Dear Ali: I need some expert advice about buying my first home. I am a 26-year-old teacher who feels that my job is stable. My apartment lease is up in January, and I figure now is about the best time in the recent past or near future to buy a first home (especially with the $8,000 tax incentive).
I’ve talked to my parents about giving me a loan for a down payment and cosigning on the mortgage because fortunately they are in a place where they could do that. (They have great credit, I have not very established credit; I’m 26!) Since they are willing to do this, it seems like there is no reason I shouldn’t go ahead and start looking for houses.
So I guess that is my question: Are there any reasons you see that this would not be a good plan? Would I be getting myself into something that, like many Americans are finding out these days, I can’t handle? I feel like I’m pretty responsible with my money, but as a teacher, it is very hard to save a lot of money. Please give me any advice you can. Thanks a lot!
A: Hi teach!
I am generally against the idea of buyers jumping into the market without having saved a down payment first. Even if it’s just 3 percent, I think there’s a lot to be said for having a little equity cushion. Plus, I think the discipline of having to save up the money is good for you.
However, that was before the government started handing out $8,000 tax incentives to buy homes. If you’re looking at a home that’s not in California or New York (I’m a proud Arkansawyer, so I hate the words “flyover states”), that tax incentive could be three percent of the value of your house.
Also, an argument in your favor is that you show some idea of what it means to be a grown-up. I can’t tell you how many homebuyers during the boom didn’t even bother to use phrases like “hard to save” and “responsible with my money.”
So what specific recommendations do I have?
1. Your mortgage loan balance should be between two and three times your current salary. No matter what the nice flattering people at the mortgage bank tell you, you definitely don’t want to go higher than three times your current salary.
Let’s run an example to show you how that works: if you make $40,000 a year, you want to borrow between 2 x $40,000 and 3 x $40,000, or between $80,000 and $120,000. You absolutely don’t want to borrow more than 3 x $40,000, or $120,000.
Rates are around 6 percent now, so if you borrow $120,000, your monthly payment would be … let me check my favorite mortgage calculator … around $719 a month. That’s probably less than you’re paying in rent, but you’d also have property taxes, insurance, and upkeep to consider. When you’re all in, you’ll be spending between a quarter and half of your income on rent.
2. You don’t have to furnish your home all at once. In the movies people have a house full of boxes one day and a perfect living room the next. In real life, it generally takes my clients a couple of years to pick paint colors, find the perfect rug, and save up money for a new sofa. It’s okay to grow into your home — don’t use it as an excuse to go crazy with your credit cards.
3. Don’t fall in love with just one house. There are a lot of tips for buyers in my book, “Diary of a Real Estate Rookie,” but let me give you the best one for free: Find two good houses rather than one perfect house. Having a backup puts you in your strongest negotiating position. If you end up dealing with a seller who’s inflexible on price, it keeps you from getting caught up in their game — you can just say, “no thank you,” and head over to beautiful house B!
Good luck and keep me posted!
See also: Red Flags for First-Time Homebuyers
