Couple in front of their first home sold
Photo: © 2009 Jupiterimages Corporation
The moment I stepped into the foyer, I knew it was the house for us.

From the squeaky hardwood floors to the stained-glass windows welcoming the afternoon sun, everything about this bungalow at the end of a sleepy, bucolic street on Chicago's South Side felt like home to my husband, Scott, and me.
Newly married and neophytes in all matters of real estate, my husband and I arrived at this moment of wide-eyed, home-buying bliss after plenty of cajoling by our loved ones and a powerful government incentive—a federal tax credit for first-time home buyers worth up to $8,000, making buying a home a tempting proposition.

The American Recovery and Reinvestment Act of 2009 provides qualified first-time home buyers an $8,000 tax credit on a principal residence purchased after January 1, 2009, and before December 1, 2009. Unlike the standard tax breaks that accompany home ownership, the current tax credit can be applied to the closing costs and, in some instances, against the down payment of a home.

"Even without the tax credit, this is a wonderful time to buy a house," says Pat Vredevoogd Combs, past president of the National Association of Realtors. "Interest rates and home prices are both at historic lows."

While the current incentives have made owning your own home more attractive, the rules of home buying still apply. Now more than ever, there are no shortcuts. As Scott and I learned, tax credits alone won't buy us hardwood floors and pretty windows or cover all the closing costs; careful planning on our parts was necessary. Using the following steps as a guide, do your homework, save your money and review your financial situation before visiting a single open house.

Step 1: Assess Your Finances
Step 1: Assess Your Finances

Writer Amanda Gengler, who covers real estate for Money magazine, advises home buyers to give themselves at least six months to review their credit scores and finances before scheduling any showings. This wide berth gives home buyers time to clean up their credit and address problems.

"Often, people are looking at their credit reports for the first time," she says. "If you find any errors or inaccurate information, you don't want to apply for a loan until that error is no longer reflected on your report."

Those with higher credit scores traditionally have qualified for lower interest rates on their mortgages, though Amanda points out that those with average scores are having a difficult time securing those low rates in the current climate.

"People used to get the best interest rates with a credit score of 680," Amanda says. "Now, [banks] want people to have a score of 720 or 740 at least if they're going to get the better rate."

What to do:

  • Visit and pull your credit history and score. Review the reports for any inconsistencies. If you have a mistake to dispute, contact Equifax, Transunion and Experian, the three national credit reporting agencies.
  • Review your credit card debt and make a plan for paying it off.
  • Review your savings. Do you have enough money for a down payment? Some lenders are requiring buyers to put down 20 percent of the purchase price and to show proof of funds before the closing date. Make sure you've also accounted for closing costs, which can run upward of $6,500 in addition to the down payment.
  • Make sure you have enough left over in savings for any unexpected expenses or emergencies. 
"If you can do one small thing to make your score jump by even just 20 points, you can see a big difference in the interest rate you'll qualify for," Amanda says. "Something as simple as paying off one credit card can do the trick." 

Though Amanda says the Federal Housing Administration (FHA) is financing the majority of first-time home purchases with federally backed loans that require buyers to put down only 3.5 percent of the purchase price, you should be prepared to do battle with fellow buyers.

"People who think they can take their time and negotiate price in the [lower-priced] housing market are coming up against multiple offers on a house," Amanda says. "You might want to be prepared to put down even 30 percent. We're seeing people with FHA financing having trouble getting their bids accepted."

Step 2: Can You Afford to Buy?
Step 2: Can You Afford to Buy?

Comfortably spending $1,000 a month in rent does not mean you can afford a $1,000 mortgage. In addition to your mortgage, you're responsible each month for taxes, homeowner's insurance and, if you don't put down 20 percent of the purchase price, private mortgage insurance or PMI, which is a lender's way of protecting itself because you're a slightly higher risk.

What to do:

  • Use the mortgage calculator tool to understand how much mortgage you can handle. Be honest with yourself! Make sure to account for all your debt so your result is as realistic as possible.
  • Open a separate savings account and deposit the difference between your rent and the total cost of a mortgage, plus the extra costs mentioned above. For example, if you pay $1,000 in rent, deposit $500 into the savings account on the first of each month. After a few months, if you're able to pay your rent and your remaining bills without that extra cash, you may be able to afford a mortgage.
  • Examine what your monthly housing costs would look like. The electric bill of an 850-square-foot apartment is substantially lower than that of a 2,000-square-foot house, not to mention the increase in costs of upkeep and maintenance on the home.
"When you find a house you like, ask to see the utility bills for the past year. Many sellers will have that ready at the house," Pat says.

Step 3: Assemble Your Team
Step 3: Assemble Your Team

When you're ready to begin your search, talk with people who have already been through the process and ask them for recommendations on who you should hire as your Realtor, lawyer, mortgage broker and insurance agent.

"Remember you'll look out for yourself better than anyone else will," Amanda says. "Sellers' agents are probably very nice people, but they're working for the seller. Understand who works for you and in your best interest."

What to do:

  • Pat says that if you're unable to get a real estate agent or Realtor recommendation from a friend or an acquaintance, or if you're moving to a new town, sites such as have a nationwide searchable database. If you have trouble finding a lawyer or a mortgage broker, ask your agent or Realtor if he has any recommendations.
  • While the Internet is a popular resource for buyers, Pat warns against using any online-based lending company. "People get prequalified online, and then we find that they almost always can't get [the home purchase] closed," she says. "They have real troubles with appraisals, and there are so many things that happen during the transaction that buyers can't get their questions answered."
  • To find a lender in your area, visit HSH Associates.
  • Look for Realtors with extra education, which signals longevity in the industry and a commitment to becoming educated in their fields. Designations after a Realtor's name, such as Accredited Buyers Realtor (ABR) and Certified Residential Specialist (CRS), indicate additional training and certification.
Step 4: Know Where You Want to Live
Step 4: Know Where You Want to Live

Amanda has a rule of thumb when it comes to choosing where to live: You are better off buying an average house in a great neighborhood than the best house in a less desirable neighborhood. "Your home will appreciate to the homes around you," she explains. "If you're the smallest home on the block, the bigger homes will drive up the value of your investment."

Next, decide the needs of you and your family. Do you want to live close to your job? In which district do want your children to attend school? Are there parks nearby? Is there access to public transportation? If you attend services, is there a nearby church or temple? Answering these questions now will make the difference in your long-term happiness.

What to do:

  • Assess your living situation for the next six years. Amanda points out that home values won't see a real period of growth for another five to seven years, which means you might not see a profit on your current investment until then. Choose a house you can live in until the market picks up.
  • Assess how much space you need. Will you expand your family? Start a home-based business? If these are possibilities in the future, account for the space they'll require.
  • Visit websites such as and research crime rates, appreciation rates and school ratings for the areas you're considering.
  • Contact the local chamber of commerce, which often provides informational packets to prospective buyers.

Step 5: Needs Versus Wants
Step 5: Needs Versus Wants

Decide what you need from your house, and separate them from what you want. Do you need a stainless-steel range? Are four bedrooms necessary, or can you and your family get by with three?

"The best way to determine what is a need and what is a want is to ask yourself whether you have to put a lot of money in it to change it," Pat says. "A house with good bones, rooms where you want and a crummy kitchen is fine. You can redo the kitchen. If you find a house with a kitchen you love but you have to knock down walls? Those major renovations cost more money and can be considered a want."

Pat points out that you can always install a fence or add central air, but you can't add a yard or a neighborhood you love.

What to do:

  • Sit down and write up a wish list of everything you want in a house. Do the same for everything you consider a need. Prioritize those things you can't live without and those things that you can.
  • Talk with your agent or Realtor about what's available in the market, and discuss with her your wish lists. She will be able to access databases and perform searches using the parameters you give her, which will whittle down some houses from others.
As it turns out, each step is well worth the time and effort. Scott and I were about to make an offer on an entirely different home, one that's been remodeled but sits on a busy street with a small backyard. We took Pat's advice and decided to revisit our needs versus wants, and the next day found our now-dream home.

Though we have a massive kitchen remodel ahead of us and rooms of wood paneling to tear down, we gained a sprawling backyard and a peaceful street instead, something we'd have missed had we rushed in. 

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