House poor, or home poor, is a term used to describe homeowners who can barely afford the regular expenses associated with their residence. It usually occurs when homeowners have a high mortgage payment relative to their income, cash flow or net worth, or when they have little money left over after paying their mortgage and other ongoing home expenses. The homeownership costs squeeze out everything else.
You can be house poor at any income level, if you’re spending too much on your home. Here’s how to tell if you are, how it happens and what to do about it.
What does it mean to be house poor?
Being house poor basically means you’re spending an enormous proportion of your income on your home, typically at the expense of other living expenses or needs. Often, it’s mainly the mortgage payment eating up the bulk of your paycheck. But other costs can contribute too, like:
- property taxes
- private mortgage insurance or FHA mortgage insurance premiums
- monthly maintenance/common charges (co-ops and condos)
- utility bills
- regular upkeep expenses (housekeeper, lawnmower, etc.)
All of these things in conjunction with your mortgage can kick you into “house poor” condition, leaving you perpetually short of funds. In fact, the status is also known as “house rich, cash poor” or “land rich, cash poor.”
How do you know you’re house poor?
…beyond feeling constantly strapped? That’s one clue, certainly, but there are more precise ways to see specifically if you’re spending too much on housing/home costs. You begin by examining your budget. To determine if you’re house poor, you need to know how much you owe and how much you earn.
Start with your income. That’s the amount you earn from your job, in addition to any other income you receive, such as from investments, gifts or grants.
Then look at your housing costs: your monthly mortgage payments (including mortgage insurance, if any), homeowners association dues and property taxes. You’ll also have to consider what you pay in homeowners insurance premiums, utilities bills, and regular maintenance and upkeep expenses.
Once you know your total housing outlay, subtract it from your income to see what’s left over. There should be enough money to cover your bills and other living expenses, including food, transportation and entertainment. And of course, rainy-day savings for the unexpected and long-term projects, like retirement and college.
Ideally, your regular, ongoing home expenditures should be around 30 percent of your monthly income (more on this figure below). When you’re house poor, that ratio gets out of whack, and you’re unable to pay other important bills, save money or make investments.
The debt-to-income ratio (DTI)
The debt-to-income ratio (DTI), a more specific calculator of your earnings and obligations, is a more precise way to determine if you’re house poor.
Your DTI is your monthly debt payments divided by your income. There are two types.
- Front-end DTI is the percentage your major housing costs make up of your monthly gross income. To get it, add up your home expenses, divide by how much you earn each month before taxes, and multiply the result by 100. So if your monthly costs run to $3,000 and your income is $7,000, your DTI is 42 percent.
- Back-end DTI is similar, but it takes into account all your debts, comparing all of your minimum monthly payments (car loans, student loans, credit cards, etc.) to your monthly income.
Lenders usually prefer a front-end DTI of no more than 28 percent — the “28% rule” — and a back-end DTI of 36 percent. In some high-cost areas, they may allow the ratios to be greater. Odds are, if you’ve applied for financing to buy a home, the lender has run these calculations to determine whether you qualify for a mortgage, and for how much — kind of a way to guard against your becoming house poor in advance. Frankly, a lender who is letting you exceed the 28 percent PITI ratio may not be doing you any favors.
How do you become house poor?
Becoming house poor happens in two basic ways: a rise in expenses and costs and/or a drop in income.
Sometimes new homeowners take on too big a mortgage, or the closing costs were higher than expected. Maybe the moving process caused them to incur other debts right away, for renovations and such. Maybe the new neighborhood has a higher-than-average cost of living that they didn’t anticipate.
Then there are increases due to good old inflation. Or property values skyrocketed, resulting in a rise in property taxes. Or the mortgage payments dramatically increased: This can happen with certain types of adjustable-rate mortgages (ARMs).
On the flip side, homeowners can become house poor due to dings in their income stream: losing a job, not getting a raise, investment losses.
Is it bad to be house poor?
Being house poor doesn’t necessarily mean that you’re financially insolvent, but it’s not a great position to be in. The good news is, the funds aren’t being misspent — because they are going to preserve and build equity in a key asset. The bad news is that you’re barely making ends meet, and you’re not saving or putting away money for emergencies or the future, because you’re spending almost all your income on housing. If big, unexpected expenses or emergencies come along, you could find yourself in dire financial straits.
However, it’s possible to be house poor and in a good financial state overall — for example, if you have a large amount of money socked away and earning for you in retirement accounts.
The key is to make sure you’re not diluting your savings and investments accounts to pay for housing, or being kept so short that you can’t invest or save at all.
How to get out of being house poor
If you’re feeling pinched by your house poor status, consider these options.
- Consolidate debt: Debt consolidation can help you lower your monthly payments on various bills and credit card balances, freeing up some funds. But you may end up paying a larger total amount over the life of the debt payments.
- Refinance your mortgage: If interest rates have fallen or you’re in a position to qualify for a better rate, consider swapping out your home loan for another, more advantageous one. A general rule of thumb is you should reduce your interest rate by at least ¼ point and stay in the house five more years to make the costs of the switch worthwhile.
- Lose the PMI: If you have more than 20 percent equity in the home, you can appeal to suspend the private mortgage insurance payments. But you will probably have to spring for a home appraisal.
- Borrow – carefully: While you don’t want to get into more debt, if a short-term loan can get you over a hump, consider it — especially if you could borrow from your own 401(k) plan or take out a home-equity loan. Be advised: Tapping into your home’s worth can complicate things if you put your house up for sale.
- Boost your income: You can find a second job, sell some of your possessions, get a better-paying position. Or consider taking on a side hustle like hosting Airbnb guests.
- Trim discretionary spending: This would mean decreasing spending on activities like dining out, travel and entertainment. At the very least, draw up a detailed budget to see where you can cut back. Maybe you should mow the lawn or vacuum the pool yourself, instead of having a service do it.
- Downsize: If all else fails, consider moving to a more affordable neighborhood or smaller home.
How to avoid being house poor
Being house poor is better than being out-and-out poor. But it’s rarely a sustainable situation long-term.
Short of a miraculous windfall, there’s no simple solution in store. You have to either cut expenses or plan a way to increase your income. If neither are feasible, think about selling your home and buying a more affordable one.
The best approach is not to get into house poverty in the first place. To avoid it:
- Budget in advance. Before you buy a home, decide how much you can afford to spend on it each month. Apply the “28% rule”: Take your monthly gross income and multiply it by .28. That’ll give you a sense of where your house expenditures should be.
- Don’t over-finance. Financial planners often advise, “only get the mortgage you actually need — not the mortgage you can qualify for.” In other words, don’t be tempted into taking a bigger loan, just because a lender approves you for more. Make the biggest down payment you can.
- Be realistic. Unless that new six-figure gig is a sure thing — or the inheritance check is in the mail — base your house-hunting not on your hopes, but on what you have now. If you can’t afford $1 million for a home, then you can’t. Don’t buy on the assumption that your income will grow into the house.
In short, to avoid being house poor, don’t rely on rosy-eyed expectations about future income or income growth. Limiting yourself to the house you can currently afford might not give you that warm and fuzzy feeling, but it can save a lot of heartache in the long-term.