Are You Ready to Buy Your First Home?

Buying your first home is one of the biggest investment decisions you’ll ever make. So how do you know if it’s the right time to venture into home ownership? You can start by answering these seven questions. 

1.    How long will you be in the area? Because of the transaction costs that come with buying and selling a home, it typically takes three to five years to break even. If you sell any sooner, you could end up losing money — even in a rising market. If you do make a profit, you’ll have to pay capital gains taxes if you’ve owned the house less than two years. Assess whether it’s likely that your circumstances will enable you to stay put long enough to make purchasing a home worthwhile.

2.    How much can you afford to pay? As a rule of thumb, your mortgage payment shouldn’t be more than 25 percent of your gross income and your total monthly debt shouldn’t exceed 33 percent of your gross income. Keep in mind that your principal and interest aren’t the only costs associated with home ownership. You’ll also incur additional expenses, such as:

• Utilities, for example water, gas, electric, sewer and garbage
• Homeowner’s insurance
• Property taxes
• Maintenance costs, for example interior and exterior repairs and           equipment for lawn and landscaping care, snow removal and pest control
• City assessments
• Association fees (if applicable)

Because these charges can add hundreds of dollars to your monthly expenses, make sure to consider your total costs to avoid an uncomfortably tight financial situation or overextending yourself.

3.    What’s the housing market like in your area? The real estate market differs by city, state and region. Compare the costs of renting and buying to determine which makes the most sense in your situation. Depending on where you live, one option may be more favorable than the other.

4.    Can you cover the down payment? Most traditional mortgage brokers require that you have at least a 20 percent down payment to avoid Private Mortgage Insurance (PMI). If you don’t have enough, PMI will typically cost between 0.5 to 1 percent of your entire loan amount every year. For example, if you purchase a $175,000 home, at a 1 percent insurance rate, it adds just over $145 a month to your expenses. Keep this in mind when calculating what you can afford and whether to purchase.

5.    What’s your credit score? If you’re not sure, you can order a free credit report from a reputable credit agency — such as Equifax, Experian or TransUnion — once every 12 months. Your credit score is important because when a bank is deciding whether to loan you money for a home, they want to know that they can trust you to pay them back. If your credit score is good, you can breathe easy. If it’s not, take action as quickly as possible to improve it. If there are any errors on your report, make sure to get them corrected so they don’t negatively impact your ability to qualify for a loan.

• W-2 or 1099 income statements for the past two years
• Current year profit-and-loss statement if you’re self-employed
• Federal tax returns for the past two years
• Bank and investment account statements for up to the past three months
• Recent pay stubs and proof of other income
• 12 months of cancelled rent checks and bank statements showing rent was paid on time if you’re a renter

Since it can take time to pull all of this information together, start sooner rather than later. Also, always provide every page of a document, because lenders will want to see every page — even if it’s blank.

7.    Do you have an emergency savings fund? Most financial professionals recommend saving enough to cover three to six months of your living expenses in case an unexpected event — such as a job loss, illness or injury — prevents you from earning an income. An emergency fund can also help you cover unexpected expenses, such as a broken appliance or a plumbing emergency.

For help assessing your financial situation to determine if purchasing a home is a good choice for you, consult your financial advisor. Your advisor can help ensure that your decision is in line with your short and long-term goals and your budget.

###

Paul Fragala, CFP®, CIMA®, is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Andover, MA.  He specializes in fee-based financial planning and asset management strategies and has been in practice for 20 years. To contact him: www.paulfragala.com, 76 Main St., Andover, MA, (978)-474-9900.

Ameriprise Financial and its representatives do not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific tax issues.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

© 2014 Ameriprise Financial, Inc. All rights reserved.                                            File # 821641