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Buying a house is a complex and emotional process, and we don’t always make perfect decisions once we’ve determined a particular property is our dream house. But even if you’re careful to think of your home as an asset and an investment, it’s difficult to swing a down payment and harder to figure out how much house you can really afford. And here’s the real kicker: Even if you’re careful with your money, you can still wind up “house poor.”
Being house poor simply means the cost of owning and maintaining your home eats up most or all of your income, leaving you with very little to cover other bills or aspects of your life.
You might have calculated those costs before buying and judged yourself capable of meeting your financial obligations, but becoming house poor can sneak up on you. Purchasers tend to focus on the mortgage payment, but there are dozens of other expenses involved in home ownership, from property taxes and insurance to higher utility bills (due to a larger space), to new furniture purchases, and unexpected repair bills. Some of those costs can rise unexpectedly, too—and if your home loan has an adjustable interest rate, it can jump alarmingly.
You can also become house poor if other parts of your life go in the wrong direction, too—if you get laid off or go through a serious health crisis that drains your bank account, you may suddenly find yourself scrambling to pay the mortgage and other house-related bills. Here’s what to do about it.
How to figure out if you’re really house poor
Math is a crystal ball that can reveal whether you’re house poor or at risk of becoming house poor. The U.S. government advises that your total debt load (aka your debt-to-income [DTI] ratio) shouldn’t be more than 36%. That means that you shouldn’t be spending more than 36% of your gross income on debt maintenance—including your mortgage. If you make $120,000 a year, for example, your monthly gross income is $10,000, so your debt payments (including credit cards, mortgage, and everything else) shouldn’t be more than $3,600. Keeping track of your DTI after a home purchase can offer you an early warning sign that you’re at risk of becoming (or already are) house poor.
So let’s say you’re tracking your DTI and after a few rough months you realize you’ve achieved the American nightmare and become house poor. What can you do about it?
Increase income, lower expenses
First, let’s get the obvious out of the way: “House poor” is a fancy way of saying “poor,” so your first order of business is to change the money conversation. A second job or a side hustle to increase your income will help (at the expense of your sanity and enjoyment of your life, of course), as will reducing your expenses as much as you can stand. You can also consider selling some stuff if you have anything worth selling.
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Something to think about is whether hanging onto the house is worth it. If you can sell it and pay off the remaining mortgage, it might be a better idea to admit defeat, even if you take a hit and lose some of your equity. It’s easy to become emotionally attached to a property, especially if it’s a dream home you’ve been working towards for years. But if you’re already house poor there is a risk that you will spend several miserable years working and scrimping—and still lose the house, possibly in a foreclosure situation.
It’s a different scenario if you’re years deep into a mortgage and have a ton of equity. The key here is to sit with the numbers and have a definitive plan for covering your housing costs—and for dealing with the emotional costs of devoting most of your energy towards paying your bills.
A possible alternative to increasing income is debt consolidation. Rolling up several debts into one big lump can reduce the overall monthly payments you have to make, and possibly reduce the overall interest you’re paying on multiple debts as well.
Another strategy to reduce expenses is to eliminate Private Mortgage Insurance (PMI) payments, if you have them. Typically PMI goes away when you achieve 22% equity in the property, but it sometimes takes time for your lender to realize this has happened, especially if it happens because of rising property values that give you more equity. If you think your house has increased enough in value to give you that magic 22%, having it appraised might be worth your time if you can stop making PMI payments on top of your mortgage.
Monetize the house
If you’ve done the budgeting work to increase income and/or decrease expenses and you’re still struggling, you can try to find ways to turn your property into positive income generator. This could be as old-school as getting a roommate or two to occupy your spare bedrooms and pay you rent (not to mention splitting up your utility bills), or you could rent the house part-time through a short-term rental platform like Airbnb.
Of course, most of us would like to think we’re leaving annoying roommates and hounding people for their share of the internet bill for good when we buy a house, so have a good think on whether going this route is worth it to you. Renting in any form can also put a lot of wear and tear on your house, as you’ll have more people using its infrastructure—and some of them simply won’t care as much about the property as you do, because they don’t own it.
Refinance your debt
A lot of folks don’t realize that if you have what’s known as a conventional mortgage, you can refinance that sucker just about any time you want to (if you have an FHA loan, a “jumbo” loan, a VA loan, or a loan through the Department of Agriculture, it’s a bit more complicated). Refinancing your mortgage essentially swaps your current loan for a new one. If interest rates have dropped since you bought your house, you can often get a much better rate. You can also extend or shorten the term, which can have a huge impact on your monthly payments. And if you have a lot of equity, you can sometimes cash out a lot of it, which can help with immediate expenses.
The rule of thumb here is pretty simple: If you can get an interest rate at least 1 point lower than your current rate, it’s probably worth your time. But there are other considerations. Even if the rate remains essentially the same, extending the term of the loan (from 15 years to 30, for example) might make your monthly costs more manageable even though you’ll be dealing with them for a longer period of time.
But! There are also a lot of fees associated with a refinance—as much as 6% of the loan balance. Be aware of what those fees will be before you pull the trigger, or you might find yourself right back in house poor territory.
The nuclear option
If the conditions that are making you house poor are likely to be permanent, or if the idea of rearranging every aspect of your life in order to afford your house exhausts you, you can always consider the nuclear option: Sell the house. Sometimes it’s just best to admit that mistakes were made. Do the math: Can you plausibly pay off the mortgage balance from a sale? Can you afford a Realtor’s fee or other expenses (e.g., necessary repairs)? Will you owe any tax for capital gains if you sell (especially if you haven’t owned the house for more than 2 years)?
Selling the property might give you the opportunity to buy a smaller, less-expensive home, or at least rent a place with a much lower monthly cost. It might be an emotional decision—it might feel like a defeat or setback—but when your other option is a few miserable months or years followed by a foreclosure or similar financial disaster, it might make the most sense.
