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Even low-income people can buy a home

Dear Debt Adviser,
I have two children, I am a single working mother and I make approximately $25,000 a year. I recently moved out of an apartment that was costing me $850 a month. I moved from one town to another after my divorce and this is the first year I have lived on my own with my two children. I barely make it.

I was told by friends that I could buy a house with certain programs that are out there. Is this possible with what I am making a year? I did make the decision to move in with a family member so that I can save and fix my credit. Will buying a home be possible with the amount of money I make? What would the best steps be for me to go toward this goal?
-- Margo

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Dear Margo,
Congratulations on setting a goal to become a homeowner and for already taking a step in that direction by moving in with a family member to save money.

Your friends are right when they say that first-time home-buyer programs are available for low-to-moderate income families that make it possible to purchase a home with a salary comparable to your own. You might start by contacting your state's office of Housing and Urban Development, or contact your city's housing department to determine what programs are offered in your area.

But before we get to the matter of home buying, let's first address the line in your letter regarding fixing your credit. As someone who also lived through a divorce, I can well imagine what your credit report looks like and how much you may owe to creditors. But believe me, you can overcome this, given some time and determination!

Before you begin your journey to homeownership, you will need to work to clear up your credit. In other words, you will need to pay any charged-off accounts, bring any late accounts current and in general make all credit payments on time from this time forward. Be especially careful of using credit unnecessarily. You want to be in as good a shape as possible when the time comes to look for a loan.

Next, I would advise you to take a hard look at your monthly expenses and make sure you are living within your means. Create a spending plan to help you map out how you can make your $25,000 income stretch enough to cover regular monthly expenses plus a new mortgage loan.

Most lending institutions require that your mortgage payment not exceed 28 percent of your gross monthly income. In your case that would mean your mortgage payment could not exceed $583 a month. According to the calculator at Bankrate.com, you should qualify for about $100,000 of mortgage at 6 percent. Budget the rest of your salary to cover the remainder of your monthly expenses. Include a small amount in your spending plan to put aside for an emergency savings fund. Even $5 a month will add up with time.

Finally, if you are not receiving child support from your ex, make it a priority to change that. Your two children need and deserve to be financially supported by both their parents and the additional income will make it easier to qualify for and meet a monthly mortgage payment.

In general, housing-assistance programs provide first-time home buyers with down-payment assistance, low-cost loans and housing education. Many programs offer grants or discounted loans (if the owner stays in the home for more than three to five years). In addition, first-time home-buyer programs work with lenders that offer these low-cost loans to be sure you fully understand the commitment you are making by owning your own home.

Most programs will include an education component. I encourage you to take full advantage of the education provided. I used to teach these myself and I think they helped a lot of people avoid a lot of mistakes! Don't rush the process. As long as you and your family member can stand it, live there and save those down-payment bucks! You are on the right track and I know things will work out for you.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.


-- Posted: Oct. 29, 2004

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