Don’t Be House Poor

BY CRAIG KIRKLAND, EVP/Director of Retail Banking, Nevada State Bank

The foundation of the American dream is home ownership. Part of the promise of America is that anyone can come here and work hard and build wealth. In doing so, we eventually become part of the banking mainstream when we access credit to purchase a home to call our own. 

The low cost of credit in recent years has given borrowers more purchasing power, which in turn has helped drive up demand and housing prices. Prospective homebuyers want to know how much house they can afford. Lenders typically look for 28 percent/36 percent debt-to-income ratios when evaluating how much to lend on a mortgage. That means no more than 28 percent of your gross monthly income should go toward your housing expense. That’s called the front-end ratio, whereas the 36 percent represents the back-end ratio. That means your total monthly debt obligations, (generally payments on your credit report) including housing, should not exceed 36 percent of your gross monthly income. 

Being “house poor” is when a disproportionate amount of your income is going toward your housing expense. Pay special attention to the 36 percent back-end ratio. Maybe when you bought your house, you were at or near the 28 percent guideline, but after the close, you bought a new car. That new car payment could put you over the 36 percent back-end guideline. 

It’s not very difficult to get overextended. While you may have locked in a great fixed-rate mortgage, home-related expenses will continue to rise, including things like HOA fees, taxes, insurance, utilities, etc. Add in today’s higher gas prices and across-the-board higher prices due to inflation, and despite being disciplined financially, your cash flow will get tighter and tighter if your income does not go up. 

So, what are some of your options if you are house poor? 

• Refinance into a lower rate (but be careful not to extend your debt much longer than the original loan term) 
• Sell your home and consider a lower-cost living arrangement 
• Find other or additional employment to bring in more money monthly 
• Consolidate and pay off high-interest debt, thus reducing your monthly payment obligation 
• Consider a home equity loan if it allows you to pay off high-interest revolving debt, but be disciplined not to spend those funds on other things. 

Beware of getting into more house than you can afford and then be careful not to take on additional debt on top of your house payment. If you cannot afford it, don’t do it! Be mindful of the 28/36 percent lender guidelines. If you are already overextended, consider taking steps to alleviate your condition by either increasing cash inflows and/or reducing outflows.