Ask a CFP® Professional
Rita Cheng, CRPC, CFP®
Financial Advisor,
Ameriprise Financial Services, Inc
Bethesda, MD
Question:
“Is now a good time to buy a house? What assistance is available?”
- DC Saver R.K.
Answer:
The combination of lower home prices, affordable long- term fixed interest rates and tax incentives provides an excellent opportunity for those individuals who are emotionally and financially prepared to become homeowners. Timing is everything, and 2009 may be the year to make the dream of home ownership a reality. Ensuring You Have Enough Money
Before purchasing a home, proper planning and due diligence are necessary to ensure that you can afford to maintain your home without compromising the integrity of your financial health.
The first step would be to create a budget, or “spending plan”, that accurately reflects your current financial picture, which will help you determine what properties are within a reasonable price range.
My advice for a first time home buyer is to use that budget to make sure that you have enough money for at least 3-6 months of expenses, in addition to what you will need for your down payment, set aside as cash reserves for emergencies or opportunities. In other words, do not commit 100% of your liquid savings or cash reserves to the down payment. You also should not have to accumulate additional debt just to "get in the house".
Also, remember that homeownership costs do not just include your mortgage payment. Be sure to consider the impact of any fees that you might incur regularly, including condo fees, Homeowners Association fees, escrow items – such as real estate taxes and homeowner’s insurance – and increased utility payments. And don’t forget to have an emergency fund, since unexpected costs can arise at any time!
Finally, in addition to having an emergency fund, it is important to understand the impact of homeownership and a mortgage as it pertains to other areas of your financial life, such as your cash flow, survivor income needs (life insurance), retirement, and taxes. For example, will a new 30-year mortgage affect your ability to save for retirement or impact your retirement decisions? Furthermore, in the event of a premature death, how will loved ones be able to afford the mortgage?
Finding the Right Lender
Next, I recommend that first time home buyers work with a loan professional or housing counselor who is very well-versed and educated in all of the different types of loan programs that are available, and who can ensure that you take advantage of any available assistance programs.
DC Saves partner Housing Counseling Services, for example, offers free pre-purchase housing workshops and counseling sessions for prospective homebuyers. You can visit Housing Counseling Services’ website at http://www.housingetc.org, or Click Here for a list of other housing counseling providers.
Once you have spoken with a loan professional or housing counselor, and you have chosen the best loan or payment program for your particular situation, you will have to decide how much money to spend on a down payment. For first time home buyers, I recommend paying the minimum down payment for whichever program is determined to be most appropriate for you. That way, you will be able to preserve your liquid assets (cash) in your emergency fund for unexpected expenses.
Also, since it is a buyer’s market, you should ask your lender for a discount on closing costs. In accordance with FHA lending guidelines, up to 6% of the sales price is allowable as seller’s concession to provide assistance with closing costs. Do not be shy as it cannot hurt to ask – the worst response you could hear is “No”.
2009 Tax Credit
Under the American Recovery and Reinvestment Act of 2009, signed by President Obama on February 17, 2009, first-time homebuyers who purchase a new or existing home on or after Jan. 1, 2009, and before Dec. 1, 2009, may be eligible for a tax credit of up to $8,000. The credit phases out for individuals with income of $75,000 or more and married couples filing jointly with income of $150,000 or more. Additionally, to qualify for this credit, neither the first time homebuyer, nor his/her spouse, could have owned a principal residence during the prior three-year period. Make sure to consult with a qualified tax professional to discuss your specific situation and verify that you are eligible for this credit prior to purchasing the home!
Click Here for more information about the homebuyer credit.
In Conclusion
In this challenging credit environment, it is imperative to work with a licensed qualified mortgage professional or housing counselor that is well versed in programs for new homebuyers. As always, do your homework and do not rush into anything. You need to work at a pace that is comfortable for your individual situation. And make sure to take advantage of all of the excellent resources available!
