Understanding 'House Poor' and How to Avoid It

Gregg Camp of Property in Santa Cruz had this to say about the fundamentals of being house-broke:

Understanding 'House Poor' and How to Avoid It"House broke, or poor is a term used to describe homeowners who can just barely afford the regular expenses associated with their residence. It usually occurs when homeowners have a high mortgage payment relative to their income, cash flow, and net worth, or when little money is left over after paying their mortgage and other ongoing home expenses. The homeownership costs will squeeze out everything else. Earners at any income level can be house-poor if they spend more on their home than their salary can cover." 

What Does it Mean to be House Poor?

Being house-poor means you're spending an out-of-proportion amount of your income on your home, typically at the expense of other needs. Oftentimes, it is mainly the mortgage payment that causes this. But other costs can have an impact as well, including:

All of the above in conjunction with your mortgage can leave you perpetually short of funds for anything else. The status is known as "house rich, cash poor" or "land rich, cash poor."

How to Avoid Becoming House Poor

Your debt-to-income ratio, or DTI, can help you determine if you're house-poor by measuring your earnings versus your obligations. Your DTI is your monthly debt payments divided by your income. There are two types:

  • Front-end DTI is the percentage of your major housing costs made up of your monthly gross income. To get this, add up your home expenses, divide by how much you earn each month before taxes, and multiply the result by 100.
  • Back-end DTI is similar, but it takes into account all your debts (not just housing), comparing all of your minimum monthly payments to your monthly income.

Lenders will usually prefer a front-end DTI of no more than 28% and a back-end DTI of 36%. Additional ways to avoid becoming house-poor include:

  • Budget in Advance: Before buying a home, decide how much you can afford to spend on it each month. Apply the 28% rule: What is 28% of your monthly income? That's the amount that you should not exceed in house-related expenditures.
  • Don't Over-Finance: Just because you get pre-approved for a particular amount does not mean you need to spend it. Get the mortgage you need, not the mortgage you can qualify for–meaning, don't be tempted into spending more money than you're comfortable with just because a lender approves you for more.
  • Be Realistic: Your income won't grow into the house–base your house-hunting not on your hopes, but on what you have now.

How to Get Out of Being House Poor

If you're feeling pinched by your house-broken status, consider these options.

  • Consolidate Debt: Debt consolidation can help you lower your monthly payments on various bills and credit card balances, freeing up some funds. But you may end up paying a larger total amount over the life of the debt payments.
  • Refinance Your Mortgage: If interest rates have fallen or you're in a position to qualify for a better rate, consider swapping out your home loan for another, more advantageous one.
  • Lose the PMI: If you have more than 20% equity in your home, you can appeal to suspend your private mortgage insurance payments.
  • Borrow–Carefully: While you don't want to get into more debt, if a short-term loan or home equity loan can get you over a hump, though be advised, tapping into your home's worth can complicate things if you decide to put your house up for sale.
  • Downsize: If all else fails, consider moving to a smaller home, or a more affordable neighborhood.

Bottom Line

Being house-poor happens for many reasons, from property taxes to private mortgage insurance, and added utility bills. Avoiding becoming house-poor is a no-brainer, including budgeting in advance and keeping yourself from over-financing. Let the professionals at Rex Edwards Jr., Broker guide you in finding your dream home in the many beautiful neighborhoods of New Braunfels, TX today!

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