Don't let the gloomy mortgage news scare you; buying your first home is still a step-by-step process.

Buying your first home is like assembling furniture: When you open the box and see those tiny bags of Allen wrenches, dowels, and nails, the number of steps involved may overwhelm you. But as you work through those assembly instructions, the process always turns out to be a little easier than you expected.

As a first-time homebuyer, it's important not to let the transactional details distract you; most of the time, they're easily managed with the help of your agent and lender. Your energies are better served by staying focused on the end result of home ownership. To help you in that regard, here's a four-step summary of the financial side of the home-buying process.

Money guide to your first home

  1. Know what you can afford. A conservative estimate for how much house you can afford is two to two-and-a-half times the amount you earn in one year. If you have a sizeable down payment, your home buying budget might be as much as three times your annual income.
  2. Know your down payment. Your down payment will come from money you have in the bank, money you receive as a gift, or money obtained through a down payment assistance program. If you receive a monetary gift from a friend or relative, your lender may require a signed affidavit stating that the money doesn't need to be repaid.
  3. Select your financing. A good part of the financing decision will be driven by the size of your down payment. Also consider the risk associated with your various mortgage options. FHA mortgages are particularly attractive right now, because the terms are lenient relative to other programs. The down payment on an FHA mortgage, for example, can be as low as 3 percent. If you're short on funds, and you don't qualify for an FHA mortgage, you can take out two mortgage loans to fund your purchase. One would be for 80 percent of the amount, and the other would be for a 10 to 20 percent down payment. Be prepared to pay dearly for it, though, because these arrangements can be expensive.


As for risk, fixed-rate mortgages are the safest, because the payments don't change. There are certain situations, however, when adjustable-rate mortgages make sense. An example would be a borrower who expects her income level to change significantly during the course of the loan.

4. Budget your closing costs. These can add up to several thousand dollars. If cash is really tight, ask your lender about rolling these costs into your loan. Or you can try to negotiate for seller's concessions, where the seller contributes to cover some of these expenses.

Once you move through these four steps (without leaving any little screws or wrenches lying around), you should be ready to close your loan and start packing.

Published on May 6, 2008