Q&A: Affording Your First Home

Q: I am a 23-year-old professional, and I'm eager to buy a home. I just landed a new job with great pay and benefits. What's your advice to a young woman ready to spread her wings? {

A: First, you need to decide how much home can you afford.
learnIt's not an easy question. But figuring it out can be fun—in a treasure-hunting sort of way. Let's start with three of the most important factors that will drive your purchase:

  • The estimated price of the home you want.
  • The target amount of your down payment.
  • How much you can afford to spend each month on ALL the expenses relating to home ownership.

Although you may know, say, what a one-bedroom condo is likely to cost in your area, you'll need to call a realtor to find out the maintenance charges, fees and property taxes.

Next, determine the amount you can save each month. If you can sock away $700 a month, it will take you at least 21 months to save a $15,000 down payment. Reality check, right?

Now, experiment with a mortgage calculator like this one.

If you earn $50,000 and put down $15,000, that could enable you to buy a $154,000 home, with a 30-year fixed mortgage of about $139,000, and an $1,166 payment (including insurance, taxes).

Can you afford that much house? Remember: You need to save a few thousand for closing costs. And if your down payment is less than 20% of the purchase price, you'll pay an extra sum for private mortgage insurance (PMI) each month. If you're buying a condo, factor in maintenance or building charges every month, too.

So, with a salary of $50,000 — and approximate take-home pay of $35,000, or about $2,900 per month — a mortgage payment of $1,166 leaves you only $1,750 to cover all your other expenses.

Ideally, your monthly payment should be about a third of your income. So start over: reconsider your target price, or making a bigger down payment, until the numbers add up to what you can afford comfortably. Happy treasure hunting!

Here's a great chart that detailing how much you can afford, broken down by salary level.

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