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
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
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
|2 car payments at
$400 per month (plus insurance of $150 per month)
|Credit Card Payments
$100, electric $100, home gas $100, cable tv $50, cell phone $50)
|Gas for Cars (2 tanks
of gas a week at $25 a tank, or $50 a week)
|Food (just 2 people!
$100 per week)
|Savings (10% of income....)
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
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
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
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
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.
of 1st Home
& Interest Payment
owed after 5 years
of Home in 5 years
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"
Do a little homework, find that banker you can trust to sit down and work
with you and make a good decision.
is brought to you courtesy of Scott Campbell of
Telegraph Rd, Suite 1801
Bingham Farms, MI 48025
Residential Mortgage Lender in
guide to Home Mortgage Loan Advice & Education for refinancing and purchasing
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