SALT LAKE CITY — In 1841 Ralph Waldo Emerson noted in a prominent lecture that “no man acquires property without acquiring with it a little arithmetic also.” Lenders would promote that the purchase of a home is simply a calculation. They emphasize the following formulas:

Front-end ratio = PITI / Monthly gross income

Back-end ratio = (PITI + debt expense) / Monthly gross income

Note: PITI = Monthly payment of principal, interest, property taxes and insurance

It is generally accepted that a borrower’s front-end ratio should be less than 28 percent and their back-end ratio should be less than 36 percent. These are lender’s requirements to qualify for a loan.

The reality is that these measures are insufficient for an individual or family seeking a new home.

When purchasing our first home, I recall meeting with the lender and discussing these very ratios. She said that we could qualify for the home we wanted and would start drawing up the papers. My wife and I were caught up in the moment and very excited.

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I called my dad, who had purchased many homes, to make sure I was doing it right. His wise council was, “Just don’t be house poor.” I didn’t know exactly what he was suggesting, but it sounded like he was raining on my parade.

I asked a follow-up question and was properly introduced to what is a generally accepted home ownership concept. Investopedia.com describes being house poor as "a situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations."

The conversation and preparation that followed my understanding of being house poor suggested setting a financial plan for the general use of my income for years to come.

Looking back on those events, it is clear that although we loved that home, we probably bought more house than needed for our small family. Although not severely house poor, we did forgo vacations, new cars, etc. until we were able to balance all those other important activities and items into our budget.

Now having purchased many homes over the years and acquiring some more wisdom, I feel comfortable sharing the following ideas to avoid being enslaved by home ownership:

• Know your goals. Know who you are and what you enjoy doing.
• Know the hidden costs of home ownership. Talk to those with experience in the area you are looking. If moving to a new area, don’t buy until you have established some trusted contacts.
• Be realistic. Know best-case and worst-case scenarios for timing of income growth and even family growth.
• Do your homework. Before engaging emotionally with a home or even looking around, know what you can afford and only shop within those parameters. Shop lenders and rates to ensure the best deals and pick a great realtor.
• Do the math. As Emerson said, there is arithmetic involved. When calculating your ratios, include your savings plan, charitable contributions and other specific goals.
• Learn from the past. Be accountable for your own mistakes, but also strive to learn from others' mistakes.

We toured the home anyway and fell in love with it. We took our parents to it and showed our kids. Then, to our credit, while walking through it one more time my wife and I remembered our goals and realized this house would be a terrible mistake. Our realtor couldn’t believe it. We later found the perfect home (price, size, location, everything) for us and were relieved that we escaped making a terrible error.

If you can set appropriate goals and can wisely consider the arithmetic involved with home buying, you too can avoid being house poor and reap the benefits and blessings of the American Dream.

Matt Wheelwright is an MBA student at Brigham Young University.

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