What Is House Poor?

Buying a house could be a great financial decision. You typically build equity as you pay down your mortgage. If your house goes up in value, this also generally builds equity. In fact, Harvard researchers found that growth in property values plus forced savings from mortgage payments helped homeowners attain 20 to 40 times as much wealth as renters.

Unfortunately, spending too much money on your home could leave you house poor—with too much house and not enough money for emergencies, retirement, or your lifestyle. In fact, you could even end up needing debt relief if you make a decision that causes you to be house poor.

What Does It Mean to Be House Poor?

Being house poor means that your housing payments are more than you can comfortably afford. You're considered house poor if you're using so much of your monthly income on housing and related costs that you have very little left over for anything else.

People who are house poor may even be rich—on paper. They own a valuable home. Unfortunately, they lack liquidity, which is money available for them to spend and save. 

Being house poor can put you at financial risk. Because you don't have a lot of extra money, it may be hard for you to save for emergencies or for the future. Without an emergency fund, unexpected expenses could lead you deeper into debt.

If you are house poor and can barely afford your mortgage payments, any loss in income could lead to you falling behind on your debts. That could even put you at risk of foreclosure.  If anything goes wrong, like a job loss or even having your hours cut, you may not be able to keep up with your mortgage or other bills.

Key Signs That You're House Poor

It's not always easy to recognize when you're house poor. Here are a few key signs that you may have bought a home that is too expensive for you: 

• More than 30% of your income is going to housing costs. Affordable housing is generally defined as costing less than 30% of your gross (before tax) income. This means if your monthly income is $5,000, you would spend $1,500 or less on housing, including your mortgage, utilities, property taxes, and homeowners insurance. 

• You worry about affording your mortgage payment. When making your payment feels like a stretch each month, this is often a sign you're in over your head. You shouldn't feel like you have to struggle to afford your house. 

• You can't accomplish other goals. If you can't save for retirement or for any other goals because every spare dollar is going to your house, this is a sign you have taken on too much. You need to have some money free to do more than just pay for your house. 

How to Avoid Becoming House Poor

Avoiding becoming house poor is simple, though not necessarily easy: You can do it by only taking on as much housing debt as you can comfortably afford.

Mortgage lenders often allow borrowers to spend more than 30% of their gross income on their mortgages, property taxes, and insurance. And lenders don't even consider utilities. 

Keeping housing costs below 30% of your gross income is a good idea, even if the bank will lend you more. However, this may not be enough to prevent you from becoming house poor if your other obligations are higher than usual.

The key is to budget before you borrow. Take a look at your current housing expenses and compare that total to the mortgage you're considering. If the new payment would be higher than your current costs, figure out where the extra money will come from. What will you give up—potenitally for good? After all, you might have your mortgage for the next 30 years. 

Once you have a budget that works now—and have thought ahead to the future—you can determine what's workable for housing payments. You may find, for example, that buying the house you want will be too expensive after you start a business or send a child to college. 

Make sure your mortgage fits into the life you want to lead. You can even practice making the payments. If your rent is $1,000 a month, and your mortgage would be $1,400, try putting the extra $400 into savings for six months. See how it feels to live on less and make sure it's comfortable. 

What to Do If You're House Poor

If you've already purchased a house that costs too much, you have a few options:

• Increase your income: Can you find a better job, add a side gig or train for a higher-paying career?

• Refinance your mortgage: If you can refinance to a lower interest rate or drop your payment with a longer term, you could reduce monthly costs. Be aware that choosing a longer loan term increases the total costs of repayment. 

• Find a roommate or renter: Divide and conquer your costs with a roommate, long-term tenant, or Airbnb income. 

• Reduce other debt: Pay off high-interest debt to free up more income for your housing payments. 

• Pay down your home loan: First, find out if your lender will allow you to recast your home loan. If so, you could make a lump sum payment to reduce the balance, then the lender might calculate a new, lower payment for you.

• Sell your home: You could downsize to a cheaper house that fits your budget. And if your home has increased in value, you might be able to pay off some other bills.

Taking these steps could help you minimize the risk that being house poor won't make your financial life harder for years to come.