How to Avoid Becoming House Poor

What Does It Mean to Be House Poor?

Spending too much money on homeownership expenses can make it harder to cover other expenses. It can also limit your opportunities to plan for retirement, take vacations, put children through college and otherwise lead a financially healthy life.

Here are four common ways you could become house poor:

1. You put a lot of money toward your down payment and closing costs. This might have drained any savings you had to cover regular or emergency expenses.
2. You don't take into account all of the expenses associated with homeownership. For instance, maybe you calculated how much you'd need to spend each month for your mortgage payment, property taxes and homeowners insurance, but you didn't include maintenance costs for your home (such as fixing a leaky roof). One formula recommends setting aside 1% of your home's purchase price for maintenance and repairs. So, for a $300,000 home, this would equate to $3,000 a year.
3. Your property taxes go up. If your tax bill climbs, that could pinch your homeownership budget. According to data provider ATTOM Data Solutions, the average property tax bill for a single-family home in the U.S. increased 4.4% in 2020 compared with the previous year.
4. Your mortgage payment rises. Let's say your home loan is an adjustable rate mortgage (ARM), meaning the interest rate can periodically go up or down. If the interest rate goes up, your mortgage payment might also rise—potentially taking a bigger slice out of your budget.

Many experts say you can afford a house that costs about 2.5 times your annual income. Using that formula, if your annual income is $70,000, you should be able to afford a $175,000 home. Another rule of thumb suggests spending 28% of your monthly gross income (your income before taxes and deductions) on housing expenses. Therefore, 28% would work out to $1,680 a month if your monthly gross income is $6,000.

How Can You Avoid Becoming House Poor?

Thankfully, you can adopt a number of strategies to prevent becoming house poor. Here are four of them.

1. Do your homework. Before diving into homeownership, educate yourself about the various expenses tied to buying and owning a house. How much of a down payment will you need? What will the monthly mortgage payment be? What about added costs like homeowners insurance and property taxes? Are you able to do home repairs yourself to save money, or should you budget for a professional?
2. Stick to your homebuying budget. Be realistic about how much you can afford to pay for a home. While you may have your eye on a $400,000 house, if your spending limit is $300,000, try not to go past the $300,000 mark. Among other factors, your homebuying budget should be based on your income, your credit, the current mortgage rates and your ability to cover homeownership costs.
3. Create a household budget. Your household budget should include expenses for necessities such as food, health care and transportation, along with discretionary expenses such as restaurant meals, gym memberships or streaming subscriptions. In addition, it should take into account payments you're making towards debts such as credit cards, student loans and sinking funds.
4. Set up an emergency fund. An emergency fund might shield you from becoming house poor. Generally, it's recommended that an emergency fund contain enough money to pay three to six months' worth of living expenses. This fund can be a lifesaver if, for instance, you lose your job or you must pay for unexpected home repairs.

What Can You Do if You're Already House Poor?

If you're already struggling to make ends meet due to high housing expenses, here are some tips for how to turn things around:

• Boost your income. If the costs of homeownership are consistently challenging, you might hunt for ways to increase your income. This could include getting a part-time job on top of your full-time job, securing a side hustle (like driving for a ride-hailing service or designing websites) or asking for a raise at your current job.
• Refinance your mortgage. Refinancing your mortgage could lead to a lower interest rate, which could lower your monthly loan payment. Refinancing also could enable you to extend the length of your loan, which also can lower your monthly loan payment.
• Cut back on other spending. Focus on need-to-have items rather than want-to-have items. For instance, you've got to buy groceries, but you likely can put off that vacation to Mexico.
• Tap into your emergency savings. This could be an option if you know that being house poor won't last forever. Missing bill payments can have major consequences, including foreclosure, vehicle repossession and credit score harm. Your emergency savings might be able to tide you over and help you avoid major issues until you can get your finances back on track.
• Sell your house. This isn't an ideal solution, but it may be best for your situation. If you're house poor, you might consider buying a cheaper home or even renting a place to live after you've sold the higher-cost house.

How Does Being House Poor Affect Your Credit?

It's important to avoid becoming house poor so you can protect your credit and avoid foreclosure. For example, if you miss a mortgage payment, it can stay on your credit report for up to seven years and cause your credit score to drop. The same is true for a late payment. And if you miss four mortgage payments in a row, your lender may foreclose on your home.

Besides the disruption they can cause to your life, missed payments, late payments and foreclosure can make it tougher to qualify for another mortgage, a credit card, a personal loan and other credit products—or at least make it tougher to qualify for loans with attractive terms, such as a low interest rate.

The Bottom Line

Following a homebuying budget and a household budget are two of the ways you can avoid becoming house poor. And if you find that you're already house poor, you can take steps to build a more solid financial foundation. Whether you're trying to avoid being house poor or if you're already there, it's wise to regularly check your free Experian credit report and free Experian credit score to stay on top of your finances.