Spending too much on your housing payment means there’s less money to spend on other things.
Published February 18, 20205 min read
Table of contents
You are “house poor” if you spend a large portion of your income on housing expenses
House poor might also be referred to as “house rich, cash poor”
In addition to the mortgage payment, housing expenses include maintenance, repairs, insurance, taxes, and more
The best way to avoid becoming house poor is knowing how much house you can afford
After you finally buy the house of your dreams, you might find that you have less and less to spend because your monthly take-home pay is being swallowed up by housing payments — not just the monthly mortgage payment, but the insurance, maintenance, and property taxes, too. Buying a house comes with many costs that you might not have been prepared for.
If you’re spending more than a 25% of your income on housing expenses, then you might be what’s called “house poor”. Homeowners in this situation struggle to pay for living expenses, like food, and clothing, and may not be able to afford recreational ones, like vacations. As a result, people who are house poor can often take on more debt.
Being house poor might also be referred to as “house rich, cash poor”, which can sound confusing. The phrase just describes the fact that you own a home, but have little to no cash.
Purchasing a house can provide you with an important asset, but you should take care not to sink all your money into it. Buying more house than you can afford is the quickest way to becoming house poor. We’ll talk about how to know if you’re house poor and how to avoid it.
Here are the biggest indicators that you are house poor:
The defining characteristic of being house poor is that you spend too much of your gross income on housing. But what is considered too much? Financial experts suggest that housing costs be limited to 20% of your income. The Department of Housing and Urban Development (HUD) considers people who pay more than 30% of their income on housing as cost-burdened. Everyone has different financial circumstances — some people may have more debt than others — so use 20% to 30% as a guide, not a strict rule.
If you’re house poor, then you probably have a restricted cash flow that limits you to living from paycheck to paycheck. In this situation, it’s difficult to set aside any monthly savings towards retirement or emergencies. Make sure to build up an emergency fund before you start depleting your savings or dipping into your retirement accounts.)
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Related article: our study on how many people are "house poor" in every state.
Spending too much on your housing payment means there’s less money to spend on other things. When this happens, you might find yourself financing basic expenses with a credit card. If you rely too heavily on a credit card, your debt can pile up quickly if you encounter unexpected costs, like a large medical bill or a car repair.
First-time homebuyers will quickly learn that there are more costs to homeownership than they’d realized. Most people only think about their upfront costs: the down payment, closing costs, and monthly mortgage payment. Some people also have to pay private mortgage insurance (PMI), if they put less than 20% down at closing. While these are significant costs of homeownership, they are not the only ones.
When you buy a house, you’ll also have to pay the following:
State and local property taxes
Maintenance and upkeep
Utilities and appliances
Homeowners association (HOA) fees if you’re part of a housing community or development
Don’t forget furniture, either — you don’t want to purchase a home and not be able to afford to furnish it.
It all comes back to buying only as much house as you can afford.
The best way to avoid becoming house poor is to know the costs of homeownership and make a budget with your monthly expenses and income. You should be deeply acquainted with both to know how much you can afford. Even if the lender lets you borrow more than you expected (maybe because you have an excellent credit score and a low debt-to-income ratio), don’t take this as a reason to buy a bigger or more expensive home.
Our mortgage calculator is a great starting point for calculating out how much house you can afford. You can play around with different down payments and interest rates to see how your monthly payment changes.
You can also check out today’s mortgage rates here, so you know whether you’re getting the best deal that you can. If not, you can shop around for a different mortgage lender.
There’s no way around this. To avoid becoming house poor, make sure you have enough money saved up. Create an emergency fund that you can draw from in case the unexpected happens so you don’t have to rely on your credit card. A simple way to start is to open a high-yield savings account and make a monthly deposit, however small.
If you bought a house out of your price range, or are experiencing financial hardship, like a permanent change in your household income — it might be best to move. You can buy a smaller home or relocate to a neighborhood with lower home prices. Selling your home before it becomes unaffordable also helps avoid foreclosure.
Renting instead of owning isn’t necessarily a waste of money, despite what you may have heard. If you can’t afford to buy a house in the first place, then you’d be off to a bad start with your investment. Sometimes, owning a house may not be right in your situation, especially if you don't want the responsibilities associated with maintaining a home. Renters don’t have to deal with many of these issues, since they're taken care of by a landlord or management company. (Look at the best cities for renters here.)
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