Q. I am 27 years old; my income is $25,000 a year. When I was younger I was foolish with credit cards and incurred a lot of debts. I have consolidated all my debts, including car payments. I also put away $200 a month in a savings account.

What I want to know is whether that's a sufficient amount since I am trying to save for a house.

---S.M., by e-mail

  

A. Your timetable for buying a house will be determined by several things beyond having a down payment. It is possible to have a down payment but not qualify for the mortgage that you need. That's why you see those house signs that read, "Contract pending"--- a buyer has agreed to buy a house but has not secured his financing.

  So let's take a close look at what you'll need to buy a house:

•           First, you'll need to find a house priced so that you can afford the                mortgage that will be necessary after your down payment. Mortgage                lenders usually limit the monthly cost of the mortgage, taxes, and                insurance to 28 percent of your gross monthly income.

•           Second, you'll need to qualify on your "back end ratio"--- the                total of your front-end (housing) expenses plus your other                obligations. That's usually limited to 36 percent of your monthly                income. In other words, if your consumer and auto loan payments are                more than 8 percent of monthly income, the difference will be                subtracted from the 28 percent limit on housing. Many people learn                that the amount of their mortgage is limited by the amount of                consumer debt they have. On $25,000 a year, for instance, your                "back end" debt would be limited to $167 a month. That's a lot less                than most car payments. Add a few credit cards and a possible                student loan, etc. and suddenly you can't get a mortgage large                enough to buy the house you want.

•           Third, your credit record can put you into a higher risk loan group.                You'll still be able to borrow money but you'll have to pay more                for it. The higher the interest rate you have to pay, the higher                your mortgage payment. As a consequence, the amount of house you                can buy goes down. Put those three factors together and the first                time homebuyer can be closed out of the market pretty easily.

•           Finally, your down payment will need to be at least 5 percent. That                means you can start thinking about buying any house that costs no                more than 20 times what you have in your savings account, provided                that you also have cash to cover closing costs.

Bottom line: for beginners, buying a home is hard work.

  

Q. My question concerns tax issues surrounding mutual funds in a rising market. Let's assume we have a growth fund holding a portfolio of substantially appreciated stocks. Let's also assume that we buy the fund at the beginning of this year; that the stock market (and fund) are completely flat for the year; and that the fund manager "repositions" and generates a moderate portfolio turnover, say 20 percent.

At the end of the year, my investment would be valued at exactly what I paid for it, no gain or loss. However, doesn't the moderate churn of appreciated stock within the fund mean that I will have a taxable position? Am I not worse off?

Isn't it possible to have a market decline yet still have taxable gains to be reported? Isn't there a hidden "gotcha" in purchasing funds with substantially appreciated portfolios?

---G.D., by e-mail

  

A. Yes, there certainly is a "hidden gotcha" and it is very possible to have the value of your investment go down and then get a tax bill on gains realized during the year. That's why many people avoid buying funds at year-end--- they don't want to "buy a tax liability."

Whether you are worse off or not, however, could be argued. If the portfolio has unrealized gains when you buy it, the tax liability is already there. You don't really gain it after purchase; you just "realize" it as a concrete tax bill.

Is there a way around the problem?

Not really. It is possible, however, to use it to your advantage. Quite a few bond funds are now selling with capital losses to carry forward. This means they can appreciate without incurring new tax liabilities.

Similarly, you can buy closed-end mutual funds that sell at a discount to net asset value where the discount exceeds any unrealized capital gain tax liability the fund has. It works both ways.