House poor: What it means and how to avoid it

People often think of homeownership as both a big life milestone and a great way to grow wealth. In general, those things are both true. But homeownership can also be costly. Some people even find themselves becoming house poor. 

So what does it mean to be house poor? And how can you get out of it? Whether you’re a current or potential homeowner, there are things you can do to avoid becoming house poor or to address it if it happens to you. 

Key takeaways

• You’re “house poor” when you’re spending a big portion of your total income on owning a home.
• Making sure you can afford all the costs associated with a home before you commit to a mortgage can help you avoid being house poor.
• Being house poor could have a negative effect on your credit scores if you start missing mortgage payments and other bills. 
• There are several ways you can improve your finances if you become house poor.

Some homeowners can’t afford the costs associated with owning a home. People in this position are commonly referred to as being house poor, also known as home poor or house broke. The terms can describe anyone at any income level who struggles to pay a mortgage on any home. 

People tend to become house poor when they have a high mortgage payment compared to their income. Homeowners who are house poor may find themselves mostly paying for their home and living expenses while struggling to save or have money for nonessentials.

If you’ve already bought a home and are feeling like an uncomfortable portion of your monthly income is going to your living expenses, you might be house poor.

But your debt-to-income ratio (DTI) could give you a clearer perspective. There are two main ways to calculate it:

• Front-end DTI: This ratio shows what percentage of a borrower’s monthly income is used for housing expenses. To calculate it, you can add up your home expenses, divide that by your monthly pre-tax pay, and multiply the result by 100. 
• Back-end DTI: For this calculation, you add up all your debts’ minimum monthly payments, including expenses like student loans, credit cards and car loans, as well as your housing expenses. Then you divide that by your monthly pre-tax pay and multiply the result by 100. 

Lenders typically say the ideal front-end ratio should be no more than 28% and the back-end ratio should be 36% or lower.

To avoid becoming house poor, it can help to consider the following factors before you buy a home.

Know the costs of homeownership

It’s more than just the house payment. Here are some other costs associated with homeownership:

• Closing costs: These are charges for services related to your mortgage application. 
• Property taxes: Many homeowners live in areas where they need to pay property taxes. They fund community services like the local police department, schools, parks and libraries.
• Homeowners association (HOA) fees: If your home is part of an HOA, there are typically fees associated with it that cover things like neighborhood maintenance and improvements.
• Home repairs and other maintenance costs: These can range from regular upkeep to essential repairs if something breaks or goes wrong.
• Increases in your mortgage payments: If you have an adjustable-rate mortgage, your payments could increase over time.

Stick to a budget for living expenses

It’s a good idea to decide how much you can afford to spend on a house each month and stick to it. If you’re spending more than 50% on your living expenses—including food, housing costs and other essentials—it may be time to reevaluate your budget. 

Consider an emergency fund

You can’t anticipate everything. It may be helpful to have an emergency fund. That way if, say, your bathroom floods or you lose your job, you have some financial cushion. You can keep your funds liquid in a high-yield savings account. These accounts have high interest rates so you can earn as much interest as possible while having enough money on hand for the unexpected.

Choose the right mortgage

The type of loan you secure can play a role in how much house you can afford. In general, there are three main types of mortgage loans: conventional loans, Federal Housing Administration loans and special programs. Each has different terms and qualifications. Your monthly payment can vary depending on the type of loan and interest rate you secure. So it’s worth shopping around.

If you’re already house poor, there are strategies and tactics you can use to get yourself into a more comfortable financial situation. Here are a few you might consider.

Increase your income

A side hustle, a second job, a raise or passive income can help if you’re struggling to afford your mortgage. Before you commit to something, though, it may be useful to compare what you would be making with the additional income to see whether it would significantly help.

Cut back on spending

Are there factors outside of home expenses that make payments tough? If you go through a budgeting exercise and see that you’re spending more than you’d like to on nonessentials, consider what cuts you could make.

Consolidate debt

If you have multiple debts, it may be worth consolidating them. If you’re able to land a lower interest rate than your original ones, it might be easier to pay the debt off. And that may create more breathing room for your housing expenses.

Cancel your private mortgage insurance

If you think the home’s market value has increased, you could get a home reappraisal. And if the new value brings your home equity up to 20%, you can ask to cancel your private mortgage insurance payments. 

Mortgage forbearance

It’s sometimes possible to suspend your mortgage payments for a set time. This is often referred to as forbearance. During this period, you can build back your finances without incurring fees or additional interest.

Applying for mortgage forbearance typically involves providing proof of your temporary financial hardship. Your lender may also ask for proof that you’ll be able to resume payments and repay all missed payments, including interest, when the forbearance period ends. You can contact your lender to learn more about the mortgage forbearance options it offers. 

Refinance your mortgage

If interest rates have decreased or you think you may qualify for a lower interest rate, you could consider refinancing.

Sell and downsize

As a last resort, you could look into the pros and cons of selling your house and buying a smaller or less expensive one. This could reduce your monthly mortgage payment and leave you more money to meet your other needs.

Being house poor in and of itself doesn’t negatively affect your credit scores. But late or missed mortgage payments can cause your credit scores to drop. The total debt you carry is also a credit-scoring factor.

Missed payments can stay on your credit report for up to seven years. And if you miss four payments in a row, your mortgage lender could foreclose on your home.

Lower credit scores and a foreclosure can both decrease your chances of qualifying for another mortgage. They can also make it harder to qualify for credit cards, especially ones with low interest rates.

Before you buy a home, it’s important to make sure you can afford the costs associated with homeownership. It’s also useful to have a plan and extra funds so you have some flexibility if something goes wrong. But if you find yourself house poor, there are tactics you can use to improve your financial situation and alleviate it.

If you’re thinking about buying a home or are looking for ways to address being house poor, it might help you to learn how to create a budget.