What is ‘house broke,’ and how can I avoid it?

House broke, also known as house 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 or net worth, or when they have little money leftover after paying their mortgage and other ongoing home expenses. The homeownership costs squeeze out everything else.

Earners at any income level can be house broke, if they’re spending more on their home than their salary can comfortably cover. Here’s how to tell if you are, how it happens and what you can do about it.

Rising debt and home costs data

Americans across the country grapple with the challenge of being house broke.

• More than a quarter of homeowners in the United States — 27.4 percent — are house poor, according to a June 2023 study by Chamber of Commerce.
• 3 percent of Americans say that buying more home than they can afford is their biggest financial regret, according to a recent Bankrate survey.
• The same survey shows that 48 percent of Americans say that their financial stress has increased since this time last year.
• In Bankrate’s recent financial security survey, 41 percent of homeowners with regrets say that maintenance and “hidden” costs are more than they expected.
• The same survey shows that 73 percent of aspiring homeowners cite affordability as their biggest obstacle.

What does it mean to be house poor or house broke?

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. Often, it’s mainly the mortgage payment that causes this. But other costs can have an impact as well, including:

• Property taxes
• Private mortgage insurance or FHA mortgage insurance premiums
• HOA fees or monthly maintenance/common charges
• Utility bills
• Regular upkeep expenses

All of these things in conjunction with your mortgage can leave you perpetually short of funds for anything else. In fact, the status is also known as “house rich, cash poor” or “land rich, cash poor.”

“In pricey markets and for young renters and homebuyers, that may seem impossibly constraining,” McBride says. “Those with steadily rising incomes may feel comfortable going above that threshold with the belief that their rising incomes will allow them to ‘grow into’ the payments in a year or two — but this is not without risk, so tread carefully.”

Feeling constantly strapped for cash is one way to know if you’re house poor, but there are more precise ways to determine whether you’re spending too much on housing. You can begin by examining your budget to develop an understanding of how much you earn and owe each month.

Start with your income. That’s the salary you earn from your job, in addition to any other income you may receive, such as from investments, gifts or grants.

Next, look at your housing costs: your monthly mortgage payments (including mortgage insurance, if any), homeowners association dues (if any) and property taxes. You’ll also have to consider what you pay in homeowners insurance premiums, utility bills and regular maintenance and upkeep.

Once you know your total housing outlay, subtract that from your total income to see what’s leftover. There should be enough money to cover bills and other living expenses, including food, transportation and entertainment. You should also have some money available to set aside for a rainy day and long-term projects like retirement or college.

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 your major housing costs make up of your monthly gross income. To get it, add up your home expenses, divide by how much you earn each month before taxes, and multiply the result by 100. So if your monthly housing costs run to $3,000 and your gross income is $7,000, your DTI is 42.8 percent.
• Back-end DTI is similar, but it takes into account all your debts (not just housing), comparing all of your minimum monthly payments (car loans, student loans, credit cards, etc.) to your monthly income.

Lenders usually prefer a front-end DTI of no more than 28 percent and a back-end DTI of 36 percent — often referred to as the 28/36 rule. In some high-cost areas, they may allow the ratios to be greater. Following these guidelines prior to purchasing a home can help you avoid the possibility of becoming house poor.

Odds are that if you’ve applied for financing to buy a home, the lender has already run these calculations to determine whether you qualify for a mortgage, and for how much — a way to guard against your becoming house poor in advance. A lender who lets you exceed the 28 percent PITI ratio may not be doing you any favors.

Some 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 percent rule: What is 28 percent 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 preapproved for a particular amount does not mean you need to spend it all. Get the mortgage you actually 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: Don’t buy on the assumption that your income will grow into the house — base your house-hunting not on your hopes, but on what you have now. If you can’t afford a $1 million home, then you can’t. There’s nothing wrong with that.

How rising debt and diminishing savings impact homeowners

Americans are dealing with an increased amount of financial stress, much of which is linked to record levels of inflation recently. Inflation has cooled significantly from its peak of 9.1 percent last June, but it’s still a major factor impacting everyday cost of living expenses, ranging from food to gas to housing. In fact, the “shelter” component of the June Consumer Price Index (CPI) report accounts for more than 70 percent of the all-items increase.

This challenge is compounded by the fact that a majority of Americans — 55 percent, according to a Bankrate report — say their wages have not kept up with the rise in household expenses.

All of these factors create a perfect storm in which many Americans are unable to set aside money in savings. In fact, 68 percent of Americans say they are saving less for emergencies because of inflation. When emergencies arise, you sink further into debt, leaving less money available for housing-related expenses and needs.

How to get out of being house poor

If you’re feeling pinched by your house broke 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. A general rule of thumb is that you should reduce your interest rate by at least a quarter-point and stay in the house five more years to make the costs of the switch worthwhile.
• Lose the PMI: If you have more than 20 percent 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, consider it. Be advised, though: Tapping into your home’s worth can complicate things if you decide to put your house up for sale.
• Boost your income: Is it possible to find a second job, sell some of your possessions or get a raise or a better-paying position? You might also consider taking on a side hustle, like hosting Airbnb guests.
• Trim discretionary spending: This would mean decreasing spending on activities like dining out, travel and entertainment. At the very least, draw up a detailed budget to see where you can cut back. For example, maybe you could mow the lawn yourself instead of paying a service to do it.
• Downsize: If all else fails, consider moving to a smaller home, or a more affordable neighborhood.

FAQs

• Is it bad to be house poor?

  Being house poor is a precarious situation that’s certainly less than ideal. Paying too much for housing impacts your ability to save for retirement, pay down debt, cover the cost of emergencies or even simply pay your daily expenses.
  

• How can you get out of being house poor?

  There are several ways to climb out of being house poor. If increasing your income is not an option, try trimming your spending on non-essential expenses like travel and entertainment. Consolidating your debt can help you lower your monthly payments as well. And if you have more than 20 percent equity in your home but are still paying private mortgage insurance, ask your provider about canceling those payments.
  

• How do rising home prices impact homeowners?

  The more you pay for a home, the more money you’ll likely have to borrow for a mortgage — and that results in higher monthly payments over the life of the loan. This can stretch household budgets to the limit, leaving little money leftover for other needs and rendering you house poor, even if you earn a good salary.