Your First Home

Know if you can afford to buy your first house!

By Gary Foreman


If you are thinking of buying your first house, it’s always better to find out if you can afford one before you begin shopping seriously. With relatively low mortgage rates and home prices in flux, many people are wondering if now is the time to buy their first home.


Do You Have Enough Savings?

How much would it take for you to get into a house? Affording one means more than having enough cash for a down-payment. Initially, you will need enough savings to cover a down-payment, the closing costs and some initial expenses like utility deposits.


You also need some cash for some of the expenses that come with a first home -- things such as a lawnmower, a ladder and basic lawn implements. Home centers love first-time homeowners!


Naturally, the down-payment is the biggest item. It usually runs from 5 to 20 percent of the price of the house. Expect to pay higher interest rates on your mortgage if your down-payment is lower. 


Many mortgages have fees or “points” associated with them. It’s not unusual for that to add 2 percent to the amount you will need at closing.


Closing Costs

Closing costs vary by locale and by what you negotiate in the contract. You can use 3 percent as a guesstimate, but that could be off by as much as 2 percent depending on the circumstances of the contract.


Some regions customarily allocate more expenses to the buyer than other places. Ask someone in the local real estate industry what costs typically does the buyer pay.


A few quick calls to the utility companies should give you an idea of any required deposits or set-up charges.


Can You Afford Ongoing Expenses?

Most experts agree that housing expenses shouldn't exceed 35 percent of your after-tax, spendable income. You can calculate your annual after-tax income using payroll check information.


Unless you got a large IRS refund or had to write a large check last April, you probably can use the net figure from your paycheck. All you need to do is figure out how many paychecks you will get in a year and then multiply your after-tax pay by that number.


Another benchmark that some advisers use is to total all debts and then compare that to income. The reason is simple. The part of your paycheck already committed to car payments or credit card minimums is not available to pay the mortgage.


Typically, experts suggest keeping total debt payments to less than 40 percent of income. If your estimate of a mortgage added to you existing payments exceeds 40 percent, you might be wise to try to pay down some debt before you begin house hunting.