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5 tips for first-home buyers in today's market

Families looking to buy their first home are in for a world of hurt. Starter homes are in short supply, which makes it tougher for buyers to not only find an acceptable property but also to negotiate on price and terms. Not surprisingly, that's locking out many first-time buyers and depressing the number of trade-up homes on the market, too.

Since 2012, the number of starter homes listed for sale has fallen 43.6 percent, and the inventory of trade-up properties is down 41 percent, according to research conducted by Trulia, a real estate website. That's fueling a vicious cycle, pushing up prices and making the market increasing unaffordable, site officials say.

"Those who are making their first foray into the housing market are worse off than they've been in years," said Ralph McLaughlin, chief economist for Trulia. "They're going to have to shell out more cash for the down payment and use a greater share of their income to make the mortgage."

Of course, the pain is not evenly distributed around the country. In looking at the 100 largest metropolitan areas, Trulia found some cities where homes of all types were easily affordable and others where all but the highest wage-earners would be locked out.

In many parts of Ohio, for example, you can buy a starter home for roughly the same price as a luxury car. In Dayton, the median starter home sells for $45,000. A similar home would cost $41,248 in Toledo and just under $59,000 in both Akron and Cleveland. In Detroit, a starter home costs less than a Ford Fusion. The median starter home: $17,500, according to Trulia. The Fusion's sticker price: $22,610.

By way of contrast, in most major cities in California, starter homes are completely unaffordable on a starter salary. Defining a first home as one priced in the bottom third of the listed inventory, Trulia found that its median price listed for a whopping $714,000 in San Francisco, $585,713 in San Jose, $416,000 in Orange County and $327,450 in San Diego.

To put this in perspective, you'd need $9,000 in cash for the standard 20 percent down payment on a starter home in Dayton, but $142,800 for the down payment in San Francisco. The Dayton resident's mortgage would set him back $172 per month, while the San Francisco resident would shell out $2,727 monthly, assuming both financed with 30-year fixed-rate mortgages at 4 percent.

Indeed, a Los Angeles resident could easily buy what Trulia classifies as a luxury home -- those priced in the top third of listed inventory -- in Dayton ($206,375) and have enough left over to buy a Tesla ($101,500) for less than the price of a starter property in Los Angeles ($329,000).

Perhaps not surprisingly, another recent study found that most renters plan to continue renting, saying it's simply the more affordable choice. Among those who would like to buy, 36 percent felt that saving enough for a down payment would be a substantial hurdle, while 30 percent thought the monthly mortgage payments would be the biggest challenge, according to a survey released last week by Freddie Mac.

What do you do if you're dead-set on buying in one of the less-affordable cities? Five things:

1. Get pre-approved. Getting okay'd for a mortgage ahead of time does two good things for you. It establishes what lenders think you can afford, which allows you to zero in on just the homes that fit your budget. And it reduces the number of contingencies you'd have on your offer. The fewer contingencies you have, the more attractive you look to a seller, said Brett Furman, a long-time real estate agent and author of "What You Really Need to Know About Selling Your House."

2. Avoid new debt. If you buy a car right before trying to close on a home, your lender could back out of your home financing, Furman added. That's because the lender knows what you may only realize six months into home ownership -- the costs and responsibilities of home ownership can be overwhelming. Don't take on additional financial obligations until you've had some time understanding the full economic impact of home ownership.

3. Talk to your landlord. McLaughlin said he bought his first house from his landlord. If you're renting a single-family home and like it, you may be able to do the same. Buying from your landlord has many advantages. First, you know what's wrong and right about the house. You know whether it needs repairs. And if you buy it, there's no need to hire movers. Another potential savings is that the landlord won't have to pay a realtor and may be willing to split that cost savings with you by selling for comparatively less.

And assuming you've been a good tenant, the seller has built up a level of trust in you. If you don't have quite enough for a traditional down payment, your landlord might be willing to carry a second loan. After all, he's been getting regular monthly payments from you for years. Carrying a second mortgage isn't dramatically different than collecting rent.

4. Save like crazy. You'll need a substantial nest egg to handle a down payment, of course, but other costs are likely to be involved in closing the deal. And once you own the home, you'll be on the hook for maintenance, repairs, property taxes and insurance -- all expenses that you left to your landlord in the past.

5. Get an inspection. The low end of the market often is filled with "fixers." Buying a house that needs cosmetic help can be a great way to get a good deal. But if your fixer has structural problems -- a cracked foundation, bad roof, plumbing or electrical issues -- the cost of repair can turn your bargain into a money pit in no time. A professional inspector should be able to spot those costly issues. That allows you to ask the seller to make repairs before the sale closes or to walk away before the repairs sink your budget.

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