What Does It Mean to Be House Poor?
“House poor” is a term used to describe individuals who spend a large proportion of their total income on homeownership, including mortgage payments, property taxes, maintenance, and utilities. When a considerable portion of income goes into these expenses, it leaves little for discretionary items and creates difficulty in meeting other financial obligations, such as vehicle payments and daily living expenses.
Key Takeaways
- A house poor person is anyone whose housing expenses account for a significant percentage of their monthly budget.
- These individuals often struggle with discretionary spending and meeting other financial obligations.
- Solutions to alleviate being house poor include cutting down on discretionary expenses, taking on additional work, using savings, selling off assets, or downsizing.
Get Ahead of Financial Worries by Understanding House Poor
Anyone whose housing costs are an overwhelming portion of their monthly budget can be considered house poor. This predicament can occur for several reasons such as underestimating total costs or experiencing a change in income.
Proactive Measures to Prevent Housing Financial Strain
Homeownership is a core part of the American dream, often perceived as a long-term investment. However, financial troubles can quickly make this dream burdensome. Here are some guidelines to prevent becoming house poor:
- Spending Ratio: One method of determining housing affordability is to limit spending to 2.5 times your total gross annual salary. Be cautious, as income and employment can vary over time.
- Front-End DTI: Consider the debt-to-income ratio by calculating the percentage of your gross monthly income spent on housing, which should ideally be no more than 28%.
- Mortgage Type: Choose an appropriate mortgage. For predictability, opt for a fixed interest rate over a variable one.
- Emergency Fund: Keep savings for unexpected costs like maintenance or sudden financial changes.
Guidelines to Avoid Becoming House Poor
While spending no more than 28% of gross income on housing is the standard advice, other debts must also be factored in. The back-end DTI should not exceed 36% of your gross monthly income. Slightly exceeding these benchmarks might define you as house poor.
Strategies for Managing If You Are House Poor
Unforeseen changes like job loss or welcoming a new child can stretch finances thin, moving a household into a house-poor situation. Here are ways to manage:
Limit Discretionary Expenses
Review and reduce areas of spending. Skipping vacations or opting for cheaper vehicle payments can make a notable difference.
Take on Additional Work
Many people take a second job or side gigs to make ends meet. Explore opportunities suited to your skills and availability.
Tap into Savings
Start building a savings account specifically for unexpected costs associated with homeownership.
Consider Selling
Selling your home might be necessary if other solutions don’t suffice. This could allow you to downsize or move to a less expensive area, thereby managing expenses better and potentially saving for future investments.
How to Prevent Becoming House Poor
High initial down payments or unforeseen increases in property taxes can contribute to becoming house poor. To avoid this, consider side jobs to boost income, refinancing to take advantage of lower interest rates, or downsizing to more affordable housing.
Emergency Fund Essentials
Financial experts generally advocate having an emergency fund to cover essential expenses in the event of a crisis. A recommended amount ranges from 3 to 6 months’ worth of living costs.
Conclusion
Being house poor is characterized by housing expenses that consume a large share of one’s income. Plan your mortgage based on the rule of allocating no more than 28% of gross income for housing and 36% for total debts. Explore additional income sources, be strategic in usage of savings, and consider resizing living arrangements if needed.
Being house poor indicates a significant financial imbalance where you’re asset-rich but cash-poor, necessitating careful planning and proactive solutions. Optimize spending, look for extra income, and prepare for emergencies to maintain financial stability.
Related Terms: debt-to-income ratio, mortgage, property taxes, fixed interest rate, savings account, emergency fund.
References
- Experian. “How to Avoid Becoming House Poor”.
- AARP. “Max Out Spending for Housing at 2.5 Times Your Salary”.
- Federal Deposit Insurance Corporation. “Loans and Mortgages”.
