Home Buying: What's It Really Cost?
How Expensive of a Home Can I Afford?
According to the Federal Housing Administration (FHA), your monthly housing costs should not exceed 29 percent of your gross monthly income. This figure is often used by lending institutions to determine how large a mortgage you can carry. If you don't have debt, that percentage can climb up to 41 percent of your gross monthly income. Using this rule, if your gross income were $20,000 annually, your monthly gross would be approximately $1,666.00 -- 29 percent ($483.14) of which you could put toward your mortgage. If you are debt-free, you could afford to pay $341 for every $10,000 of your gross income.
Your ability to qualify for a mortgage also depends on your credit, work histories, and on the amount of debt you have. While you may lack in one of these areas, your strength in another may offset it. If your credit isn't great historically, you may be able to show you've shored it up recently by paying off (or lowering) debts and canceling unnecessary credit cards, especially those with high interest rates.
A good work history doesn't require staying with the same employer all your working life, but rather showing that you've stayed at one company for a length of time, have stayed within the same industry, or have changed jobs to boost your earning power.
Do I Have to Put 20 Percent down to Buy a Home?
Not necessarily. The 20 percent rule is not today's norm: Some lending institutions will let you put down as little as 3-5 percent! But to qualify for a lower down payment, you'll likely be required to buy mortgage insurance, either through government programs (FHA, the U.S. Department of Veterans Affairs for qualifying military veterans and reservists, or the Farmers Home Administration in rural areas and small towns) or through private institutions. Mortgage insurance protects your lender against the possibility that you might default on your loan. The insurance cost is tacked onto your monthly mortgage payment.
You'll also have to pay closing costs on the sale of the house, which are the various fees required to officially transfer ownership to you. Closing costs range from 2-5 percent of the home's cost.
How Does a Mortgage Work?
A mortgage is simply a loan you take out to buy your home. It'll include the principal (the amount borrowed) plus the interest. Mortgages are typically repaid over a 15- or 30- year time span. The longer your mortgage term, the more interest, but the lower the monthly payments. For more detailed information, see our article on mortgage basics.
With a 30-year mortgage (the most popular term) at a fixed interest rate of 7 percent, you'd pay $6.65 per month for every $1,000 borrowed. Thus, a $100,000 loan would cost you $665 per month. To this amount you should add utility expenses, state and local property taxes, and the cost of homeowners and mortgage insurance.
Are There Any Government Programs That Help First-time Buyers?
Most communities have programs to encourage homeownership -- especially first-time and low- to modest-income homeownership. Some programs offer assistance to buyers who participate in financial counseling programs; other programs are administered through local allocations of U.S. Department of Housing and Urban Development (HUD) funds. "Sweat equity" programs, where part of your "payment" is your contribution of manual labor to the building of the community, are also an option in some areas.
HUD homes are available in nearly every community, in many price ranges, and in many neighborhoods. They're homes the FHA has foreclosed on -- HUD now owns the deeds. HUD wants to recoup its investment to keep funds circulating for home buyers and HUD programs, so the homes are sold at fair market prices.
Programs vary between communities, so call your local housing and community development office for more information -- and don't forget your local HUD office. If your city has a website, you can also find resources there.