House Poor: What Does it Mean and How to Avoid it
Overspending on housing can be a slippery slope that puts a considerable burden on your financial wellbeing. Learn how to avoid becoming “house poor.”
February 7, 2022
Between September 2020 and September 2021, home prices in the US surged an incredible 19.5%. That means a $300,000 home in 2020 would fetch $358,500 just 12 months later.
With a competitive real estate market, it’s easy to overspend on housing. The combination of rising prices and brutal bidding wars make it challenging for first-time homebuyers to stay within their budget.
You may have heard the term “house poor” to describe homeowners who may have bought a bit beyond their budget. But what does it mean to be house rich, cash poor?
What is house poor?
House poor is often used to describe homeowners who spend a large portion of their monthly income on housing costs.
For instance, someone that makes $60,000 ($5,000 per month) may be considered house poor if they own an expensive home with a total cost of $2,500 per month.
Of course, there’s no formal definition for house poor — it’s a term that refers to more of a feeling than a “diagnosable” specific financial condition.
Individuals who are house poor may feel their housing costs are eating up too much of their income. They may struggle to meet other financial responsibilities or feel like they don’t have any money for optional expenses like entertainment and dining out.
Why avoid overspending on housing?
For most households, spending on housing is the #1 expense. Housing typically accounts for 32.4% to 40% of all expenses, depending on the household size and other factors. As such, it’s important to avoid overspending on this category. Becoming “house poor” can lead to other problems:
It can lead to more debt
Overspending on housing can be a slippery slope. If you spend too much on housing, it’s easier to fall behind on other expenses — which forces many households to rack up credit card debt and other costly loans. For example, if you were to have an unexpected repair on your home, you might not have enough saved to pay for it out of pocket.
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It can create financial stress
A large mortgage payment can be particularly stressful. A Nerdwallet survey found that 28% of recent home buyers reported that their monthly mortgage payments are among the biggest sources of stress in the coming years when it comes to money.
It can reduce your discretionary spending
If you spend too much of your monthly income on housing, you may not have much left in the budget for optional (and fun) spending such as restaurants, bars, entertainment and other splurges.
It can derail your other financial goals
Owning your own home is a huge accomplishment — but you likely have other financial goals, like saving for retirement or boosting your emergency fund. When housing costs eat up too much of your budget, saving towards these long-term and mid-term goals can be tough.
It can get ugly in a housing market downturn
As we saw in 2008, having a huge mortgage can be very risky if the housing market ever crashes. Many Americans lost their homes or found themselves paying a mortgage on a $350,000 home that was now worth just $200,000.
How much should I spend on a house?
If you are wondering how to avoid being house poor, figuring out how much you can realistically afford is the first step.
A good rule of thumb for buying a house is that your total monthly housing costs should be no more than 28% of your gross monthly income.
For example, if your monthly household income is $6,000, you should aim to keep total housing costs to under $1,680 per month. This figure includes all housing costs, from mortgage payments to utilities and taxes.
You should also aim to keep your total debt to income ratio to under 36%. This ratio compares your total debt payments (mortgage, credit cards, etc.) to your total household income. It’s one of the primary factors banks consider when issuing new mortgage loans.
Wondering how to calculate mortgage payments to estimate how much you can afford? The simplest way is to use a mortgage affordability calculator.
But remember — it’s not just the mortgage that you need to consider. Learning everything you need to know about buying a home can help you save money and stress in the term. It can make it easier to budget for various other housing-related expenses.
Other housing costs to consider
It’s important to remember that your mortgage payment isn’t the only cost you’ll face once you’re a homeowner. Other housing costs to budget for include:
Property taxes (this may be included in your mortgage payment)
Closing costs on the mortgage
Homeowner’s association (HOA) dues
Renovations and necessary upgrades
Landscaping and outdoor maintenance
These expenses can add up quickly:
The average utility cost is around $171 per month
Average HOA fees run around $300 a month
Average property taxes are around 1.1% of a home’s value per year ($4,400/year on a $400,000 home)
Combined, these costs could easily add on $500 to $1,000 (or more) to your total housing expenses.
This is another reason so many homeowners fall into the house-poor trap. They may see a mortgage payment of $1,900 and feel that that is affordable — but after utilities, taxes, HOA dues and other expenses, they could be spending closer to $3,000 per month on their housing.
Buying a home is a huge financial decision and one that you could be paying for the next 30 years.
Ask yourself, when are you ready to buy a house? And perhaps more importantly, how much can you really afford to spend?
Whenever possible, try to stay within your budget. And if the hot housing market doesn’t allow for that, it may be best to wait until you can save up a larger down payment — which will result in a lower monthly mortgage payment.
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