Are You Ready to Buy Your First Home?

Dollars & Sense

By Mark Freedman

Published June 30, 2016, issue of June 30, 2016.

Home ownership is the cornerstone of the American Dream. But before you start looking, consider a number of things.

Buying a home should be viewed as a lifestyle investment first and only secondly, as a financial investment. While over time buying a home can be a good way to build equity, recent history has shown house prices can go down as well as up.

Real estate prices can fluctuate considerably and if you aren’t ready to settle down in one spot for five years or more consider deferring a home purchase until you’re ready for the long term commitment.

And when you are ready to take the plunge, you’ll need to determine how much you can spend and where you want to live.

How Much House Can You Afford?

Most people, especially first-time buyers, must take out a mortgage to buy a home. To qualify for a mortgage, the borrower generally needs to meet two ratio requirements that are industry standards: the housing expense ratio and the total obligations ratio.

The housing expense ratio compares basic monthly housing costs to the buyer’s gross monthly income (before taxes and other deductions). Basic costs include monthly mortgage, insurance, and property taxes. Income includes any steady cash flow, including salary, self-employment income, pensions, child support, or alimony payments. For a conventional loan, your monthly housing cost should not exceed 28% of your monthly gross income.

The total obligations ratio is the percentage of income required to service all your total monthly payments. Monthly payments on student loans, installment loans, and credit card balances older than 10 months are added to basic housing costs and then divided by gross income. Your total monthly debt payments, including basic housing costs, should not exceed 36%.

In addition to qualifying for a mortgage, you will likely need a down payment. Down payment requirements vary from more than 20% to as low as 0% for some Veterans Administration (VA) loans. Down payments greater than 20% generally buy a better rate and exempt you from buying private mortgage insurance (PMI).

Closing Costs

Closing costs vary considerably, but typically add between 3% and 8% to your purchase price. Such costs include home inspection costs, loan origination fees, up-front “points” (prepaid interest), application fees, appraisal fee, survey, title search and title insurance, first month’s homeowner’s insurance, recording fees, and attorney’s fees. Finally, adjustments for heating oil or property taxes already paid by the sellers will be included in your final costs.

Home Buying Costs

Down Payment: 0%-20% of purchase price.

Home Inspection: $200-$500.

Points: $1,000 and up for 1%-3%.

Closing Costs: 3%-8% of purchase price.

Operating Costs

In addition to mortgage payments, there are other costs associated with home ownership. Home association fees, utilities, heat, property taxes, repairs, insurance, services such as trash or snow removal, landscaping, assessments, and replacement of appliances are the major costs incurred. Check the actual expenses of the previous owners and make sure you understand how much you are willing and able to spend on such items.

Once you’ve determined a price range and location, you’re ready to look at individual homes. I recommend visiting You’ll gain a perspective on estimated values of homes in different neighborhoods. Remember that much of a home’s value is derived from the values of those surrounding it. Since the average residency in a house is seven years, consider the qualities that will be attractive to future buyers as well as those attractive to you. The more research you do today, the better your decision will look in the years to come.

Next reach out to an independent real estate agent. Tell them everything about your financial situation and share your list of “wants vs. needs.” Make sure you know how much money you have for a down payment and make sure that if mom or dad are “gifting you money,” that you disclose that too.

Forgotten Costs

Once you move into your new home you’ll be faced with cost for furnishings, appliances, paint, carpet and more. Make sure you’ve allocated adequate resources to pay for these items. And if anyone asks what they can get you as a housewarming present, tell them – “A Home Depot Card.” Spending money at this superstore will be like grocery shopping for a while. Be prepared to buy garbage barrels, common household tools, a garden hose, a lawn mower, shovel, BBQ grill and so much more.

Marc Freedman is President and CEO of Freedman Financial in Peabody. Contact him at

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