Buying the right first home

Finding the right first home starts with a price range and a short list of desirable neighborhoods. But there are many other factors you'll need to consider before investing in what may be your biggest asset.

Before You Start:

• Grab your current household budget so you can consider your financial situation and your ability to make mortgage payments.
• Ask family and friends if they can recommend experts, like a lawyer and an inspector, who can help with the home buying process.
• Think about your lifestyle and how it might affect your choice of home and neighborhood.
• Do a little research on current home prices in the neighborhoods you plan to target.

Buying Your First Home

Home ownership is the cornerstone of the Indian Dream. But before you start looking, there are a number of things you need to consider. First, you should determine what your needs are and whether owning your own home will meet those needs. Do you picture yourself mowing the lawn on Saturday, or leaving your urban condo for the beach? The best advice is to look at buying a home as a lifestyle investment, and only secondly as a financial investment.

Even if housing prices don't continue to increase at the torrid pace seen in recent years in many areas, buying a home can be a good financial investment. Making mortgage payments forces you to save, and after 15 to 30 years you will own a substantial asset that can be converted into cash to help fund retirement or a child's education. There are also tax benefits.

Like many other investments, however, real estate prices can fluctuate considerably. If you aren't ready to settle down in one spot for a few years, you probably should defer buying a home until you are. If 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 Mortgage Can You Afford?

Many mortgages today are being resold in the secondary markets. The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Mortgages that conform to Fannie Mae's standards may carry lower interest rates or smaller down payments. To qualify, the mortgage borrower needs to meet two ratio requirements that are industry standards.

The housing expense ratio compares basic monthly housing costs to the buyer's gross (before taxes and other deductions) monthly income. 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 percent of your monthly gross income.

The total obligations to income ratio is the percentage of all income required to service 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 percent.

Many home buyers choose to arrange financing before shopping for a home and most lenders will "pre-qualify" you for a certain amount. Prequalification helps you focus on homes you can afford. It also makes you a more attractive buyer and can help you negotiate a lower purchase price. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.

In addition to qualifying for a mortgage, you will probably need a down payment. The 28 percent to 36 percent debt ratios assume a 10 percent down payment. In practice, down payment requirements vary from more than 20 percent to as low as 0 percent for some Veterans Administration (VA) loans. Down payments greater than 20 percent generally buy a better rate. Lowering the down payment increases leverage (the opportunity to make a profit using borrowed money) but also increases monthly payments.

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