First-Time Buyers Should Take Advantage of Housing Tax Credit

In dollars and cents: At about 5.5 percent for a no-point 30-year fixed-rate loan with a traditional down payment, a $180,000 loan would mean a monthly mortgage payment of $1,022.

Property taxes and insurance, which are based on the home's value rather than the loan amount, are estimated at $302 a month by MortgageGrader.com, an online mortgage shopping service. If you add in a $100 condominium association fee, your total monthly cost is $1,424, or about 28 percent of your $5,000 in monthly gross income.

DOWN PAYMENT

A traditional down payment is 20 percent of the home's amount. So if you're buying a $200,000 home, you'll need $40,000 for the down payment.

If you have generous relatives, some of the money could come from gifts. If it does, your lender is likely to require documentation -- maybe a letter from Mom and Dad saying the $20,000 that suddenly appeared in your bank account was a gift and not a loan.

But if you don't have enough funds for a traditional down payment, you may be able to get a government-insured FHA loan, which requires a down payment of as low as 3.5 percent. The downside of FHA loans is that they require mortgage insurance, which can add almost 2 percent to your closing costs and will boost your monthly payments.

OUTSTANDING DEBTS

In addition to looking at your housing costs as a percentage of your monthly income, lenders are going to look at your outstanding debts such as student loans, auto loans and credit cards. The reason: They want to make sure that you'll have money after paying your mortgage and other debt for food and transportation expenses.

That's not really because they care whether you can afford to eat and get around town. It's because they realize that if you're short on gas money, you can't get to work, and you're likely to eat whether you can afford it or not.

So if there's not enough money for both, lenders will assume that you'll have trouble paying your loans.

MORE CASH FOR CLOSING

In addition to a down payment, you are likely to need between 3 percent and 7 percent of the home's value to handle closing costs, Glink said. The money will be needed to pay for as many as 35 different items including title insurance, inspections and loan fees.

COST OF OWNERSHIP

With all these costs, it's easy to tap every dollar of your available cash. But you'd be foolish to drain your emergency fund, McBride said. Home ownership requires constant maintenance that you'll eventually learn to budget for. But initially, a broken refrigerator, a leaky roof or a broken pipe is going to seem like an emergency.

"Buying a house is a lot like getting married," McBride said. "You have to be in it for the long haul and be prepared for the financial commitment."

TAX CREDIT

On the bright side, the tax credit may help restore your emergency savings. This credit amounts to $8,000 or 10 percent of the home's value, whichever is less. The full amount can be claimed by single taxpayers earning less than $75,000 and by married couples who earn less than $150,000. After that, the credit begins to phase out.

But to claim the credit, you have to complete the purchase by Nov. 30. It normally takes 45 to 60 days to close the deal, even when you're organized. So, if you want the tax credit, you'll have to move fast.