House Poor: Meaning and How to Avoid It

Home affordability has become a major source of concern for many first-time buyers who often struggle to get a foothold in an expensive market. As you shop for homes and explore your borrowing options, you may hear warnings about becoming “house poor.” But what exactly does this mean?

In a nutshell, house poor means that a homeowner feels like they are spending too much of their income on housing. They may feel "poor" because their remaining income (after covering housing costs) is inadequate to meet their other financial obligations. This may cause them to struggle financially.

This guide explains what it means to feel house poor and how to avoid it, so you don't set yourself up for ongoing financial stress.

What Does House Poor Mean?

Being or feeling house poor is a figure of speech to describe the feeling that after you cover your housing costs, including your mortgage costs, property taxes, insurance, and maintenance, you have little to no money left over to spend on other things – even if you have a good income.

The percentage of your income spent on housing costs that might cause a person to feel house poor varies depending on your situation but some financial professionals suggest that if you spend more than 30% of your gross monthly income on your housing costs, you may feel house poor.

You should consider this when deciding how much to spend on a house and making informed choices about how much of your monthly income goes to housing. Keep in mind that you are committing to make mortgage payments for decades, and all of your other spending must fit into what's left of your income.

What Is Considered House Poor?

Financial experts disagree on what it means to be house poor. For example, popular finance guru Dave Ramsey recommends spending no more than 25% of take-home pay on housing, while federal housing policy considers your housing costs affordable for you if they are below 30% of your gross income.

You can determine your housing ratio by dividing housing costs by gross monthly income. For example, if your housing payment is $2,500 and your household income is $4,500, you would be spending around 56% of your income on housing and would have just $2,000 left for everything else. You might struggle to afford the basics, much less emergencies.

In some cases, borrowers may see reference to a 28/36 rule. This is a rule some financial experts reference as a sign of home affordability. It says a homeowner can spend 28% of their gross monthly income on their mortgage, insurance, and taxes, and up to 36% of their income on total debt. So, a borrower could spend $1,260 monthly on a mortgage, taxes, and insurance if they made $4,500.

However, most mortgage lenders have their own guidelines for how much you can spend, often based on different loan program guidelines. These guidelines may allow you to take on more debt than the 28/36 rule would suggest, so you should confirm with your lender how much you can actually borrow.

Common Causes of Being House Poor

There are many different ways that someone could end up feeling house poor. Here are a few primary reasons people end up in this situation.

• Buying a home at your maximum approval limit: If you borrow the full amount you're approved for, you're more likely to end up feeling house poor once all of your expenses are factored in. To help you avoid this, Freedom Mortgage offers tailored mortgage prequalification letters that allow you to show you can afford a home you're interested in without disclosing the full amount you're prequalified for.
• “Hidden” costs of homeownership: Unexpected costs like increases of HOA fees, surprise repairs, property taxes, and homeowners insurance can often push your housing costs higher than you expect. That's especially true as insurance and property tax payments typically increase over time.
• Income change: If you lose a job or secondary source of income, your mortgage may temporarily become less affordable.
• Loss of savings or an emergency fund: Sometimes life happens, and you spend your savings or emergency fund on a down payment, medical bill, or major life event like a wedding, divorce, or the birth of a child. Until your emergency fund savings have been replenished, you could find yourself stretched and feeling house poor, especially if unexpected repairs are needed.

As you can see, feeling house poor is often not the result of poor planning. Unexpected housing expenses and changing financial circumstances can happen to anyone. Still, it's helpful to understand the reasons people sometimes feel house poor, so you can make informed buying choices.

House Poor Warning Signs

When you buy a home, focus on maintaining your long-term security. This means watching for red flags that suggest you may end up house poor. Here are some warning signs to look for:

• Exceeding the 30% rule: Try to keep your mortgage, insurance, and property tax payments under 30% of your income.
• Living paycheck to paycheck: If you struggle to afford essentials, too much of your income may be going to housing costs.
• Overreliance on debt: Borrowing can make all of your purchases costlier. Work to avoid relying on debt for routine purchases like groceries.
• Lack of retirement contributions: You must invest to build a secure retirement. If you can't afford to do so because your housing payments use too much of your income, your long-term financial security could be affected.
• Minimal savings contributions: Saving for other goals matters too, and you need money left over after paying your mortgage (and other bills) to do so.
• No room for emergency expenses: Unexpected costs are inevitable, make a plan to have money set aside to cover surprises.
• Increasing financial stress: You may feel house poor if you’re often stressed about how you will cover your bills because too much of your income goes to your mortgage.

Watch for these signs that a home is unaffordable so you can try to be prepared to make changes like increasing income, cutting other spending, refinancing your mortgage, or moving to a cheaper home.

How to Avoid Becoming House Poor

The most strategic way to avoid feeling house poor is during the home buying process. Here are the steps to take.

Know How Much House You Can Afford

The amount you qualify to borrow is not necessarily the amount you should spend, especially if you have other financial goals or other large monthly expenses.

Use a home affordability calculator to decide how much you can comfortably afford and commit to housing payments, while keeping the big picture of what best fits your budget.

Choose the Right Mortgage

Different mortgage loan types may help make your payments more affordable. You can also look into loan options with no down payment if you want to preserve savings for moving costs, emergency repairs, and other homeownership expenses.

Determine All Homeownership Expenses

Account for all homeownership expenses, not just your monthly payment, when deciding what's affordable. This includes expenses like closing costs, property taxes, homeowners insurance, mortgage insurance, HOA fees, utilities, maintenance, and repairs. Estimate these expenses before you buy so you aren't caught by surprise.

Establish a Realistic Budget

Before you buy a home, set a budget that accounts for all essential costs and leaves room for expected and unexpected expenses. Make sure your budget lets you cover your housing costs while also meeting other goals, like maintaining an emergency fund and continuing to save for retirement.

Understand Your Refinancing Options

If your financial needs change after you've purchased a home, a mortgage refinance can sometimes provide options like lowering your monthly payment by extending your loan term or qualifying for a lower rate.

By refinancing to extend your loan term, the total finance charges will likely be higher over the life of the loan, even if your monthly payment or interest rate is lower.

Knowing when to refinance your mortgage can be complicated, and your eligibility depends on market conditions and buyer qualifications. Freedom Mortgage is always available to help you explore all options to reduce your costs.

Final Thoughts: Home Affordability and How to Avoid Being House Poor

Finding the right mortgage loan and buying a home comfortably within your budget is the best way to avoid overspending on housing. Reach out to Freedom Mortgage today to learn about your loan options and we’ll help you find the home financing that's right for you.