With the Tax Incentive for First-Time Buyers, Is Now the Time to Buy?

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Deciding if it's the right time to rent or buy a home can complicated, but the government's tax incentive for first-time homebuyers might mean now's the time.

A home is probably the most expensive purchase you'll ever make in your life, and while there are always more rental units available, finding a home to buy can be more difficult and requires a bit more commitment.

Here are some tips from the Wall Street Journal that will help you decide if jumping out of renting and into the housing market is a good move for you. And if you're living in a rental home, the home of your dreams could already be under your feet and worthy of making an offer on.

Consider the $8,000 tax credit for first-time homebuyers, which expires at the end of November. More home foreclosures are leading to great deals on homes, so taking advantage of this tax credit soon should be extra incentive if you're thinking of buying a home.

How long will you stay in the home? Over time, a mortgage will cost less than renting. To avoid eating the transaction costs in buying and selling a house, you'll want to stay in a house longer to make up the difference. The costs of buying a home include a real estate agent's fee, closing costs, inspection fees and all kinds of loan fees. They could add up to 10% of the sale price, or approximately 18 months of rent. Averaged over 10 years that's not so bad, but leaving a house after a few years makes those fees more painful.

What are the monthly expenses? Don't just compare the monthly mortgage to the monthly rent. There are also property taxes, maintenance, utilities, homeowner association dues and insurance. Add those up and see if you can set those aside for a few months and still pay what the proposed mortgage.

Price-to-rent ratio? Divide the price of the home by the total cost to rent it for a year. If the answer is more than 20, you're outside the historic median of 15. Anything higher than 15 has a higher risk of dropping in price, and anything 15 or less means it's a good time to buy because the home is at a good price and not overvalued. It's also a good idea to look at what markets have good ratios.

Do you have a steady job? In a recession that's a difficult question to answer, but if your career is stable and you want to stay in one area for awhile, then buying a home you can afford is a smart move. Without job stability, making mortgage payments, and other payments associated with owning a home, becomes difficult.

How is your credit? With banks getting more strict on who they loan money to for a home, you'll have an easier time getting a loan if you have good credit. It also helps to get pre-approved for a loan before going to all of the trouble of looking at homes for sale. Pre-approval is different than pre-qualification, which is a cursory review of your finances. Pre-approval requires a lender to look at your actual income, debt and credit history.

After weighing all of those factors, you should be able to more easily decide if the time is right to buy a home. Don't let the toughest buying decision of your life become clouded.

Aaron Crowe is a freelance journalist in the San Francisco Bay Area. Reach him at www.AaronCrowe.net

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