To be 'house poor' means that the costs of paying for, and maintaining, your home take up such a large percentage of your income that you don't have enough money left to cover other expenses. As grim as that sounds, many people choose to be 'house poor' because they believe that it's wise to purchase the most expensive home that they can afford, regardless of how far they have to stretch. Their theory is that, over time, their income will increase as a result of raises and promotions, making that expensive mortgage a smaller and smaller percentage of their monthly expenses.
Clearly, those who choose to be 'house poor' have their own set personal criteria determining what kind of home they can afford. (To learn more about the home costs, see To Rent Or Buy? The Financial Issues - Part 1, Home-Equity Loans: The Costs and The Home-Equity Loan: What It Is And How It Works.)
The decision of whether or not to be 'house poor' is largely a matter of personal choice - since getting approved for a mortgage doesn't mean that you can actually afford the payments. So, in addition to the lender's criteria, consider the following issues and set some decisive factors of your own:
When contemplating your ability to pay a mortgage, ask yourself the following questions: Are you relying on two incomes just to pay the bills? Is your job stable? Can you easily find another job that pays the same, or better, wages if you should lose your current job?
The calculation of your back-end-ratio will include most of your current debt expenses, but what about other expenses that you haven't generated yet? Will you have kids in college someday? Do you have plans to buy a new car, truck or boat? Does your family enjoy a yearly vacation?
Are you willing to change your lifestyle to get the house you want? If fewer trips to the mall and a little tightening of the budget doesn't bother you, applying a higher back-end-ratio might work out fine. If you can't live without that double mocha cappuccino every morning, you might want to play it safe, and take a more conservative approach to that mortgage payment.
No two people have the same personality, regardless of their income. Some people can sleep soundly at night knowing that they owe $5,000 per month for the next 30 years, while others fret over a payment half that size. The prospect of refinancing the house in order to afford payments on a new car would drive some people crazy while not worrying others at all. If you keep your personality in mind when shopping for a new house, you are likely to be pleased with your purchase.
Beyond the Mortgage
Buying a new home is an exciting adventure. But many prospective homeowners, caught up in the thrill of searching for their dream house, forget to pause and consider the financial responsibilities of homeownership. While the mortgage is certainly the largest and most visible cost associated with a home, there are a host of additional expenses, some of which don't go away even after the mortgage is paid off. Smart shoppers would do well to keep the following items in mind: