How To Avoid Being House Poor
(and still end up with the house you really want)

First off, I would never pretend to be able to tell you how much you can afford to spend on your house payment. Just like I wouldn't try to tell you what kind of car to drive. This is a decision that you need to make on your own.

Too many financial consultants and mortgage people with their charts that define what a person will "qualify for" end up getting people into trouble as they max out what a person can "afford." Don't let yourself get caught in this situation.

These are only GUIDELINES!

Can you imagine having to go to a financial consultant to learn that... "With your income level, you get to drive the blue car and you will get the 1200 square foot home with the 2 car garage." You would never even consider doing that! In the same way you should not consider the amount you can qualify for to get a mortgage as anything more than just that, a guideline.

The beauty of living in America and here in Michigan is that we get to make our own choices about things like this. You can't drive to work and tell how much everyone makes just by looking at their car or their house.

These are the Upper Limit
These guidelines will push you to the limit if you are not careful. Unfortunately, too many people have a beautiful house, but have become what they call "house-poor" because they forgot that little term upper limit. They have assumed that this is an affordable level, not an upper limit only to learn later exactly what upper limit really means.

As long as you will take the time to estimate how much you like to spend on entertainment and housing and such your consultant will be able to help you work through the options and explain the guidelines used by the lenders.

Do a little homework first and you won't put yourself into a house payment that will make you "house-poor." I've seen it happen time and again. Every homeowner seems to understand the idea that owning a home is better than renting a home because they are building up equity as the home appreciates in value.

However, many homebuyers, especially first time buyers, get themselves into unmanageable situations than there should be. Maybe this is part of the "I want it now" generation, but if more couples took their time getting to the house they really wanted, they could have it all.

If you understand that getting into that dream home may be a 2 or 3 step process, you will have a much better life in the meantime. Again, I don't pretend to be able to know what a couple can "afford", but I sure can tell when a couple if pushing the limits.

Very often, there is a better way . . .

About the Guidelines
When you hear that you can afford a certain priced home and mortgage payment, you need to understand that the bank has looked at your finances and used the figure of 28% of your before tax income to come up with that number.

Let's take a minute to think about what that really means. To use round numbers we will take a couple that makes $100,000 to give you an example.

This couple is making $9,333 a month in income.

28% of $100,000 is $28,000 a year for the house payment, the taxes and the insurance.
This is a total of $2,333 a month.

This would leave this couple $7,000 a month for car payments, utilities, credit card payments, utilities, gas for the cars, food, entertainment, savings and income taxes.

First off, before we even talk an expenses, the taxes for most couples is in the 25%-30% range of their income. 30% of $100,000 is $30,000 or $2500 a month that goes to the government. This chart will give you an idea of what the bank thinks you can afford!

This is just a rough example, but it will help you make your own chart. I have taken average numbers to come up with these figures to give you an idea of what a bank may expect you to be spending when they tell you what you can afford.

Type of Expense	Amount
Income Taxes	$2,500
2 car payments at $400 per month (plus insurance of $150 per month)	$950
Credit Card Payments	$250
Utilities (phone $100, electric $100, home gas $100, cable tv $50, cell phone $50)	$400
Gas for Cars (2 tanks of gas a week at $25 a tank, or $50 a week)	$200
Food (just 2 people! $100 per week)	$400
Savings (10% of income....)	$900
Total	$5,600

So, for this perfect couple they will have $1400 a month or $350 a week leftover for other expenses that may come up or that they have.

Now, what about couple with 2 kids? That $350 a week just disappeared, didn't it? More food, higher utilities, the car broke, we need a new lawn mower, oh we want to put away for a vacation....on and on.

Now, the type of expenses you will have are going to be different for the next person, but if you sit down with your banker and let them know things like. "We like to take a vacation every year and they cost $X" the banker can help you plan and be comfortable, not house poor.

We all know instinctively that what we have been given is a guideline, but we instinctively trust that person to have given us a reasonable guideline, not an upper limit. Many mortgage people seem to forget this because they have been given these charts to show an upper limit for an average couple.

Personally, I have yet to meet anyone "average," have you?


Avoiding Being House-Poor
You may fall into a slightly different scenario, but here's a story of two couples and how the couple who planned not to be house poor can get the best of both worlds..

These two couples both fall in love with a $250,000 house, but the $1,663 payments are beyond their budget. Both couples have saved $20,000 for a downpayment.

Couple #1 says that's the house they really want, so they say they will cut corners in other places just to afford this home and will hear nothing about any advice.

The end result? The have the house they want, but now it's a stretch to go out to dinner and a movie. Or maybe they don't get the car they really wanted in order to get that house. That is what I call house poor.

How can you avoid this scenario and still have that beautiful house, drive the car you enjoy and still have those evenings out? That is the true beauty of living in the USA. You can have it all, if you follow a plan.

We've all heard the old saying, "The rich get richer . . ." I believe that a good plan will allow all of us to get richer.

Meanwhile, couple #2 does a little homework. They sit down and figure out their expenses and that what they really want to spend on their house payment is $1,200, not $1,663. They could pull off the extra $463 per month, but there is a better way.

A $1,200 payment per month for a 30 year fixed mortgage means the amount of their mortgage would be about $180,000. This means what they really should buy is a $200,000 home.

Here is one way I might show this couple to get that $250,000 home.

I suggest they buy the less expensive home and work their way up to the home they really want. Between the appreciation in value of the home and a little savings, they can be in the dream home in 5 years with a two-step process by taking advantage of different loan programs without stretching and still enjoying their life.

Here's how it works. First off, I suggest they take advantage of a hybrid ARM program. Let's say at today's rates, a 30 year fixed mortgage is at about 7%, while a 5 year ARM is at about 6%.

What does this mean? The couple can now buy a $220,000 home the first time with their payment still at $1200. Plus, with the lower interest rate, more of their payment goes toward the principle and builds up equity faster. In fact, this gains this couple over $3,400 in equity just by taking out a mortgage with the program that fits their situation..

Next, let's say that this house appreciates at an average of 5% per year. Just the difference in being able to buy a little more expensive home will earn couple #2 an additional $6,500 in equity.

Let's put this in a chart so you can see the advantages.

Cost of 1st Home	200,000	220,000
Downpayment	20,000	20,000
Mortgage	180,000	200,000
Principle & Interest Payment	$1200	$1200
Amount owed after 5 years	169,437	186,108
Value of Home in 5 years	255,256	280,781
Equity in home	85,819	94,673

Wow! In just 5 years, couple #2 has $95,000 for the downpayment on their second home, plus they have not spent that $463 per month that couple #1 did. Over 5 years, that is $27,780 of extra disposable income (or savings for a bigger downpayment) in their pockets.

Guess which home they can afford?

The $250,000 home has also appreciated over the 5 years and now would cost about $319,000. With a $95,000 downpayment and increases in their salaries, couple #2 can buy that dream home without stretching. Their new mortgage is $225,000 (still less that that 1st couple started with) and they will have payments only slightly larger than they were making!

Now, of course, we need to pu tin all the disclaimers about "interest rates may be higher" a couple may not be making more money, etc, etc. But guess what? This couple again has a choice while the other couple is still just getting along.

Do I need to tell you which is the happier couple or which couple doesn't argue about money or which couple is taking vacations every year?

A little planning can make any couple be one of the "rich get richer" crowd. Do a little homework, find that banker you can trust to sit down and work with you and make a good decision.

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More Articles on Mortgage Deals

Getting an Accurate Mortgage Quote

Tips for A Stress Free Mortgage

Items that determine your mortgage rate

Is it a scam or For Real? Mortgage Broker Tricks

Mortgage Broker or Bank - which is better for you?

Errors People Make
Don't be this guy!

Avoid becoming House Poor - Ways to still get the home you really want



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