

The percentage-of-income rule, or the 28% rule, states that no more than 28% of your gross monthly income should go toward your mortgage payment.

Is it bad to be house poor?

Being house poor can put homeowners in a tough situation. Paying more than what you can afford can impact your ability to pay down debt, save for retirement, cover the cost of emergencies or pay everyday expenses.

The Bottom Line

Homeownership is costly, and getting in over your head can happen to anyone. When this happens, homeowners can find themselves becoming house poor. However, a little research and smart budgeting strategies can help you avoid or even correct being “house rich, cash poor.”

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