When is the best time to buy a first home?

Question: We want to buy a first home. We have a joint income of $80,000 a year and no debts of any kind. A loan officer says with $25,000 for the down payment and closing costs we could get a $250,000 mortgage. We have the cash, but our problem is the monthly cost: $2,000 – a figure made high by mortgage insurance and very steep flood insurance premiums (as much as $5,000 a year because of where we live). Is now the time for us to buy a home?

Answer: You get tremendous marks for saving money – that $25,000 up front – plus you have no debts. That’s terrific. You no doubt have a very high credit score for the simple reason that you have a solid income, savings and no payments to miss.

You earn $80,000 a year. That’s $6,666 a month. Less taxes and Social Security you bring home perhaps $4,650 in cash per month. The $2,000 payment is around 30 percent of $6,666 per month, but it’s nearly 43 percent of your spendable cash income. The monthly mortgage payment plus utilities – a separate but additional cost – would mean at first glance that you have few dollars for anything beyond housing expenses.

However, with mortgage interest, mortgage insurance and property tax deductions your income tax bill would drop significantly. That would make the monthly expense of ownership much more tolerable, but there is still a hard $2,000 monthly cost. A job loss or fewer hours could quickly drive you into foreclosure, as might new and additional expenses. A job opportunity elsewhere could be lost if you cannot sell or rent the house for enough to cover costs.

There are several ways to make this picture more attractive.

• Buy a less expensive house. This would mean a smaller mortgage and related costs.

• Put down at least 20 percent, plus closing costs. This would eliminate the need for private mortgage insurance, plus you would have a far smaller loan amount.

• Buy in an area that does not require expensive flood insurance. Ask insurance agents for a local flood map. Be aware that as a condition of having and keeping a mortgage the lender can require that you maintain flood insurance. At the same time, flood insurance costs can rise in the future, further straining your budget since coverage is required regardless of cost.

• Buy a fixer-upper. This would give you a low monthly cost, and because you would live at the property you could do much of the work yourself. Given that you have jobs this is not easy, but it is a way to build equity. Once repaired you could then stay, sell or rent the property.

As you consider these issues review your credit report and clean up any factual errors or items that are out of date. For a free credit report, go to AnnualCreditReport.com.

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