Being a homeowner is widely considered a pivotal life milestone. Not only does it mean you have a place to live (important!), owning real estate can also be a reliable way to grow wealth. Despite those benefits, homeownership isn’t necessarily worth pursuing at all costs. In fact, if you buy a home that is mismatched with your budget, you might end up being “house poor.”
While 69% of people feel house poor1 only about 27% of people actually are, according to data from the Census Bureau.2. That means they spend more than third of their monthly income on housing costsTo avoid becoming house poor, make sure to take into account all the hidden costs of homeownership, like maintenance and taxes, not just the mortgage payment.
Being “house poor” means that a person has a high percentage of their monthly income tied up in housing costs, leaving little money for other expenses. This term, which is a shortened way of saying “house rich, cash poor,” is often used to describe a situation where someone has mortgage payments that are a high percentage of their income, or where someone has invested most or all of their savings into their home, leaving them with limited cash for other necessities.
Other ways to refer to this situation include “house broke” or “home poor.” They all describe the same problem: too much of your money goes towards your home.
There isn’t a universal rule for how much of your income you should spend on housing, but the amount should be manageable in relation to your other financial needs and goals. Experts usually say that you should spend anywhere from 25% to 35% of their income on housing, with 20% being a pretty conservative estimate and 35% quite liberal. So if you're spending more than about 30% of your income on housing, it may indicate that you're house poor.
If you’ve bought a home and feel like you suddenly are very short on cash or you’re having a lot of trouble meeting your living expenses outside of housing costs, you might be house poor. Here are signs that someone is house broke:
However, the best way to tell if you’re house poor is to simply do the math and see if your housing costs actually high relative to your income.
Here are some common ways that people become house poor:
To avoid being house poor, it's important to consider your financial situation carefully before making any housing commitments, and to budget your expenses in a way that allows you to maintain a comfortable standard of living. Whether you’re just starting your house-hunting journey or you already own real estate and just want to be smart going forward, here are five tips to help you do that.
The costs associated with buying and owning a home are more than just the mortgage payment. Before you commit to becoming a homeowner, there are other costs that you might need to take into account:
Use our mortgage calculator to figure out what your monthly expenses will be. The tool takes into account your mortgage payment, property taxes, and HOA fees, along with other factors.
Depending on your budget and the costs of homeownership in your location, you may not be able to purchase your dream home right away. That’s why so-called “starter homes” exist. They emphasizing affordability and are a great way to become a homeowner while you save up to invest in a larger or more expensive property. You might also consider a tiny home or townhouse as your first home.
Regardless of the house you end up purchasing, it’s a good idea to decide how much you can afford to spend on a house each month and stick to it. Creating a budget that incorporates all of your living expenses, including the costs associated with homeownership as outlined above, will help you know how much house you can buy without becoming house poor.
The type of loan you secure can play a role in how much house you can afford because your monthly payment can vary depending on the type of loan and the mortgage rate you secure. So be sure to compare multiple loan estimates before you apply for a mortgage and make sure you’re getting the lowest possible interest rate.
While you may be able to comfortably afford your home right now, the unexpected can always happen. Ideally, you’ll have cash available just in case, say, your basement floods or you lose your job. Having an emergency fund will give you a financial cushion.
While you may be able to comfortably afford your home right now, the unexpected can always happen. Ideally, you’ll have cash available just in case, say, you need a roof replacement or find yourself in between jobs. Having an emergency fund will give you a financial cushion, and experts recommend stowing away at least three months worth of expenses.
Is all of this sounding a little too accurate, like you may in fact be house poor? Don’t worry; there are ways out. Here are some ideas about how to deal with a "cash poor, house rich" situation.
It's important to take action quickly if you find yourself house poor to avoid falling into debt and damaging your financial health. Seeking the help of a financial advisor or counselor might also be a good option.
These frequently asked questions being house poor can help you understand more.
Just the fact of being house poor does not negatively affect your credit score. Technically, you can be house poor—struggling to make your mortgage payments, or to pay your other expenses on top of your housing costs—but still make all your payments on time. But if you’re so house poor that you’re making your mortgage payments late, or even missing them, that will cause your credit score to drop. Additionally, the total debt you carry also impacts your credit score.
If you're taking out a mortgage to buy a house, lenders will typically look for a debt-to-income ratio of 28% to 36% depending on loan type. It's possible to end up with a greater DTI after you secure your mortgage, especially if you don't account for other costs of homeownership or incur other unexpected events that you didn't plan for.
It isn't necessarily bad to be house poor; it just means you may not have enough cash flow for other expenses. Paying more than 30% of your income towards housing may not be ideal, but as long as you're able to save and live comfortably, it isn't always the end of the world. On the other hand, if you're barely getting by, unable to put away for retirement, or racking up credit card debt, then it could pose more danger to your financial health.
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