First-Time Home Buying

home house, money sign
AP/CBS
The process of shopping for and buying a home can be an overwhelming experience, especially for first-time homebuyers. Add the element of uncertainty and the whole process can be downright stressful. (What if you don't get approved for the mortgage you want? What if the inspection uncovers problems? What if the closing is delayed?)

The more knowledgeable and prepared you are about the process, the more likely you'll be able to minimize the hassles.

Buying vs. Renting
First-time homebuyers should compare the costs of renting (rent, utilities, renters' insurance) to the costs of owning a home (mortgage payments, insurance, property taxes, utilities and maintenance).

Often the cash flow costs of owning a home will be the same or more than renting. Remember to account for the fact that you'l probably save money on taxes in the form of deductions for mortgage interest and property tax payments. Also, owning a home does come with some certainty: while your landlord can and will raise your rent, your mortgage payment will stay the same each year (assuming you have a fixed rate mortgage).

Time To Buy or Buying At The Top?
There's no guarantee that home prices won't fall after you buy. In fact, there are more signs that home prices are softening and in some areas, prices could be headed for a drop. Rising interest rates on adjustable rate mortgages and high home heating costs could leave more sellers eager to cut a deal. According to a recent report in BusinessWeek, there has been a significant rise in the supply of homes listed for sale in many areas across the country.

Here's a list of increases in inventory of homes listed for sale over the past three months:

Phoenix: 72.3 percent
Miami: 47.7 percent
Tampa: 36.3 percent
Washington: 34.1 percent
Jacksonville: 32.1 percent
Boston: 28.5 percent
Los Angeles: 26.7 percent

Source: BusinessWeek, Dec. 19, 2005

The best way to avoid overpaying when buying a home is to ask a realtor to prepare a comprehensive market analysis before you make a purchase offer. This should include the recent sales prices and the original listing prices of comparable homes in the vicinity, listing prices of similar homes listed for sale, and the asking prices of recently expired listings of homes taken off the market.

Use what you learn from a market analysis to determine what you will offer. For example, if the supply of homes for sale is rising in your local market, more sellers will be competing for you to buy, which means they may be willing to accept a lower offer.

Also, if you have your eye on a house that has been on the market for a few months or more, or if the seller has dropped the asking price several times, this is a sign that the house is overpriced and you may have some room to bargain.

When you make an offer, you will include an inspection contingency clause in the purchase contract. Before you close on the house, this will allow you to get a professional home inspector to inspect the condition of the home, identifying any repairs and problems. If the repairs identified in the inspection are considerable, you may be able to justify reducing your original offer price by the projected cost of the repairs.

Over long periods of time, owning a home has turned out to be a pretty solid investment, as long as you do not over-pay.

Don't Become House Poor
How much house you can afford to buy depends on two things: the money you have on hand and your income.

Your housing payment shouldn't be more than 25 to 30 percent of your gross income. Housing payment includes mortgage payment (principal and interest), property taxes and homeowners insurance; commonly referred to as PITI. So, if your gross income is $4,000 a month, your monthly housing payment shouldn't be more than $1,200.

To determine how much home and mortgage you can afford, ask a realtor or mortgage broker or use a calculator on Web sites such as Quicken.com and eloan.com.

Banks and mortgage lenders may allow you to qualify for a mortgage with a payment that's more than 30 percent of your income (often up to 38 percent), but I wouldn't recommend it. Common sense should tell you that with about 30 percent of your gross income going toward house payments and 25 percent going to income taxes (Fed, State and FICA), you're left with 45 percent of your gross income to pay for living expenses, other debt payments, and saving for retirement, kids college, etc.

Get Your Credit Score
Your credit score has become the most important thing to look at before you apply for a mortgage because lenders will review this score when deciding to approve a loan and the terms they will offer.

The most commonly used credit score is the FICO score, developed by Fair Isaac & Co. Your credit score is a three-digit number, ranging from 300 to 850 which is calculated from the information on your credit bureau reports. About 60 percent of individuals have a credit score of 700 or better.