These Days, First-Time Home Buyers Are Primed to Cash In

By Ilyce R. Glink with Samuel J. Tamkin
Saturday, March 21, 2009; F05

In the nearly 16 years that I've been writing this column, I've never seen a better market in which to be a first-time home buyer.

The rising tide of foreclosures has pushed down home prices significantly over the past 18 months. Homes, relative to income, are about at the historic norm, which means they're more affordable than they've been in at least a decade.

Beyond that, if you buy a foreclosed property, you might wind up spending even less, as lenders struggle to process all of the foreclosures and short sales that are piling up. (If there were no more foreclosures in Florida, it would take the courts nearly two years to process all of the foreclosures on the docket today.)

Not only have homes come down in price significantly, but 30-year fixed-rate loans are at about 5 percent. Some first-time buyers are getting 15-year rates at 4.5 percent or lower. These are historically low interest rates that will seem downright cheap if rates rise above 7 percent, which they will probably do several years from now.

Spending less to finance a property means you can get more for your money or save more for retirement or other purposes. With interest rates so low and home prices falling, homeownership becomes affordable to many first-time home buyers.

Also, first-time home buyers (defined as those who have never owned a home or have not owned a home in the past three years) who close on a home purchase by Dec. 1 can get up to an $8,000 tax credit on their 2009 income tax return. If you bought a house after Jan. 1, you can file for the credit on your 2008 tax return.

This year, about 4 million people will buy a new or existing home. If you want to make sure the house you buy this year is a smart financial move, follow these quick tips:

-- Get preapproved for your loan before looking for a house. That means the lender has to pull a copy of your credit history and score, you have to apply for the loan, and the lender has to approve your application. Make sure you shop around for the best lender and loan before putting in an application.

-- Once you know what you can spend, find the right neighborhood for the next seven to 10 years. Over that time, you've got a good chance of at least breaking even on the sale, plus you'll have built up a decent amount of equity by paying down your mortgage each month. Remember, it'll cost you about 10 percent of the sales price to sell that home.

-- Don't go for flash -- buy what you need. You can always add granite countertops to a kitchen. It's a lot harder to buy the size house you need in your school district of choice. So, buy something a little faded and dated and upgrade over time as your budget allows.

-- Make sure you have cash in reserve. Houses always need something, so when you're calculating your budget, make sure you allow some extra cash for upkeep and maintenance.

-- Buy a home that you can afford and suits your needs now and for the long term. In the past I have written about overbuying -- that is, buying a bigger and better house than you need. Good planning in the purchase of your home should go hand in hand with good financial planning for your future.