Just because you’re a young single doesn’t mean you have to give up your dream of owning your own home. Here are some steps you might take to acquire a new house, plus a few other financial tips.
1. Figure out how much house you can afford. A general rule is to look for a house two and a half times your annual income. Mortgage lenders typically use three tests:
- The monthly house payment, including property taxes and insurance should not exceed 26 percent of gross monthly income;
- All monthly debt payments plus the house payment should be less than 38 percent of gross monthly income; and
- The homebuyer should have two to three months’ worth of payments in an emergency fund. Using these guidelines, let’s say your annual income is $26,000. This would qualify you for a $60,000 mortgage. The monthly principal and interest payment would be about $400 a month; taxes and insurance would add another $100 to $150, depending on the area. If you put less than 20 percent down, you’ll have to pay private mortgage insurance as well, for a total monthly payment of about $575.
2. Know your own cash flow. Mortgage lenders may qualify you for a bigger house than you feel comfortable with because they concentrate on one thing: your ability to pay back the loan.
It’s up to you to make sure you can make the monthly house payment, pay your general expenses and any student loan payments, and still look out for your long-term goals such as retirement. Track your spending for several months so you’ll know how much house really fits in your budget.
3. Figure in taxes. Houses are often touted as great tax breaks because mortgage interest and property taxes are deductible, but that is true only if you itemize.
4. Save wisely. Let’s assume you decide you afford a $64,000 house and would like to put 5 percent, or $3,200, down. With closing costs and an emergency cushion you’ll need to save about $5,000. If you invest $100 a month in a conservative no-load mutual fund, you should reach your $5,000 goal in five years. Although it would be nice to go for maximum growth, the stock market is too risky if you’ll need the money in a few years.
With a five-year time frame, the best place to invest the money is in a mutual fund within a Roth IRA. After five years, first-time homebuyers can pull out all their initial investments plus all the earnings (up to $10,000) tax-free.
5. Consider alternatives. Five years may be too long to wait or $64,000 may not buy your dream house. If the numbers just don’t add up, explore less traditional paths to home ownership. A relative may be willing to invest in your home through a "shared-equity" arrangement. In some communities, two or three families have bought a large home together, divvying up childcare and household chores.
Before you plunk down the down payment, make sure the rest of your financial picture is sound. Inspect your safety net: do you have term life insurance, and a will naming who will inherit your belongings?
Finally, don’t neglect your own retirement fund. It may sound selfish to fund your own future first, but remember that houses can be obtained with loans or other assistance. There’s no such thing as a scholarship for retirement.
Source: InCharge Institute of America, Inc.
© 2008, Young Money Media, LLC. All rights reserved.
Are You a First-Time Home Buyer?
This list of Links contains website addresses for organizations that offer advice and assistance on various aspects of finding, buying, and maintaining a home.