Are you House Poor? What to do if you Are

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Woman stressed about money and bills

Owning a house is the American Dream, but too many people find themselves in over their heads, resulting in a nightmare, not a dream. If this sounds like you or you think you’re house poor, here’s what you can do.

What is House Poor?

You might be house poor when you spend too much of your monthly income on your housing expenses. If it’s difficult to afford your other normal costs, you might feel like you’re drowning in housing payments.

For some people, being house poor means, you miss mortgage payments, can’t pay your taxes, or don’t have enough money for the daily cost of living each month.

How do you Get House Poor?

You probably wonder how someone can become house poor. After all, you must qualify for a mortgage before you get it, so how does it happen?

Unfortunately, when getting a mortgage, to determine your affordability, lenders only review your DTI or debt-to-income ratio, which is to percentage of monthly debt payments you have compared to your income. However, we all know that we are responsible to cover more expenses than debt payments, such as; electric, gas, water, sewage, internet, cable, childcare, and a host of other things. 

Outside of people stretching their budgets to the max, borrowing every dollar they are pre-approved to borrow, even though it’s a stretch in their monthly budget, others have unfortunate circumstances that cause them to become house poor, including the following:

  • Losing your job – If you lose your job and have trouble finding another, you could quickly get in over your head and get behind on your mortgage.

  • Change your family size – If you bought your house before children, it might have been easy to afford, but once you have children, life gets much more expensive, making it hard to afford your housing payment.

  • Letting emotions get the best of you – Sometimes, we get in over our heads based on emotion. Whether you’re trying to keep up with the Joneses by buying a larger house than you can afford or you want to impress friends, you might bite off more than you can chew.

Signs that You’re House Poor

So how do you know if you’re house poor? Here are some common signs.

  • You put all your money into your mortgage payment and put off necessary maintenance and repairs on the home just to keep up.

  • You don’t have an emergency fund to cover unexpected issues with the house or anything else in your life. 

  • You hold your breath each month, wondering if you’ll have enough money to pay the mortgage, real estate taxes, and home insurance.

  • Your debt-to-income ratio is much higher than 43%. This means your debts take up more than 43% of your income.

What can you do to Fix Being House Poor?

If you’ve determined you are house poor, here are some steps you can take.

Revisit your Budget

If you can’t make ends meet each month, revisit your budget. Determining where you can cut back, so you have more disposable income. Look at services you pay for that you don’t need or those you can shop around to save money on, such as cable, insurance, some utilities, and internet services.

Consider cutting out excessive eating out and creating a budget for spending outside of the necessities so you can make ends meet.

Consider Consolidating your Debt

If you can consolidate your debt, you might save money. For example, if you have high-interest credit cards, consider finding a 0% APR balance transfer card that allows you to pay your debts off with no interest. As a result, you’ll get out of debt faster and keep more money in your pocket.

Find Additional Income

Today it’s easy to add to your regular income. You can start a freelancing gig online, work a part-time job, or use gig-sharing apps like Uber or DoorDash to make extra money. Make sure to funnel the money toward your monthly bills so you can make ends meet and not feel so strangled by your monthly obligations.

Refinance your Mortgage

If you have equity in your home and decent credit, you may be able to refinance your mortgage to make it more affordable. Determine if you can get a lower interest rate or better terms to lower your payment and make it easier to make ends meet.

Ask for a Loan Modification

Ask your lender about a loan modification if you aren’t eligible to refinance. This is a modification of your original mortgage terms to make your loan more affordable. For example, some lenders can extend your term, lower your interest rate, or forgive a portion of your loan.

The options vary by lender, and not everyone is eligible, but it doesn’t hurt to ask.

How to Avoid Becoming House Poor

It’s best to avoid becoming house poor if possible. Here are a few key ways to ensure it doesn’t happen to you.

  • Keep your debt-to-income ratio low – Most lenders allow DTIs of up to 43%, but that puts you at risk of becoming house poor

Instead, keep it as close to 28% as possible. This allows more room for disposable income, and if your circumstances change, you might not be in over your head in debt.

  • Watch your budget – Your budget will likely change often, so keep a close eye on it. If your expenses increase, find other expenses you can decrease to offset the new bills. Just letting your bills continually increase can lead to you feeling house poor.

  • Make a large down payment – If you have the funds upfront, put them down on the home. This keeps your mortgage payment down and makes it easier to afford your loan.

  • Have an emergency fund – Try keeping 3 to 6 months of expenses in an account you don’t touch. This way, if you have an emergency and can’t work, you know your bills are covered.

Final Thoughts

Don’t let being house poor ruin your financial goals. The key is to avoid becoming house poor by buying a home you can afford and taking the necessary steps to avoid it while you own a house.

Life happens, and it’s not always fair, but when you’re prepared, you can handle what comes your way. If not, know there are options to help you as long as you ask.