Quick notes

 

  • Someone who is house poor overspends on their monthly housing payment
  • When you’re house poor, you often can’t keep up with other financial obligations
  • Being house poor means you’ll be sacrificing most of your disposable income

 

 

Your home is usually your biggest asset. When it comes to your mortgage payment, this is also typically one of your biggest expenses. When things go awry financially, and someone’s mortgage payments take up the majority of their income, however, they may be referred to as “house poor.”

To say being house poor is a bad financial situation is an understatement. Here’s an overview of what it means to be house poor and how to avoid this potentially major financial mistake.

What does it mean to be house poor?

The term house poor describes a homeowner who spends the majority of their income on homeownership. This can include mortgage payments, property taxes, utilities, and property maintenance.

Because this person is usually spending more than they can afford on their home, they won’t have a large amount of disposable income. When a person is house poor, they may also be called house rich, cash poor.

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A person may become house poor after losing a job, losing another form of income, not accounting for future expenses, or simply overextending themselves. While a mortgage lender will do their best to try and keep the amount someone is approved for within a reasonable limit, there may be expenses that weren’t factored in when they purchased the home.

Let’s say you bought your house while you had a full-time job as well as a contract for a side job. You also had kids in high school at the time. Fast forward a few years later–your contract is up, and you have three children you’re paying tuition for. Now that your income is less and you have a lot more expenses, your housing costs far exceed what they should.

How to avoid being house poor

When you’re searching for a home or applying for a mortgage, there is a general rule of thumb in terms of how much house you can afford: generally, your mortgage payments should never exceed 28 to 33 percent of your income.

Your other debts will also need to be factored in here. Your total debt to income ratio should always be below 40 percent. Your debt-to-income ratio is the amount of money you make compared to the amount of debt you owe. The lower your debt to income ratio is the better off you’ll be in terms of your credit, and the ability to pay your debts.

One reason many homeowners get into trouble is that they don’t account for utilities and home maintenance. If you have a large home, you should also budget for high utility bills. If your home is a condo, take the home association fees into consideration.

When you’re thinking about the budget for a new house, don’t just take the maximum amount your lender will give you. Think about your lifestyle and your future self. If you know you’ll want to travel and save for retirement, go below what you’re approved for so you have more disposable income free to do what you love and invest.

How to get out

If you find yourself struggling to make mortgage payments or unable to do anything else, there are a few things you can try to get your head above water. The first thing you should do is cut back on spending. This should be more than just clipping coupons as well. You will likely need to trade in cars and cancel vacations.

If you can’t cut back any further, you’ll need to increase your income. To do this, you may need to take a second job. If these aren’t enough, you may also have to dip into your savings or emergency fund.

The option that may be the hardest is to sell your home. While this may not be the ideal situation, selling when you can is a lot better than falling behind on your mortgage payments or entering into foreclosure.

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