Can You Be House Poor Without Realizing It?

You know all about the “American dream”? A nice house with a nice, modest yard surrounded by a nice, white picket fence. There’s a lot of “nice” in there. It doesn’t always work out that way though does it? Chasing that dream causes some to overextend themselves, and they unintentionally become house poor as a result.

You’ve seen the happy young couple? They just put down 10% or less on their first house (not enough), and their mortgage payment is going to make things tight. But they’re not thinking about that right now. They’re just excited to finally live out their version of the American dream. Little do they know, that their dream is soon to become a nightmare. You see, they’re house poor.

But what exactly is house poor?

My working definition of ‘house poor’ would go something like this. You make decent money, but you can’t afford to do anything with it because your mortgage payment is such a high percentage of your monthly take-home income. And by high, I mean 45% or more.

If that’s you, that a tough situation to be in no matter what your actual numbers are. It’s hard to put food on the table and keep the lights on with that much of your take-home pay going towards the building you live in.

And if you have other debts to pay it’s even harder. You barely have any margin in your monthly budget because of your high mortgage payment.

And if something breaks that you have to pay to get fixed? You just drowned. You probably have little to no emergency fund, and all your money is already spoken for the minute it hits your bank account.

You may wonder how you got here. The answer is that you bought too much house. Just because the bank was willing to loan you the money doesn’t mean you could actually afford the house. You should have run the numbers yourself to see how much of your income was going to be tied up in mortgage payments each month. But you trusted the bank to make your decision for you. Not smart!!

Being House Poor is a Real Thing.

I suspect a former boss of mine was house poor. I don’t know for sure, as that’s something you wouldn’t advertise. Nor would I ask him about it.

But we went to a social event at his house one evening. I couldn’t help but notice the size of the house, and the neighborhood in which he and his family lived. It was certainly an upscale development in our community.

What struck me as odd though, was the lack of furniture inside the house. There were several rooms that were completely empty. Maybe he hadn’t gotten around to furnishing them, or maybe he had other things on which to spend his money. But I suspect his house took up a substantial portion of his income.

He had the nice house, but not enough money for anything else. In different conversations with him, I surmised that money was tight, and his house was to blame.

And what should I do if that’s me?

There are really only three options if you find yourself house poor.

  1. Sell your house, and buy something cheaper. Hopefully, you have enough equity built up to put down a nice down payment on a cheaper house where the mortgage payment is no more than 25% of your take home pay. Maybe you’ll need to go back to renting for a while until you clean up your mess?
  2. Suck it up, and keep the house while you work to get your income up. This might work if you really love the house, and you have room to grow at your job. This is certainly not the easy way out. It will be tough, no question about it.
  3. Refinance the mortgage to a smaller payment. There are only two ways to do this. You can either get a lower interest rate, or increase the term. I would never recommend that you increase the term. Your monthly payment will be lower, but in the end you’ll be paying much more in interest. If you think this is your only option, you can’t afford this house, and you should sell it. I would only recommend a refi if you can get a better interest rate or you can switch to conventional mortgage without PMI or other monthly fees.

No matter what you choose, it’s not going to be fun. But once you work through it, your financial situation will clear up considerably. You’ll have some breathing room to start attacking your goals. And your life will be less stressful.

Final Thoughts

My wife and I are aggressively paying down our mortgage. The only way we are able to that is because our mortgage payment is only 18% or so of our take-home pay. We chose to buy a house much cheaper than the bank told us we could afford. And because of that, we have margin in our monthly budget that gives us flexibility to save towards our other goals . . . without worrying about whether we can make the mortgage payment or not.

If you have yet to buy a house, here’s what you should do. Make sure that your mortgage payment is less than 25% of your monthly take-home pay. If it creeps up toward 30%, you’ll be ok. You’ll just have less margin in your budget. You have to decide if the house is worth it. Because in the end, you have to live in it. And it may become a constant reminder of what you should have done.

Don’t be that guy or girl. Buy a house that you can afford.

How about you? Are you house poor, or did you make a smart decision when you purchased your home?

Let me know about it in the comments. Thanks for reading and sharing.

Author

Chris is the original Cash Dad. He's a father of 3 and a mechanical engineer by trade.

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