Step 9: Buy a Home

Purchasing a home can be a very wise investment. While the real estate market fluctuates, most houses gain value over time. Additionally, Uncle Sam subsidizes your property investment with tax breaks. You can deduct the amount paid on mortgage interest and property taxes on your income tax return, and when you sell the house, you are exempt from paying taxes on up to $250,000 ($500,000 for married couples filing jointly) of the profits from the sale, as long as the home had been your primary residence for at least two of the last five years.

If you dream of owning your own home someday, it’s never too early to start planning. Having a down payment makes it much easier to get mortgage approval – in fact, you may not be able to get a mortgage if you don’t have one. While 20% of the purchase price used to be the required down payment amount, today, many lenders will accept less. However, you may have to purchase private mortgage insurance or get a second mortgage at a higher interest rate. In addition to the down payment, it is a good idea to save for closing costs (costs required to execute the sales transaction, such as attorney fees, title insurance, appraisals, points, and tax escrows) and post-purchase reserve funds.

Having a good credit score and low debt load also help when applying for a mortgage. Many mortgage lenders require a FICO score of at least 680 for approval and mid-700s for the best interest rate. The lower your level of debt, the higher the loan amount you can qualify for. Many lenders require that your existing debt payments plus your mortgage payment not exceed 36-38% of your gross income. (See Steps 7 and 8 for information on establishing a good credit history and paying down debt.)

Homeownership isn’t right for everyone. If you move around often or are struggling to meet your current financial obligations, having a mortgage may only create a burden. It is important to honestly assess your financial obligations and determine if you can carry a mortgage and how much can you afford to pay. Don’t just rely on the lender’s approval amount to tell you what you can afford – take a close look at your budget. If you get a mortgage you can’t keep up with and lose your home, you are not accumulating any wealth – only damaging your credit report. You can always reconsider purchasing a home in the future if you decide it is not a good option now.