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Home buying, how to know when it’s time

Springtime — when the thoughts of so many gradually turn to sunshine, flowers, golf, clean-up, travel, etc. And how about home buying? The spring of each year has been traditionally primetime for either buying or selling a home. And we have heard all of our lives that it is better to own than to rent. Or is it?

For many who are having these thoughts, this would be a first-time experience. And the purchase and property can be a daunting task, even for those who have done such things before. So the big question is: How do you know when you are ready? And how much can you afford?

These are not easy questions to answer, but I will be glad to share my thoughts on the matter. First, let’s address readiness:

You might be ready to purchase a home for the first time if you are settled into a decent job or have a well-established business enterprise that is showing a steady profit over multiple years. I will go into a little more detail later regarding those who are self-employed and that business is their only source of income.

You may be ready if you are feeling comfortable with where you live or you are very sure of where you wish to live for the next several years. Moving is often difficult, time-consuming, and it is usually quite expensive.

You could be ready if you have saved enough of a down payment to get a decent interest rate on your mortgage loan. Related to this, you better have a good credit track record and at least a 700 FICO score.

Beyond the down payment number, which should be at least 20 percent of the purchase price, you will need to have some kind of “emergency fund.” That is something that people should generally have anyway, but you will learn that the first six months in a home will nickel and dime you in ways that you never imagined.

The next readiness factor is simply being ready to accept the responsibility that comes with being solely in charge of land and home. Responsibility, in most cases, does not end at your doorstep or even your property line. It extends to your neighbors and your neighborhood. You certainly will have the right to “be yourself” and “do your own thing,” but always within reason. And you don’t want to be at odds with your neighbors if you can help it. There is enough stress in life without that. This is a matter of maturity

Finally, you will need to gain experience rapidly regarding the process of searching for properties and then evaluating relative values. You must consider the school system if you have children or are planning to. You must be able to negotiate for the best deal. And you must be prepared to hire an inspector and get pre-approved by a lender. Some

Realtors will not even show properties to people who cannot easily verify that they will be able to get a mortgage and that they will have the ability to pay. And you can’t blame the Realtor for not wanting to waste that valuable time — especially during prime season.

Now that we have addressed the readiness issues, we should look at ways of determining just what you can comfortably afford. The first thing I try to convey to anyone looking to buy for the first time is this: If you are currently renting, and if you sometimes have trouble making rent payments at, let’s say, $1,000 per month, how then will you manage if your mortgage payment is $1,200 per month and you now have to pay for heat, electric, plowing, lawn care, all sorts of maintenance expense, and painting the whole house every six or seven years, etc.? Be realistic.

Now, let us look at specific numbers. For sake of discussion here, we will assume that you can somehow make that 20 percent down payment and that you will have a couple of thousand at least leftover for those first few months of redecorating and getting some yard tools, etc. Let us further assume that you are hoping to get something decent — in the $200,000 range.

So you will have to borrow $160,000 with $40,000 down payment. That leads to a monthly principal and interest mortgage payment of $764, plus you will be paying approximately $50 per month for insurance and another $336 per month roughly for property taxes. Total equals $1,150 per month.

If you have no credit card debt and no car payments, you would need to have gross annual income of $60,000. If you have a typical car payment and some credit card debt, this number would probably be $70,000.

Further, if you only have 10 percent down payment, and you need to borrow $180,000, then your mortgage payment goes to $1,250 and your income requirement without debt goes to $61,200. With the aforementioned debt, you would need rough $71,200. There are many assumptions built into these estimates so there could be some wiggle room.

The real starting point before any of this is: Prepare a realistic budget. Get help doing that if necessary. Once you know where all of your money is going, you can adjust your possibilities just by switching in the mortgage payment, insurance and tax dollars into the equation to see how you are doing. Always leave some cushion. You still want to be able to save a bit each month. You still need an emergency fund. You still need to save for retirement. You still need vacations. And you will have medical bills.

Larry Schwartz of Hancock has been providing financial advice in the Monadnock region for 12 years. He has been trained in all areas of personal finance and he volunteers as the official Money Coach for The River Center in Peterborough.

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