Weak Market Creates Advantages for Lower-Income Buyers

Q: I don't want to continue renting, but I make only $30,000 annually and don't have a lot of money for a down payment. My credit score is over 800, and I'm self-employed. I know there are many programs for first-timers, and the local government here in Miami also has some programs to help first-timers and low-income people, but I don't know where to start.

A: Your question is quite timely. Congress recently passed a housing bill that could help some first-timers buy a home. But first you need to take a close look at your finances and make sure you can afford to buy.

In the last several years, people making $50,000 bought homes worth $500,000. Those purchases never made sense and still don't make sense. You need to determine how much money you can afford to spend on housing and then figure out if there are homes available in your price range.

Historically, lenders told buyers that they could not afford to buy a home if the price of the home exceeded about 2 1/2 times their annual income. In your case, that would mean you would have to look for homes that would cost $75,000 or less. But with lower interest rates, a lender may allow you to buy a home that costs three to 3 1/2 times your income, or up to about $100,000.

In addition, lenders usually told buyers that their housing expenses and other debts should never exceed 36 percent of their pay. In your case, you shouldn't want to pay more than $10,800 per year for all of your housing expenses, property taxes, insurance and other debts.

After reviewing your financial information, if you decide to buy a house, you may find a little help with the housing bill.

The bill allows first-time buyers (classified as individuals who have not owned a home in the last three years) to take up to a $7,500 tax credit in the year they close on their first home. A tax credit is a dollar-for-dollar reduction in the amount of taxes you pay to the IRS.

While you'll reduce your taxes in the first year, you'll have to pay back the $7,500 to Uncle Sam over 15 years. So what you're really getting is an interest-free loan with generous repayment terms.

The other bit of good news is that Federal Housing Administration loans require only a 3 percent down payment. They may cost more, but a person with little money to put down can still buy a home.

Although there are extra costs when you don't have at least 20 percent to put down, housing prices have fallen substantially in most areas, some more than others. There are great deals to be had these days, especially in places with a large inventory of unsold condos, such as Miami.

Find a real estate agent you can trust. Then start looking at neighborhoods with good school districts, plenty of shopping, and transportation networks that are close to friends, family and house of worship. You'll also want to find an excellent mortgage lender who can help you with your planning. You need to make sure that you can live comfortably with the costs involved in owning a new home, which increase over the years.

As recent history shows, it can be easy to buy a home, but it can also be difficult to sell it if the market turns.