First-Time Buyers Beware!

One impact of the continuing housing slump is that people find themselves owning homes they can't really afford. But how do you know before you buy? Anthony Mason has tips for first-time home buyers.

Newlyweds Sean and Susan McDonald are shopping for their first house.

"We're not looking for a mansion or anything like that," says Sean. "We're just looking for something nice."

But they didn't know it would be such a battle.

"It's just been more difficult, quite frankly, than I had anticipated," he said,

Sean, who works for a credit union, and Susan, an accounts receivables coordinator, were surprised at how much a bank was willing to lend them.

"Then Sean did some number-crunching and realized we can't afford a monthly payment like that," says Susan.

So the McDonalds have cut the target price they're willing to pay by 25 percent.

"I don't want to put us in a position where we buy a house and then can't afford to start a family," says Sean.

In the housing boom, when credit was easy, that happened to many buyers who borrowed more than they could really afford. Now, rising delinquency rates are showing that home ownership isn't for everyone.

"Hundreds of thousands, if not millions of homeowners did get in over their heads. And they're going to have a great deal of difficulty staying above water," according to Moody's.com economist Mark Zandi.

Even though we're now in a housing slump, the median price of a house has soared 85 percent over the past decade to $221,000, while the percentage of first-time home buyers who put "no money down" to buy their homes jumped from 28 to 45 percent in just the past three years.

So how do you know whether you can afford to make the leap to owning a home? First, remember, says Zandi, that "owning a home entails lots of costs. It's not just the mortgage."

Calculate the cost of your monthly mortgage payment, but don't forget insurance and taxes. Then apply the 33 percent rule.

"About one-third of your income devoted to all your housing costs is a very good rule of thumb," Zandi says.

Make sure you have enough cash to cover your down payment and closing costs, and that you understand what kind of loan you are getting. "Adjustable rate" mortgages often start with lower monthly payments. But they can rise abruptly if interest rates do, and you'll need to be able to afford those higher payments.

Finally, don't let housing costs wipe out that emergency three months' worth of living expenses you should have in your savings.

"It's actually nerve-wracking," says Sean. "It's exciting, nerve-wracking, scary, terrifying. It's all those things wrapped into a ball of the American dream turning into the American nightmare."

The good news is that Zandi predicts prices will continue to fall until housing becomes more affordable for first-time buyers like the McDonalds.