Buying a First Home

How to buy your dream house with your eyes wide open.

For many, property and the American dream are inextricably linked - it’s a huge milestone on the path to success and security. If you’re looking to buy a house, it’s important to go into the process with as much information as possible. That way, you can strut confidently towards your own slice of the American dream

If you dream of owning a home, we’ll be the last to persuade you otherwise. But it shouldn’t come at the expense of your financial security. Here are a few things to look at as you pursue home ownership.

How much house can you afford?
Generally speaking for conventional mortgage (Fannie Mae and Freddie Mac) income qualifications, your monthly mortgage payment - including principal, interest, property taxes and homeowners insurance - shouldn’t exceed 28% of your gross monthly income. Governmental loan programs may have higher percentage income qualifications. You’ll also need to factor in any remodeling, landscaping or other home improvement projects you want to do - both now and later - to help determine if a particular house will fit into your longer-term budget.

Don’t forget to calculate your other home expenses. There’s the down payment, mortgage payments, insurance, utilities, maintenance and taxes — to name a few. Remember to think about how your income might grow over the years. Run the numbers on several different home price points, and calculate your down and mortgage payments to get a feel for what your ideal price range is. 

Saving for a rainy day
There’s nothing like a new home to keep the rain at bay. Save for it. Many people save for three to 10 years before buying a house. Setting up a separate savings account and gradually building up enough for a down payment is a great idea. Even in the midst of saving for a home, most people who are working will continue contributing to their employer’s saving plan, especially when the employer provides matching contributions. When prioritizing, it may be best to set aside an amount for your retirement accounts, and then determine an amount for your house.

Borrowing from yourself
Borrowing from a retirement plan to fund a down payment is becoming increasingly popular. It can be a great tool, but you need to be aware of the risks. 

First the good stuff. When you borrow from your retirement plan, you’re locking in today's low mortgage rates. Also, you’re paying interest to yourself. This interest rate is typically one or two percentage points above the prime rate. Score! Another great thing about borrowing from your Plan account is that you you’re allowed up to 15 years to repay the loan. And, keep in mind, generally a Deferred Compensation Plan loan does not count in your debt-to-income ratio when you apply for your mortgage.

Here’s what to watch out for: You’ll need to repay the loan in full or it can be treated as if you made a taxable withdrawal from your plan - so you'll have to pay taxes on the balance. If you're laid off or fired from your job, you generally have only 60 to 90 days to pay off the outstanding loan. Also, borrowing from your retirement plan means less money to potentially grow, so your nest egg will likely be smaller. That dent will be even deeper if you suspend or reduce contributions to your plan while you're paying off the loan. The tax code doesn't work in your favor either: You’ll have to repay the loan with after-tax dollars, and you'll pay taxes on that money again when you take withdrawals in retirement.

A solid foundation
Owning a home is a major undertaking, so it’s important to know all the facts before getting in over your head.

This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation.

Daniel Powell