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When it comes to discussing the things that hold most people back financially, the first few things that come to mind are lack of income, credit card debt, car payments, and student loans. But it might surprise people to learn that I would add your home right up there with those because most people consider a home an investment and the mortgage on it is “good debt.” But being house poor is a real thing and turns the dream of home ownership into a disaster.
The definition of house poor is essentially making a good income that should allow you to live comfortably, but you aren’t able to because your mortgage payment is too much of your income. The house then takes up too much of your life and instead of owning your home, your home owns you. This can become very frustrating and impact not only your finances, but your quality of life.
It’s an easy trap to fall into. You start to look for houses and you find something just out of your price range. But you tell yourself that “you’ll figure it out” for now and once you get that big raise you’ll be fine. Or you convince yourself that you can afford it because it is a good investment or it is your “dream home.” But before you know it your mortgage is 40% or more of your income and that raise never comes through, one of you loses your job, or something breaks in the home and you need to replace it.
To protect yourself against becoming house poor, I recommend that your mortgage payment is no more than 30% of your monthly income and preferably at a term of no more than 20 years. Now, this is really conservative and a lot less than what the bank will let you borrow. But having this limit will allow you to have some breathing room in your budget to do the other things that you choose.
I also recommend that you become debt free before purchasing a home. Keeping up with all the maintenance and paying the mortgage is enough even when you don’t have debt. But when you have other monthly obligations besides your mortgage, it adds stress to your life. Yes, this might mean having to wait a year or two before getting a home, but it also means you’re less likely to end up house poor.
But what if you are already have a home and are house poor? If this is your current situation I would recommend seriously considering selling your home, if you aren’t underwater. I know that’s a hard thing to stomach and it’s not my first choice. However, would you rather have your life back and actually be able have some freedom in your budget or hang on to a house?
Have you ever felt like your home owns you and that you are putting too much time, energy, and money into it? Do you wish you had the freedom to do other things with your cash? If this describes you, you might be house poor. Or if you are getting ready to buy a house, resist the temptation to stretch your budget and instead buy a home that you can comfortably afford. It will allow you to look back at your home buying experience with fondness. Remember, it’s just a house, so don’t let it control your life.