Does it surprise you that over one-fifth of homeowners in the US are considered house poor? If you are just starting the home-buying process, learning what “house poor” means can help you spend within your means. For homeowners, there are ways to get yourself out of the “house poor” dilemma.
What Does House Poor Mean?
The term “house poor” refers to a person who spends a significant amount of their income on home ownership. This includes mortgage payments, home insurance, maintenance and property taxes. Home ownership is expensive and many costs are often overlooked.
House poor is also referred to as “house rich, cash poor.” Someone who can be characterized by these terms may struggle to meet their financial obligations and is more likely to accumulate debt.
How Do You Become House Poor?
People can become house poor in a couple of ways. First, you can buy a house with a mortgage that is more expensive than you can afford. Second, you can buy a house with a mortgage and then experience a large decrease in your income.
There are many rules of thumb to use to determine if someone is house poor. According to Investopedia, a rule of thumb is for your mortgage payment to not exceed 28-33% of your income. Although this calculation doesn’t account for other costs of home ownership. Historically, financial advisors have recommended housing expenses (more than just your mortgage payment) to not exceed 30% of take home pay.
Moreover, another rule of thumb states that your debt-to-income ratio (or DTI) should not exceed 40%. This takes all debt into account, not just your mortgage. Your DTI ratio is your monthly debts divided by your gross monthly income x 100. It can also be calculated on an annual basis. Mortgage lenders use your DTI ratio (including your estimated mortgage payment) to determine if they should approve you for the loan.
Here is a debt-to-income calculator for you to use:
A 2019 analysis by Construction Coverage, an industry research site, found that over one-fifth of American homeowners are considered house poor. Their definition of house poor is spending above 30% of household income on housing-related expenses.
Fortunately, there are ways to get out of the “house poor” designation and improve your finances.
Ways To Escape Being House Poor
Don’t Buy A House You Can’t Afford
It’s tempting to buy the biggest or nicest house or condo you can get a mortgage for, but this is a BIG risk. What if your income decreases? What if significant expenses pop up? Your mortgage is not the only cost of home ownership and a more expensive house usually means additional costs. To learn more about the monthly costs of home ownership, read our article, Important Monthly Costs of Owning A Home You Need To Consider.
Beware of Lifestyle Creep
Lifestyle creep or lifestyle inflation is the common phenomenon where a person’s expenses increase as their income increases. This is normal to a degree, but you should be weary of it. If you get a pay raise, don’t just assume you can now spend more of your money carelessly. Avoid buying a more expensive house or car right away. Instead increase your savings rate or contributions toward retirement. Save additional money for an emergency fund. The big issue here is that your income can easily be cut or large expenses can pop up that you aren’t prepared for.
Learn about different types of bank accounts to find the right one for your lifestyle to help you reach your financial goals.
Cut Costs & Understand Your Spending Habits
Take a good look at your spending habits. Consider the monthly costs that you can live without. Where is your money going? If you’re unsure, create a budget. There are many budgeting methods, but the zero-based budget enables you to give a job to every dollar of your income. That includes expenses, debt payments and savings. Learn more about creating a zero-based budget and use our spreadsheet in our article, Make A Zero-Based Budget & Save 18% More Money.
Increase Your Income
This is a good strategy to use on top of the others. Get a part-time job, start a side hustle or get a raise at your current job. Improve your negotiation skills to earn a high salary with our article, Use These Negotiation Tactics To Ensure The Best Outcomes. Sell things you don’t need online. There are many ways you can increase your income, you just have to set your mind to it.
Sell Your House
This may be a last resort, but it should be considered if you are still struggling to make ends meet after making other financial changes. Many people have down-sized and find their lifestyle much better because they can afford more than they could previously. This also reduced their stress, which is very important in order to live a well balanced life.
Being house poor may not be a big concern for you, but in some cases it can be a significant source of stress. Learning more about it is a great step in improving your personal finances. The next step is implementing some of the changes you just read about.
Our Take
As homeowners, we love having a place to call our own. But it’s easy to imagine how things can change that would put us in a position where our housing-related costs consume our finances. It’s really helpful to understand all of our monthly costs and for us doing a monthly check-in is beneficial. We like to see where our spending has increased and identify where we can cut costs to improve our overall financial health.
For example, living in south Florida means our electricity bill increases significantly in the summer and becomes a big expense. Luckily for us, our power company provides tools and insights in order to see exactly how much electricity we are spending in different categories, such as cooking, A/C, lights, plugged in devices, etc. This has allowed us to make changes and ultimately save on our bill. Being mindful of our spending as well as increasing costs, like electricity, helps us to avoid being house poor.
Financial freedom begins with good habits.
Rebecca & Tiago, theloadedpig.com