Single Parents Can Buy Houses Too!

1. Figure out how much house you can afford. A general rule is to look for a house two and a half times your annual income. Mortgage lenders typically use three tests:

• The monthly house payment, including property taxes and insurance should not exceed 26 percent of gross monthly income;
• All monthly debt payments plus the house payment should be less than 38 percent of gross monthly income; and
• The homebuyer should have two to three months' worth of payments in an emergency fund. Using these guidelines, let's say your annual income is $26,000. This would qualify you for a $60,000 mortgage. The monthly principal and interest payment would be about $400 a month; taxes and insurance would add another $100 to $150, depending on the area. If you put less than 20 percent down, you'll have to pay private mortgage insurance as well, for a total monthly payment of about $575.

2. Know your own cash flow. Mortgage lenders may qualify you for more house than you feel comfortable with because they concentrate on one thing: your ability to pay back the loan.

It's up to you to make sure you can make the monthly house payment, pay for child care and still look out for your long-term goals such as retirement and your children's education. Track your spending for several months so you'll know how much house really fits in your budget.

3. Figure in taxes. Houses are often touted as great tax breaks because mortgage interest and property taxes are deductible, but that is true only if you itemize.

4. Save wisely. Let's assume you decide you afford a $64,000 house and would like to put 5 percent, or $3,200, down. With closing costs and an emergency cushion you'll need to save about $5,000. If you invest $100 a month in a conservative no-load mutual fund, you should reach your $5,000 goal in five years. Although it would be nice to go for maximum growth, the stock market is too risky if you'll need the money in a few years.

With a five-year timeframe, the best place to invest the money is in a mutual fund within a Roth IRA. After five years, first-time homebuyers can pull out all their initial investments plus all the earnings (up to $10,000) tax-free.

5. Consider alternatives. Five years may be too long to wait or $64,000 may not buy your dream house. If the numbers just don't add up, explore less traditional paths to home ownership. A relative may be willing to invest in your home through a "shared-equity" arrangement. In some communities, two or three families have bought a large home together, divvying up child care and household chores.

Before you plunk down the down payment, make sure the rest of your financial picture is sound. Inspect your safety net: do you have term life insurance, and a will naming a guardian for your children?

Take advantage of tax breaks. Filing as head of household, claiming childcare expenses and the $500 tax credit for each child under 17 can shave hundreds of dollars off your federal tax bill. Your income bracket ($26,000) should make you eligible for an $850 earned income credit -- one of the few times the IRS pays you.

Finally, don't neglect your own retirement fund. It may sound selfish to fund your own future first, but remember that houses and a college education can be obtained with loans or other assistance. There's no such thing as a scholarship for retirement.