You need cash for clunkers
About this tax credit thing. In the Boston area, where prices are high and houses are old, this $8000 credit does not do all that much to make buying easier. The income limits for this program are not much above the income needed to consider buying here.
Susan asked this morning,
Just curious. If $8,000 (for those who qualify for the full amount) isn't enough to push people off the fence, how much would be enough?
The typical two-bedroom condo that I have worked with lately requires $80,000 for 20 percent down. That is a bucket-load of cash! For someone who hasn’t been saving for years, that $8000 is a drop in the bucket. Maybe, you can qualify with 10 percent down; you’d still need $40,000 or more in your pocket.
I do not think there is a single cash amount that would universally help first-time home buyers. The $8000 is enough to give a push to those who have been planning to buy and have most or all of their deposits in place. Those who have been saving up and waiting for a dip in prices and low interest rates are jumping in. Good move!
Now, for the rest of you, if you earn more than $75,000 a year and you are single, don’t qualify for the credit. A couple can earn double that, $150,000. To readers in normal places, this seems like a lot of money. But, where I work most of the time, that income does not qualify a buyer for a big house unless the prospective buyer has a large deposit saved up.
A single person who earns $75,000 a year should spend about $2000 a month for principal, interest, tax and insurance (using the 30 percent of income rule). That monthly payment would buy a $400,000 house if that buyer has a 20 percent down payment and gets a 5.5 percent lending rate.
With a 10 percent down payment, the principal is much more and PMI kicks in. Then that borrower can buy a $310,000 house.
If this property is a condo, the purchase price must be scaled back again. The condo fee is part of the loan limit calculation. Thirty percent of the $75,000 income purchases a condo at about $260,000 with 10 percent down, once you add in PMI and condo fees.
The income limit is double for a couple. So a two-earner couple has options, if they have down payment money.
In my experience, it is the down-payment levels that are prohibiting most people from buying in my market area. Working people who don’t have resources from the National-Bank-of-Mom-and-Dad find it very hard to save $100,000 to buy a house. Some do it; and I admire their tenacity. (The most successful strategy I see for this is to live simply during the first few years that you earn a professional income. Those who are used to getting by on $30,000 a year can live well on $50,000 and save $25,000 a year.)
House hunters, how much down payment have you saved before you started hunting? Spectators, how much money should buyers have?
What do you think about a 5 percent credit, which has to be paid back either in cash or in community service over the first 5 years?
