The New Home-Buying Rules

Looking to purchase your first home or upgrade from your current one? Don't take the plunge until you've read our home-buying handbook for families.
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Peter Ardito

You check the real-estate ads every week "just for fun." You fantasize about watching your kids running around the backyard and having a family room big enough for all their toys. Admit it: You've even picked out the perfect paint colors for the nursery and curtains for the kitchen. But when will you finally be able to afford a new home?

This just might be your moment. The mortgage crisis and recession during the past two years have led to a 31 percent decline on average in housing prices from their 2006 peak, according to the S&P/Case-Shiller National Home Price Indices. Plus, sales remain sluggish (leaving greater room for negotiation), and mortgage-interest rates are still very low. These factors combine to make it a great time for bargain-hunting.

But before you start attending any open houses, keep in mind that the rules for buying a house have changed substantially. Fear not, though: Follow these steps, and you'll find your dream home.

1. Figure Out What You Can Afford

As alluring as home ownership may be, you need to be on solid financial footing first. Don't begin your search until: 1) You have enough stable income to handle the expected monthly mortgage payments; and 2) You have ample cash on hand to cover the down payment and closing costs. Use this family-specific worksheet to see whether you're there.

Cash on Hand

To determine how much cash you need to close on a house, multiply the figure from K (How Much Home Can You Afford Worksheet, above) by .23. Why? Most on a house. Add roughly 2 percent for closing costs lenders require a 20 percent minimum down payment and 1 percent for incidental extras (such as inspections, title searches, and the like). So that means you'll need about 23 percent, or $46,000, up front to purchase a $200,000 home. You should also set aside additional funds to pay for moving expenses, furnishings, and setting up an emergency fund equal to six to nine months worth of living expenses.

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