How Not to be House Poor

My father taught me many things about money growing up. One of the lessons that really stuck out to me, though, was to avoid ever becoming house poor.

As a carefree teenager working for minimum wage, I didn’t really understand what the term meant. But when it came time to buy my first home a decade or so later, his warning resurfaced with every big, beautiful home my realtor showed.

You may have heard the term house poor before (sometimes also referred to as house rich, cash poor), even if you didn’t know what it meant. It’s an important concept to understand--whether you rent or own your home, avoiding a house poor situation is a key goal to have. In the end, it could mean the difference between struggling each month or being able to successfully meet your financial goals.

What It Means to be House Poor

When someone is referred to as house poor, it means that a significant portion of their monthly income is being allocated to their housing expenses. These expenses include:

• Rent or mortgage payments
• Property taxes
• Utilities
• Homeowners or renters insurance
• Maintenance costs

Oftentimes, this overspending on housing costs lands people in hot water with other obligations. They might struggle to pay off credit cards in full each month, or be unprepared for something unexpected, like replacing the roof or buying a new car when theirs kicks the bucket.

Related: How to Build an Emergency Fund

Not only that, but overspending on your home each month takes away from your ability to progress financially.

I often come across sellers who have sacrificed their lifestyle and future plans in order to afford the home they’re living in, says Ford Shanley, who is a real estate agent and broker in Austin, Texas. It’s easy to wrap your head around spending less on shopping, eating out, or taking vacations to afford the home you really want, but it’s much harder to accept not making any further progress financially or even suffering devastating losses along the way.

Even if you can technically afford to live in a certain home, is it worth being house poor if it means being unable to also save for retirement, invest in a new business, or stay prepared for an emergency?

How It Happens

There are many reasons that someone could wind up spending too much on their monthly housing expenses. Some families cant avoid the situation, because they live in an area with an exorbitant cost of living. Some may be there by choice, opting to spend more on the home of their dreams, rather than settling for something smaller, older, or in a different area of town.

Others may find themselves house poor unexpectedly. This can happen after an unplanned financial change, like a drop in income for you or your spouse. Big, sudden expenses can land you there, too, such as a major illness or having to take on a new car payment.

The term house poor doesn’t just mean folks with too-high monthly mortgage payments, either. It can also be used to refer to those who spend all of their savings on their new home’s down payment, leaving them without a safety net.

Additionally, if you have too much of your net worth tied up in your home’s equity--rather than in cash, an investment portfolio, or other assets--you are considered house rich, cash poor. This is a dangerous place to be.

So, What Qualifies as House Poor?

It can be tricky to calculate what you should reasonably be spending on your housing expenses each month, and how much is too much. Not only can this threshold vary from one family to the next--thanks to savings goals, other expenses, and even the area in which you live--but there’s no standard calculation.

What we do have to go by is the general rule of thumb in the industry: many experts recommend spending no more than 35% of your income on your total household expenses. Others are a bit more conservative, recommending that you aim for around 25 percent. Of course, this includes all of your household expenses: mortgage or rent payments, property taxes, utilities, repairs and other maintenance, and insurance.

In many areas of the country, that might not be a problem. If you live in a big city, though, or in a state like California, you may quickly learn that you have two choices: being house poor or settling for (a lot) less.

What to Do If You Are House Poor

So, you bought (or rented) that gorgeous home, and have been making faithful payments each month. After also paying your insurance premiums, those utilities that keep creeping higher, and putting money into escrow for taxes each month, you feel stretched thin.

After sitting down to do the math, you realize that you are actually spending 50% (or more) on housing and housing-related expenses each month. No wonder you’re struggling to pay off student loan debt and put enough away for retirement!

That’s when it hits you: you are textbook house poor. Now what?

Figure Out the Cause

The first step in climbing out of this situation is to figure out how you got there to begin with.

• Did you blatantly buy more home than you could afford? (You’re certainly not alone, but recognizing the mistake is important!)
• Are you dealing with a temporary setback that will resolve itself in the near future (like unpaid maternity leave)?
• Were you in a good place previously, but a big life change (such as a drop in income or the expenses of a major illness) made your home less affordable?

In some cases, you may be able to either wait out the situation or even correct it before your finances take a huge hit. Otherwise, it might be time to make some changes.

Reorganize Your Budget

Reconfiguring your household budget is a quick way to improve your cash flow and ease the pinch. Take a look at how and where you’re spending, then make adjustments.

This might mean cutting the cord on cable, lowering grocery bills, finding extra discounts on your insurance, and the like. You may also decide to eliminate any wasteful or fun spending for a little while, until you’re in a better place.

Trim Housing Expenses

Do your housing expenses make up more than the recommended 35% of your income? Then it’s time to see how you can reduce those costs.

Before you go selling your house, let’s start with the more manageable expenses. You could:

• Make your home more efficient with an electricity audit, programmable thermostat, snap-on pipe insulators, low-flow toilets and showerheads, etc. This will hopefully lower your utility bills each month and save you money.
• Shop around for new homeowners/renters insurance. Use an aggregator to compare your current policy and find the best rates.
• If your county has appraised your home’s value for significantly more than previous years--and you haven’t made any improvements--you may be able to fight the increase. This could save you hundreds in additional property taxes.
• Try to save on your mortgage loan. If federal rates have dropped since buying your home, or if your credit has improved since then, you may qualify for a competitive refinance loan. This can lower your monthly payments, decrease your interest rate, or both.

Lowering these will help take the pinch off of your monthly finances, and make your home’s total expense easier to manage. A nice home is only enjoyable if you can afford to keep the heat on (or the A/C, here in Texas!), reminds Shanley.

Consider Selling, If Needed

If you are struggling to cover your housing expenses each month and hardly have enough left over to live on, you may need to consider downsizing. No, it’s not the most convenient (or exciting) option, but it could save you from financial ruin--or at least, a lot of stress!

Moving a few neighborhoods away might be all that’s necessary to get a better deal. You could look into a slightly smaller or older house, or one that’s a bit more removed from the city center.

Helpful Tools to Use Along the Way

Not sure where to start or how to figure out what you can truly afford at the end of the day? There are a few places you should look first.

Use an Affordability Calculator

Almost every mortgage lender has a mortgage calculator on their website, which will give you results like your monthly payment and total interest paid. While this is helpful, though, it doesn’t really tell you how much you can afford each month for 30 years.

That’s why you need an affordability calculator, like the one offered by SmartAsset. This form takes into account not only your income and projected interest rate, but also the area in which you’re buying (to predict property taxes, insurance, closing costs and mortgage rates), your current debt payments, and how much you can afford to put down.

Once you’ve entered all of this information, you’ll be given a much more accurate picture of what you can afford to buy. Remember: this is likely less than what a lender is willing to give you and that’s okay.

With my existing mortgages (from rental properties), student loan debt, my husband’s financed truck, and other obligations, it looks like we can afford to spend just under $600,000 when we move back to Austin next year.

Utilize Free Resources (Like Your Agent)

Want to know where surprise expenses might crop up? Talk to the professionals!

Finding a good Realtor, lender, and/or financial planner is invaluable, according to Shanley. Experts will provide you with valuable insight that you may never have considered when buying a home. I'm always surprised when a client doesn't ask for my advice--I have a wealth of knowledge they could tap into for free!

When a professional does this day in and day out, it’s worth soliciting them for free insight. This is especially helpful if they’ve been working in a specific area of town for years, as they will know things like recent trends in property taxes.

Be Realistic

The Rolling Stones said it best: you can’t always get what you want. This is true in every facet of our lives, of course, but is especially important to remember when it comes to our money and buying a home.

If you want to maintain a healthy cash flow, plan for a successful retirement, and stay prepared for the unexpected issues that will inevitably arise, you may need to compromise a bit in terms of your home’s cost. Just because you can borrow it, doesn’t mean that you should.

And remember: maybe you can’t afford that house on the hill today, but that doesn’t mean that you won’t be able to afford it in a few years. You’ll just have to make smart financial choices on your way.

According to Shanley, it’s a self-promoting cycle. When you’re responsible with your money and invest in a home that allows you to continue to save, you’re going to continue to make progress. You can then afford to invest in other things like businesses, stocks, or rental property. When you can take advantage of opportunities like these, you increase your wealth and your ability to afford the things that make you happy... like dream homes!