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InvestorGuide University > Subject: Real Estate > Avoid Becoming House Poor

Buying or Selling a House
Avoid Becoming House Poor
by Jeff Goldman (Write for us!)
(Click on the links within the article to get definition of that word)

Being house poor has little to do with the value of your home. You could live in a palatial estate worth $4 million, and you'd still be considered house poor if your home absorbs a disproportionate share of your income. Generally, you're considered house poor if you spend too much on your house payments and home maintenance. But what's too much?

While there are some rules of thumb by which lenders gauge the reasonableness of your housing costs (see sidebar), the valuation of your property and the size of your mortgage payment are only part of the picture.

You're considered house poor if your housing costs prevent you from:

Saving the equivalent of 3 to 6 months income in an emergency cash reserve account
Setting money aside for your retirement
Accumulating a diversified investment portfolio
Budgeting for other life events, such as paying for your child's education
Buying the furniture you need for your new home, or eating anywhere other than in your new kitchen

If you're thinking of buying a home, do some early planning to avoid becoming house poor. Meet with a financial professional who can help you clarify your goals and formulate a strategy for meeting them. Review your budget with an eye toward trimming discretionary expenses and saving more toward your goals.

As you go through the mortgage preapproval process, see how much you qualify for on the basis of just your normal yearly income, without considering overtime, bonuses, part-time employment, or alimony or child support you receive. That way, although you may not qualify for as large a mortgage as you would otherwise, you'll be in a better position to afford the house you buy, and you'll avoid the added stress of constantly juggling your financial responsibilities.

Be very cautious about using creative financing arrangements, such as interest-only mortgages or optional ARMs, to buy more house than you can otherwise afford. If home valuation increases cool off and interest rates heat up, you could find yourself caught between the rock of making the mortgage payment each month and the hard place of not being able to sell the house for enough to cover repaying the loan that secures it. You don't want to lose your home to foreclosure because you bit off more now than you can later chew.

Finally, resist the urge to buy a home with an eye toward making a killing in a few years on its anticipated appreciated value. Think of your home as a necessity--a place to live -- rather than as a speculative investment.