What to Do If You're House Poor?

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April 25, 2023

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Owning a home is a dream for many people, but it's important to remember that homeownership is also a significant financial responsibility. Home buyers soon find out that the costs don't end once you purchase a home; you must also factor in the costs of homeownership before pulling the trigger. Property taxes, mortgage payments, Homeowners’ Association (HOA) fees, and routine costs are some of the few items to remember. In fact, a survey by Fannie Mae found that non-mortgage ongoing expenses are the largest contributors to housing costs.

The Consumer Financial Protection Bureau says your debt-to-income ratio shouldn't top 36%. Put another way: The regulator says you shouldn't spend over 36% of your earnings on debt, including mortgages. For example, if you make $100,000 in a year, your debt payments (credit cards, any personal loans, and mortgages) shouldn't exceed $3,000 per month.

But what can you expect if you decide to purchase a house even when your income is just keeping you afloat? You'll become "house poor," a term used to define a person who spends a significant portion of their income on housing expenses. From cutting costs to seeking professional advice, we'll explore options to help you avoid or overcome the challenges of being house poor.

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What does it mean to be house poor?

Being house poor is a financial condition that can occur when someone takes on too much housing debt without considering their overall financial situation, including debts, income, and expenses. Low-interest rates and favorable housing markets may tempt some homebuyers to purchase a house beyond their means. Alternatively, rising housing costs and limited affordable housing options can also contribute to being house poor.

But the consequences hit you fast and hard — stress, financial instability, and potentially even homelessness. Other times, you may have to sacrifice important financial goals such as saving for retirement, paying off debt, or investing in education or business ventures. You may even have to take on a second job or cut back on basic necessities.

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How to tell if you're house poor

If you're unsure whether you fit the definition of being house poor, there are several signs to look out for that can indicate that you're struggling to afford your house.

High housing costs

High housing costs can be a significant burden on a household's finances. These costs typically include mortgage payments, property taxes, insurance, and maintenance. All told, they can eat into a considerable portion of your monthly income.

But how can you tell if you're paying too much for housing? For that, we'll turn to the "30% Rule," a commonly used guideline to determine how much of your income you should spend on housing costs. The guideline stipulates that if you're spending more than 30% of your monthly income on housing costs, it's a sign that your housing costs might be too high.

Find yourself in this situation and want to lower your housing costs? You may consider downsizing your home, refinancing your mortgage to a lower interest rate, negotiating with lenders for better terms, or exploring alternative housing options such as renting or co-living. You should also talk to a financial planner or housing counselor to help create a sustainable budget and financial plan.

Struggling to pay bills

Paying bills can include a raft of expenses such as credit card debt, car loans, utility bills, and other bills essential to maintaining your daily life. When housing costs consume a large chunk of your income, keeping up with other essential expenses may prove challenging. As a result, you risk the possibility of missed payments, late fees, or defaulting on loans or bills, which can negatively impact your credit score.

Struggling to pay bills can also result in a snowball effect, where missed payments can build up over time, making it even harder to get current. This can cause a cycle of debt and financial stress that can be difficult to break.

To address this issue, taking a closer look at your budget and prioritizing your expenses is essential. Start by listing all your bills and expenses and prioritizing them based on their importance. Essential bills such as mortgage payments, utilities, and groceries should come first, while discretionary expenses such as entertainment or travel should be cut back or eliminated entirely.

Living paycheck to paycheck

This means you rely on each paycheck to cover your basic living expenses. As a result, you're unlikely to have any extra money left over for savings, investments, or leisure activities. Living paycheck to paycheck can also signify a larger issue, such as debt or poor budgeting habits. If you're relying on credit cards or loans to cover your expenses or find yourself regularly overspending, addressing these issues is essential to break the cycle.

As a corrective measure, you can, you guessed it, create a budget, cut back on discretionary spending, and direct that money towards essential expenses or building an emergency fund. In addition, you should consider ways to increase your income. The internet has made it easier than ever to make money online. Zero in on what you're passionate about and start monetizing your skills.

Sacrificing basic necessities

If you're cutting back on basic necessities such as food, clothing, transportation, or healthcare to afford your housing costs, it's another sign you might be house poor. Sacrificing basic necessities can have serious consequences for your health and financial stability.

If you find yourself in such a situation, it's essential to take action to address the underlying issues. This may involve increasing your income, such as seeking a higher-paying job or doing additional work. It may also involve reducing expenses, such as downsizing your home or car or finding more affordable healthcare options.

No emergency fund

Not having an emergency fund means you don't have money to cover unexpected expenses or emergencies, such as car repairs, medical bills, or a job loss. If you don't have an emergency fund, it may be challenging for you to manage unexpected expenses. This may force you to take on debt, which can negatively impact your credit score and make it even more difficult to achieve financial stability.

Experts say that you should aim to save three to six months' worth of living expenses in a separate savings account. This ensures you have a safety net to fall back on if unexpected expenses arise.

How to avoid becoming house poor

Create a budget: Creating a budget is essential to understanding your income and expenses and can help you avoid becoming house poor. You can start by tracking your income and expenses. This gives you a clear picture of where your money is going. A good budget always has some wiggle room for certain categories susceptible to overspending. Unsure where to start? Check out any of the budgeting apps like YNAB.
Determine how much you can afford: Generally, your housing costs should not exceed 30% of your income. To begin, calculate your income, total debts, and your debt-to-income ratio. When calculating how much you can afford, don't forget future expenses, such as the cost of childcare or a potential job loss. You can use an online affordability calculator to make crunching numbers easy.
Save for a down payment: A typical down payment is 20% of the home's purchase price, although some lenders may accept a lower percentage. You should create a savings plan by setting aside a certain monthly amount for your down payment. You can also open a high-yield savings account and park your money there. You may also want to consider taking on a side hustle or asking for a raise at work to have a higher down payment.
Shop around: Before you lock down a lender, research different lenders to compare their rates, fees, and terms. Getting pre-approved before you even begin house hunting would also be a good idea. Read the fine print to avoid any surprises in the future.
Consider all housing expenses: When purchasing a home, it's important to consider expenses beyond the cost of the home and the mortgage payment. Property taxes, homeowners insurance, HOA fees, maintenance and repairs, utilities, and closing costs will affect your home-buying process.
Avoid adjustable-rate mortgages: Adjustable-rate mortgages can be tempting since they tend to have a lower initial interest rate, which means you can make your mortgage payment more easily. However, the interest rate can fluctuate over time, making it difficult to accurately predict how much you'll be paying over the mortgage.
Consider long-term financial goals: Buying a home is a major financial decision that impacts your finances for years to come. That's why it's important to consider your long-term financial goals and any financial obligations before you become a homeowner. Be sure to consider the effect on your retirement savings, emergency savings, and the ability to pay off debt.

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What to do if you become house poor?

Cut expenses

If you become house-poor, cutting expenses is one of the most effective ways to put yourself back on your feet. Here are some tips:

Create a budget: This is the first step in identifying areas where you can reduce expenses.
Reduce discretionary spending: We all dine out and spend on entertainment and shopping. But if you're house poor, you'll have to cut down on these expenses. Consider packing your lunch for work instead of eating out, and look for low-cost entertainment options.
Negotiate bills: Call your utility companies, cable provider, and other service providers to see if you can negotiate lower rates. And if your efforts prove unsuccessful, there are a few service providers — like Billshark and Trim — who may be able to help you with that

By cutting expenses, you can free up more money in your budget for your mortgage, bills and other expenses. This will require sacrifices, but it can help you improve your financial situation.

Increase your income

There are several ways you can make extra money:

Take on a side job: This job can be anything you're passionate about — freelancing, tutoring, petsitting. Look for opportunities that fit your skills and schedule.
Sell unwanted items: We all have something lying around our homes that we no longer use. You can sell items on online marketplaces like eBay or Craigslist or have a yard sale.
Participate in the gig economy: Consider participating in the gig economy by driving for a ride-sharing service or delivering food. These jobs can be done on your own schedule and provide a flexible income source.
Ask for a raise: If you have been at your job for a while and have a good track record, consider asking for a raise. Prepare a list of your accomplishments and contributions, and then make a request.

Increasing your income requires time and effort short-term, but once you lock them down, you should have enough money to avoid becoming house poor.

Refinance your mortgage

Interest rates dropped since you first took out your mortgage? It would be good to look into refinancing to secure a lower interest rate and monthly mortgage payments. But before you take the plunge, check your credit score and work on improving it, if necessary, before applying for a refinance. Also, shop around; don't settle for the first refinance offer you get. Another thing to consider is closing costs — determine whether any savings from refinancing outweigh the cost of the closing fees.

Consider downsizing

A home downsize is far from the ideal outcome one would hope, but downsizing to a smaller, more affordable home may be inevitable if you can no longer afford your current home. Start by evaluating your needs and determining what size and type of home you require. Next, research the housing market in your area of choice and see the average selling price there. Don't forget the costs — the cost of moving, any repairs or renovations that may be needed, and the cost of new furnishings.

If you've lived in your home for long, downsizing can take an emotional toll. You should be prepared for the emotional impact of downsizing and take steps to make the process as smooth and stress-free as possible.

Seek professional advice

If any corrective measures fail to yield any result, it's time to bring in the pros. Here are some types of professionals who can provide guidance and support:

Financial planner: A financial planner can help you create a budget, set financial goals and develop a plan for managing your money. They can also advise how to pay down debt, save for the future and manage your investments.
Credit counselor: A credit counselor can help you understand your credit report and advise on improving your credit score. They can also guide how to manage debt and develop a plan for paying off your mortgage and other bills.
Real estate attorney: If you're facing foreclosure or other legal issues related to your mortgage, a real estate attorney can provide legal advice and representation.
Housing counselor: A housing counselor can provide advice on a range of housing-related issues, including how to avoid foreclosure, how to budget for your mortgage payments, and how to navigate the home-buying process.

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The bottom line

Being house poor can significantly impact your mental health and overall well-being. The stress and anxiety of struggling to pay bills and make ends meet can affect your emotional and physical health. If you struggle to make ends meet, take action to reduce your expenses, increase your income, or seek professional advice. With the right mindset and financial strategies, you can avoid the pitfalls of house poverty and achieve your long-term financial goals.

But it's important to remember that housing costs are just one piece of the financial puzzle. It's essential to have a holistic approach to managing your finances, which includes saving for emergencies, paying down debt, and investing for your future. Doing so can build a strong financial foundation that can weather any unexpected expenses or financial setbacks.

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Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.

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