Before You Start:

• Grab your current household budget so you can consider your financial situation and your ability to make mortgage payments.
• Ask family and friends if they can recommend experts, like a lawyer and an inspector, who can help with the home buying process.
• Think about your lifestyle and how it might affect your choice of home and neighborhood.
• Do a little research on current home prices in the neighborhoods you plan to target.

Buying Your First Home

Home ownership is the cornerstone of the American Dream. But before you start looking, there are a number of things you need to consider. First, you should determine what your needs are and whether owning your own home will meet those needs. Do you picture yourself mowing the lawn on Saturday, or leaving your urban condo for the beach? The best advice is to look at buying a home as a lifestyle investment, and only secondly as a financial investment.

Even if housing prices don’t continue to increase at the torrid pace seen in recent years in many areas, buying a home can be a good financial investment. Making mortgage payments forces you to save, and after 15 to 30 years you will own a substantial asset that can be converted into cash to help fund retirement or a child’s education. There are also tax benefits.

Like many other investments, however, real estate prices can fluctuate considerably. If you aren’t ready to settle down in one spot for a few years, you probably should defer buying a home until you are. If you are ready to take the plunge, you’ll need to determine how much you can spend and where you want to live.

How Much Mortgage Can You Afford?

Many mortgages today are being resold in the secondary markets. The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Mortgages that conform to Fannie Mae’s standards may carry lower interest rates or smaller down payments. To qualify, the mortgage borrower needs to meet two ratio requirements that are industry standards.

The housing expense ratio compares basic monthly housing costs to the buyer’s gross (before taxes and other deductions) monthly income. Basic costs include monthly mortgage, insurance, and property taxes. Income includes any steady cash flow, including salary, self-employment income, pensions, child support, or alimony payments. For a conventional loan, your monthly housing cost should not exceed 28 percent of your monthly gross income.

The total obligations to income ratio is the percentage of all income required to service your total monthly payments. Monthly payments on student loans, installment loans, and credit card balances older than 10 months are added to basic housing costs and then divided by gross income. Your total monthly debt payments, including basic housing costs, should not exceed 36 percent.

Many home buyers choose to arrange financing before shopping for a home and most lenders will “pre-qualify” you for a certain amount. Prequalification helps you focus on homes you can afford. It also makes you a more attractive buyer and can help you negotiate a lower purchase price. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.

In addition to qualifying for a mortgage, you will probably need a down payment. The 28 percent to 36 percent debt ratios assume a 10 percent down payment. In practice, down payment requirements vary from more than 20 percent to as low as 0 percent for some Veterans Administration (VA) loans. Down payments greater than 20 percent generally buy a better rate. Lowering the down payment increases leverage (the opportunity to make a profit using borrowed money) but also increases monthly payments.

How Much Home Can You Afford?

Bob and Janet’s combined income is $50,000 a year, or $4,166 a month. Their housing expense ratio of 28 percent yields a monthly maximum of $1,166 for mortgage, insurance, and taxes ($4,166 x 0.28 = $1,166).

Their total debt ceiling of 36 percent is $1,583 (4,166 x 0.36 = $1,500). Their monthly debt payments include a $200 car payment, credit card payments of $100, and student loan payments of $200. Subtracting this total of $500 from the $1,500 permitted leaves $1,000 in monthly housing payments.

Costs of Buying a Home

Many home buyers are surprised (shocked might be a better word) to find that a down payment is not the only cash requirement. A home inspection can cost $200 or more. Closing costs may include loan origination fees, up-front “points” (prepaid interest), application fees, appraisal fee, survey, title search and title insurance, first month’s homeowners insurance, recording fees and attorney’s fees. In many locales, transfer taxes are assessed. Finally, adjustments for heating oil or property taxes already paid by the sellers will be included in your final costs. All this will probably add up to be between 3 percent and 8 percent of your purchase price.

Ongoing Costs

In addition to mortgage payments, there are other costs associated with home ownership. Utilities, heat, property taxes, repairs, insurance, services such as trash or snow removal, landscaping, assessments, and replacement of appliances are the major costs incurred. Make sure you understand how much you are willing and able to spend on such items.

Condominiums may not have the same costs as a house, but they do have association fees. Older homes are often less expensive to buy, but repairs may be greater than those in a newer home. When looking for a home, be sure to check the actual expenses of the previous owners, or expenses for a comparable home in the neighborhood.

Choosing a Neighborhood

Before you start looking at homes, look at neighborhoods. Schools and other services play a large part in making a neighborhood attractive. Even if you don’t have children, your future buyer may. Crime rates, taxes, transportation, and town services are other things to look at. Finally, learn the local zoning laws. A new pizza shop next door might alter your property’s future value. On the other hand, you may want to run a business out of your home.

Look for a neighborhood where prices are increasing. As the prices of the better homes increase, values of the lesser homes may rise as well. If you find a less expensive home in a good neighborhood, make sure you factor in the cost of repairs or upgrades that such a house may need.

Finding a Broker

If you are a first-time home buyer, you will probably want to work with a broker. Brokers know the market and can be a valuable source of information concerning the home buying process. Ask lots of questions, but remember that most brokers are working for the seller, and in the end, their primary obligation is to the seller and not to you. An alternative is a so-called buyer’s broker. This individual does work for you, and therefore is paid by you. Seller’s brokers are paid by the seller.

Make sure that the broker has access to the Multiple Listing Service (MLS). This service lists all the properties for sale by most major brokers across the country. Brokerage commissions average 5 percent to 7 percent and are split between the listing broker and the broker that eventually sells the home. Don’t be surprised if your broker is eager to sell you their own listing since they would then earn the entire commission.

Once you’ve determined a price range and location, you’re ready to look at individual homes. Remember that much of a home’s value is derived from the values of those surrounding it. Since the average residency in a house is seven years, consider the qualities that will be attractive to future buyers as well as those attractive to you.

Although it can be difficult, try to remember that you will probably want to sell this home someday. The more research you do today, the better your decision will look in the years to come.

Summary:

• Buying a home can mean building significant value through the years.
• Think carefully about how much you can afford to spend and consider borrowing guidelines like those used by Fannie Mae.
• Pre-qualifying with your lender is a good way to determine how much house you can afford.
• You will need cash for a down payment and closing costs. Generally speaking, the higher the down payment, the lower the interest rate and monthly mortgage payment.
• In addition to your mortgage payments, you will also need to consider the other costs of home ownership.
• Schools, taxes, services, crime rates, transportation, and zoning are important considerations when selecting a neighborhood.
• Brokers usually represent the seller, but they can be valuable sources of information for buyers as well. A broker that belongs to the Multiple Listing Service will be able to offer a wider variety of homes to choose from.
• Remember to consider resale value when buying your home.

It’s All About the Market

Market conditions play a huge part in any decision about when to buy. Housing market values have varied widely from region to region in recent years. While the Florida market has seen meteoric rises in home values, Ohio has seen its real estate prices go into negative territory in the last year.

Do not buy high and sell low – if your market is softening or has hit its peak and is heading south, you may want to wait on your purchase.

The magazine Smart Money has created a worksheet to compare the costs of renting vs. buying using market appreciation calculations to determine at what point you come out ahead. Plugging in the price, down payment, your income bracket, interest rate, and current market appreciation rates, the worksheet will break out what you will gain.

For example, say you were to buy a $400,000 house in Boulder, Colorado and you estimate the market will soften from the current 11% appreciation to about 9 percent annually. If you stayed in the house three years, you would recover $88,750 in equity at the end of that period; if you stayed five years, you’d realize $120,360.

It’s All About You

The top three reasons people file for bankruptcy are change of job status, divorce, and unforeseen health expenses. If you face any of these challenges and don’t have a financial cushion, this may negatively impact your ability to pay a mortgage. Big life events dictate your readiness to buy now or to wait for a little more stability.

Signs you should not buy right now:

• Will you be moving within the next five years?
• Will you be having kids soon?
• Will you be making a job change?
• Have you recently filed for bankruptcy or is your credit score below 630?

If you answered yes to any of these questions, or you are experiencing other life-changing events like illness, marriage, divorce, or breakup, you may want to wait.

Your Financial Future

Aside from life events contributing to your decision, getting your financial house in order before you begin your home search is key. Even with all the programs available for buyers with a low-or-no down payment, if your debts are growing steadily and you don’t foresee an increase in your income, you are putting yourself in greater financial risk by taking on a mortgage.

With only a few exceptions, many loans for people who are still repairing their credit or recovering from bankruptcy carry higher rates than those available once your credit is in better shape. So the question comes down to this: Do you buy now, before prices appreciate higher than you can afford, but do so with an expensive loan? Or do you wait and repair your credit, then get a favorable loan, and pay more for your home?

That’s the sort of analysis you need to go over with a financial counselor or mortgage broker before you start hitting open houses.

Ways to Cushion the Blow

On the other hand, if you are willing to buy a home that needs a bit of work and, over time, you can afford to get it done, your home could appreciate faster, strengthening your financial position. If you are willing to take on a roommate or renter, you can also soften the expense of a mortgage, which almost always costs more than rent. Buying a home is a risk, and it’s worth asking yourself hard questions about what you’re willing to do to protect yourself from getting in over your head.

If you answered “no” the life-change questions, and have the down payment or equity from your current home, you still need to look at interest rates and at how buying affects your taxes. You can’t time the stock market, but you can time interest rate hikes, as they are a little easier to predict. If they are going up fast, you can jump in before they rise too far; if they are already high, you will have to calculate how refinancing in the future affects your budget.

What to Do First

If you are anxious to get moving, be patient. You have a few things to do first:

• Go to open houses – get the lay of the land
• Talk to a mortgage broker to get pre-approved
• Interview agents (You may want to find an agent at the same time as you look for a mortgage broker – a good agent can recommend reputable brokers and help you make sense of the terms of the loan)
• Review credit report and scores with mortgage broker to determine if any repairs are needed
• Use Zillow.com to find info on neighborhoods that interest you and then use the Home QandA feature to ask current homeowners

“Tight underwriting standards and the lack of a down payment are keeping a big chunk of buyers out of the market and other people are being displaced by foreclosures,” Wayne Yamano, director of research at John Burns Real Estate Consulting in Irvine, Calif., told Bloomberg News. He predicts that the home ownership rate may fall to about 62 percent by 2015.

The home ownership rate reached a record high of 69.2 percent in the second and fourth quarters of 2004.

“A home ownership rate of 69 percent is not sustainable,” William Wheaton, an economist and co-founder of the Center for Real Estate at the Massachusetts Institute of Technology, told the Investor’s Business Daily. “The notion that it comes down to 64 percent or 63 percent is completely logical, reasonable and likely to happen. … You have a generation of first-time buyers that went overboard into the market in 2000-2007. You’re going to have to wait for the next generation to come in and gobble up houses (and) that’s going to mean a little scarcity of first-time buyers for the next 5 to 10 years.”

But many economists are banking that the younger generation, particularly Generation Y, will drive the housing market in the next decade.

“It may take them a little longer to get a home” due to weak hiring and pay, says Stan Ross, chairman of the University of Southern California’s Lusk Center for Real Estate.  But, “I really believe that the American dream [of home ownership] still exists.”

Source: “U.S. Homeownership Falls to Lowest Since 1998 on Tight Lending,” Bloomberg News (July 29, 2011) and “Home Ownership Plunges to 13-Year Low, Bust,” Investor’s Business Daily (July 28. 2011)

The average cancellation rate for the past 16 months has been between 8 percent and 10 percent.

Lawrence Yun, NAR’s chief economist of NAR, says possible culprits could be lowball appraisals and tightened mortgage underwriting rules. Some real estate professionals also point to lawmakers’ indecision on the national debt ceiling the last few weeks and an increase in short sales-related cancellations due to buyer frustration at the lengthy process or banks not approving the short sales.

And some real estate professionals say that buyers simply have just gotten more picky.

Home inspections often turn up some problems in homes, but “lately buyers seem to be holding out for perfection,” Jessika Mayer, manager of professional development at Coldwell Banker Plaza Real Estate in Wichita, Kan., told The Real Deal. She says that minor problems surfaced by inspections that buyers once let pass are now derailing deals, with buyers’ increasing demands for replacements, repairs, and price discounts.

Those are possible outcomes predicted by some homeowners, local leaders and a major home builders group from the sweeping property insurance bill that hit Gov. Rick Scott’s desk Wednesday. The governor has until May 26 to decide whether to sign it into law or veto it.

Supporters of the bill, including insurers, say the bill could strengthen the state’s property insurance market and draw more private insurers to Florida — a key goal for Scott and other state leaders who want policyholders to have more insurance options. Many homeowners in South Florida have only the option of insuring their homes with state-backed Citizens Property Insurance.

Insurers report premiums are not keeping pace with their costs, including expenses for sinkhole claims.

Opponents say the bill reverses changes that were made when problems surfaced after the 2004 and 2005 hurricanes: Premiums doubled and tripled in some cases, and homeowners had trouble finding contractors willing to repair their homes if they could not pay the costs upfront.

Rate hikes

One provision allows insurers to increase premiums up to 15 percent a year for costs and profits related to reinsurance, insurance for insurers. That means a $1,000 premium could double after five years to $2,011, as the increases compound. The provision drew the most fire before the Senate approved the bill last week.

Another provision allows insurers to charge customers for advertising costs and agent commissions — without direct or indirect interference from regulators.

Those parts of the bill are meant to ease the burden on insurers, allowing them to get rate increases for expenses including those they may not control. The less regulation, the more likely insurers are to stay in or come to Florida, say lawmakers who support the bill.

Mickey Berk, a retired business owner in Coral Springs, said he’d like more insurance companies to choose from, but not if it means another rate hike. His annual homeowners insurance premium went up 20 percent in March, to $6,000.

“Somehow it seems if we have a hurricane, we get hit. When we don’t have hurricanes, we get hit anyway. I don’t know where it stops,” he said. It has been more than five years since Florida suffered a direct strike from a hurricane.

Arnold Ruskin, a retired accountant in Margate, said he managed to lower the premium for his condominium unit insurance last year to $550 by getting less coverage and increasing the deductible. But his insurer informed him a few weeks ago the premium will increase to $715 when it’s up for renewal.

“I don’t think the state understands the problems [facing people] living on fixed incomes. Gasoline is high, food is high, and they keep giving these insurance companies new” benefits, he said.

Claims payments

Critics also worry that if the bill becomes law, some policyholders won’t receive claims payments for home repairs. The bill would shorten the time policyholders have to file or reopen claims to two years for sinkhole claims and three years for hurricane claims — from five years currently.

Supporters of the bill say homeowners should know whether their property is damaged within a few years of a disaster.

Thousands of homeowners who filed claims for Hurricane Wilma did so years after the storm. Some said they did not know they could challenge their insurers’ decision to deny claims or pay less than the contractors’ estimate. Others said they did not know how extensive the damage was until years later.

Some policyholders avoid filing sinkhole claims when they first notice cracks in their homes’ walls and foundation because they don’t know how serious the damage is. They know if they file a claim, insurers are required to report the problem to county officials, diminishing the home’s value.

Under the bill, if the ground under policyholders’ homes continues to settle and the damage worsens after two years, homeowners would be out of luck.

Less up-front money

Another provision would require insurers to pay upfront only part of a claim to repair damage to a home. Insurers initially would pay what they estimate as the depreciated value of the home, less the deductible. As repairs are made and expenses incurred, they would pay the rest.

Lawmakers say the measure is aimed to ensure repairs are made, rather than homeowners pocketing the money.

That could make it difficult, and in some cases impossible, for policyholders to repair the home.

As it is, many contractors are reluctant to take on construction jobs that involve an insurer because it usually takes longer to get paid — if the insurer approves the claims, said Doug Buck, director of legislative affairs for the Florida Home Builders Association.

The bill would make the work even less appealing. “The homeowner will probably be asked by a contractor to cover it out of his or her own savings,” Buck said. That means the damage to the policyholder’s home could get worse while he or she saves up for the repair or waits for a contractor.

Harry Dressler, a Tamarac city commissioner and a former senior vice president of financial services firm Morgan Stanley, said this change could be hard on homeowners who are underwater, or owe more than their homes are worth. “You could be contributing to a major increase in defaults [as people say], ‘Why am I paying the mortgage or why am I going to borrow money to pay for repairs? I’ll pass,’” he said.

Consumers who want to weigh in on the bill, SB408, can contact the governor’s office at 850-488-7146 or at flgov.com/contact.

Here, Barbara Holland, CPM, of H&L Realty & Management Co. in Las Vegas, identifies some of the biggest liability mistakes common among those who haven’t yet learned the ropes.

1. Not having a written property management agreement. Even if you’re just helping out a friend and managing the property for free, you’re walking on thin ice if something comes up—like the need to evict the tenant.

2. Using a makeshift lease agreement. These agreements are easy to find on the Internet—maybe too easy. If the agreement isn’t thorough, or if it doesn’t include sections that are required by your state law, you’re leaving yourself exposed.

3. Not depositing the security deposit in a proper trust account. The proper place for the money isn’t with the owner. In some states, the trust account money must be in a separate property management trust account and not in the broker’s general sales trust account.

4. Not having the tenant sign a move-in and move-out form. This form includes a property condition disclosure. Without it, you have little recourse if a unit is damaged beyond the usual wear and tear.

5. Trying to incorporate a lease- purchase arrangement into the lease agreement. There’s nothing wrong with doing this, but it’s complicated, and if it’s not done properly, you could invite trouble. For instance, you could have a difficult time evicting the tenant for nonpayment of rent if the court looks at the arrangement as a purchase agreement.

For the fifth year in a row, Florida led all states in 2010 in the amount of reported fraud and misrepresentation on loan applications, according to a report released Monday by the LexisNexis Mortgage Asset Research Institute.

The Sunshine State had more than three times the expected level of reported mortgage fraud for its loan origination volume. Florida also was first in loan investigations for the fourth consecutive year.

Meanwhile, the Miami-Dade, Broward and Palm Beach county metro area placed near the top for fraud incidents last year. It ranked fifth with 5 percent of all reports received. Los Angeles-Riverside, Calif., was first with 17 percent.

Mortgage fraud makes underwriting tougher and raises costs for all borrowers, industry officials say.

The problem in Florida isn’t surprising, given the depth of the housing downturn here.

The state attracted large numbers of speculative builders and buyers amid a lax lending environment that gave mortgages to borrowers who didn’t have to prove income. Such mortgages became known as “liar loans.”

“Florida will continue to be ground zero for mortgage fraud, mostly because it’s a huge place for investor properties, second homes and foreclosure sales, and that’s where the fraud tends to be centered,” said Guy Cecala, publisher of the Inside Mortgage Finance newsletter.

“Florida is like Las Vegas: It attracts people from all over the place,” added Jerry Tepps, a foreclosure defense attorney in Plantation. “And some of them are wrong-doers.”

With the increased emphasis on fighting fraud, consumers shouldn’t sign anything related to a mortgage that isn’t completely accurate, officials say. Also, borrowers must take a more active role in the process to ensure they aren’t being deceived.

Some in the industry say they thought mortgage fraud in Florida would have declined along with home values.

But scammers have a different strategy now that the housing market has tanked, focusing on fraud related to short sales and foreclosures, said Latour “LT” Lafferty, a former prosecutor for the U.S. Attorney’s Office.

“Now they’re preying on what the system offers them,” said Lafferty, who heads the white collar crime defense practice at Fowler White Boggs in Tampa.

Recently, complaints have mounted about foreclosure rescue firms that persuade unsuspecting homeowners to transfer ownership of their properties.

Reports of suspicious activity relating to mortgage fraud in the U.S. rose last year to 70,472, nearly a 5 percent increase from 2009. Losses are estimated at more than $1.5 billion, though the dollar amount is likely to be underreported.

Mortgage fraud also is prevalent in New York, California, New Jersey and Maryland, according to the report. It cited misrepresentation on loan applications and issues relating to appraisals and home valuations as some of the most pervasive problems last year.

A newer type of fraud is called “flopping,” in which real estate agents or other industry insiders resell homes for less than the stated short sale values to lenders. The scheme takes advantage of “minimal information required to validate declining values and lender desperation,” according to the report, co-authored by Denise James and Jennifer Butts.

Lenders are getting better at identifying opportunities for fraud and protecting themselves from future abuse, said Ward Kellogg, chairman of Paradise Bank in Boca Raton.

Still, “you’re always going to find people trying to cheat,” he said.

Write an online column. Contribute your real estate knowledge for a weekly or monthly online real estate column. Contact your local newspaper Web site or look into writing for Patch.com. The visibility can help generate business without costing you a dime, says Jeannie Feenick, a salesperson at Keller Williams Towne Square Realty in Bernardsville, N.J. Online is “where the consumers are,” Feenick says.

Make neighborhood videos. Hannah Williams, of RE/MAX Eastern Inc. in Philadelphia and Bucks County, shoots video footage of local neighborhoods and posts the videos to her blog. This draws the attention of potential buyers who want to move into the area, resulting in new leads, she says.

No more snail mail. Clients won’t get a calendar or recipe cards from the staff at Minneapolis-based iMetroProperty.com. Practitioner Danny Dietl prefers to engage with past, current, and potential clients exclusively through Facebook, Twitter, and YouTube.

Get work done from home. “Before I was set up at home with a scanner and printer and a functioning office, I was making a lot of trips” to the office, says Marilyn Boudreaux, associate at Century 21 Mike D. Bono & Co. in Lake Charles, La. Now she’s saving time and money on fuel.

Try online planning services. Instead of hiring a social media expert or spending significant time creating her own social media plan, Marjorie Taylor used SocialMadeSimple (www.socialmadesimple.com), which charges a small fee. “It saves me time, which is my money,” said Taylor, a broker-associate at Watson Realty Corp., in St. Augustine, Fla.

Have (and use) a good CRM system. It may cost money up front to set up an effective contact relationship management system, but it will save you in the long run, urges Mike Seebinger, an associate at Downtown Resource Group in Minneapolis. “Have a system that keeps you on top of the leads you have been spending money and time to generate,” he says.

Use Google Apps for Business. Chicago-based Newman Realty switched to Google Apps for Business, which creates a network of synchronized e-mail, calendar, and instant messaging accounts for all associates at just $50 per month for the whole company. “This simple move has given us a network comparable with that of  the big brokerages at a fraction of the cost,” says broker-owner Scott Newman.

Get rid of the landline. Switch from traditional phone service to a Voice over Internet Protocol service, suggests Haiminis, who recently made the change. VoIP providers use the Internet to move your conversation as data through a broadband connection, providing an economical alternative.

A number of tax deductions and credits are still available for home owners; these include deductions – with specific limits – for mortgage interest and capital gains on home sales, and credits for certain energy-efficient home improvements. Even with these benefits, home owners pay 80-90 percent of all U.S. federal income taxes.

“It’s been suggested that many of today’s tax incentives for home ownership primarily benefit wealthy individuals, but that’s simply not true,” said Phipps. “As today’s public debate continues about what home ownership means for families, communities, and the nation’s economy, there’s no question that for many, owning a home is still the best way to begin building wealth.”

Ninety-one percent of home owners who claim the mortgage interest deduction earn less than $200,000 a year, and the ability to deduct the interest paid on a mortgage can mean significant savings at tax time. For example, a family who bought a home in 2010 with a $200,000, 30-year, fixed-rate mortgage, assuming an interest rate of 4.5 percent, could save nearly $3,500 in federal taxes when they file this year.

“Realtors® see the very real positive impact of home ownership every day with our clients,” said Phipps. “Recent proposals to reduce or eliminate the mortgage interest deduction and remove government support of the housing finance market could have disastrous consequences for the economy, not to mention making it harder or nearly impossible for millions of families to own their own homes. We believe America must continue to invest in home ownership, for the future of our families and our nation.”

For home owner tax season tips, visit www.HouseLogic.com. HouseLogic is a free source of information from NAR that helps home owners maintain and enhance the value of their homes and engage in issues that affect their local communities.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.