If living in your home without debt is the best-case scenario and being underwater on your mortgage (owing more than the house is worth) is the worst, "house poor" may be the uncomfortable middle ground. If you find yourself, like many U.S. homeowners, struggling to make ends meet, read on for insight and advice.
"House poor is spending so much of your income on your mortgage, insurance and taxes that you don't have money for repairs and improvements," says real estate broker Cindy Grady-Hamilton. "It can be from buying too much house, a reduction in income from divorce or job loss, not maintaining a savings account for contingencies, or accumulating other debt in addition to the mortgage. It's your debt-to-income ratio that gets you the mortgage, but accumulating more debt once you're in the house can make you house poor," whether from credit card debt, medical bills or unplanned house expenses.
As in all cases of debt, there are two solutions. Reduce expenses or increase income. Popular financial programs help with ideas and approaches. Visit the Crown Financial Ministries (no relation to this feature writer) website for specific mortgage calculators, or Dave Ramsey's financial solutions website for tools that will help you budget effectively both before and after purchasing a home.
"It's very stressful when people are house poor," says Hamilton. The first approach is to sell the current home and buy something more affordable, or even rent for a while. She says one conventional goal is to spend no more than 40 percent of gross income on housing. "But keeping your mortgage, insurance and taxes at 25 to 30 percent gives you more of a cushion."
If you decide to sell, she continues, "recognize your comfort level and look for a home at or below your maximum price range." This may be less than your lender has approved, but it will allow for redecorating, improvements and the unexpected expenses you can always expect as a homeowner. "A good realtor will want your repeat business and should help you stay in your comfort range."
Otherwise, Hamilton says, get a second job, or tighten the budget, reduce spending and focus on building savings and whittling down the mortgage. If refinancing at a lower interest rate is a good option, keep your payments level to build equity faster. And be sure not to skip any payments offered at the loan closing. This simply increases the life of the loan.
The worst thing to do if you become house poor, Hamilton adds, is to take on a second mortgage. "It's not realistic to take on another loan to make repairs and improvements if you're already struggling. You'll just be adding to the problem instead of solving it."
A prospective homeowner's age and life stage, risk tolerance, complete investment portfolio, long-term location plans and other important factors will determine how much house is practical at any given time. But investment professionals agree that overextending the budget to buy or stay in a larger home than is affordable is never a sound investment strategy.