EVEN though every nook and cranny of the housing market is draped in doom and gloom, it may be a good time for potential buyers to take a contrarian look.
I'm not minimizing the risks in the US housing market, because they're very real in many locations. Nor am I predicting any sort of miraculous turnaround in the next six months, since I doubt that we'll see that happen. But I'm still a believer in the long-term viability of housing as a solid investment if you buy at the right price. The current shakeout is in fact creating an interesting sweet spot for first-time home buyers to at least start checking out the market.
Take a new look
Some of the markets that were hot a few years ago are full of overextended builders looking to unload their unsold inventory. First-timers tend to focus on existing homes rather than more expensive new construction, but I advise them to take a look at new homes as well. All those stressed-out developers are motivated to make deals.
Know what price is right
It's crucial to load up on as much data before you bid on a home. Get at least three to five recent comparable sales, what are known as "comps" from your real estate agent.
You want to know the differential between the initial list price and the sale price for those homes. The size of the gap, and whether it's been trending lower or higher, is what will determine your aggressiveness in bidding. Keep updating your market analysis every few weeks to stay on top of your market's twists and turns.
Being patient and bidding correctly are crucial. Don't be afraid to go for it. If you see a house you want and it's been on the market for some time, you have nothing to lose by going in and bidding 50 percent lower than the asking price.
Buy only if you have a five-year time frame
If you anticipate relocating anytime soon, it's probably smart to keep renting instead of buying. Remember that once you're an owner, it's going to cost you a 5 to 6 percent sales commission when you decide to sell, should you use a realtor. You probably need to stay put for at least five years.
Shore up your score
Before you look at a single house, check your FICO credit scores. Home buying is the one time you want to pay up for all three scores, because many lenders base the interest rate you're offered on a calculation that takes all three scores into account.
If you're applying for a mortgage with someone else, make sure both of you have strong FICO credit scores. Some lenders will base the rate you're offered on the lowest score between the two of you. If your scores aren't in the top range of 760 to 850, chances are you'll be given a higher interest rate on a loan - and that can make all the difference in whether you can afford to buy or not.
Get the lowdown on down payments
During the housing boom, lenders were all too happy to dole out mortgages that didn't require a down payment. That's coming back to sting many lenders - and crippling the entire credit system - as homeowners who never had to put equity into their home are now walking away from them when their outstanding mortgage is more than the current value of the home. The upshot is that to have any chance of getting a mortgage in today's tight lending market, you need a down payment.
A 20 percent down payment will speed up your loan approval, but not many people have that right now. One possible remedy is the recent change in FHA limits. FHA-insured loans require just a 3 percent down payment, but up until recently these loans maxed out at US$362,790 in high-cost metro areas. Following the economic stimulus package signed into law in February, the new top loan limit for high-cost metro areas is as much as US$729,750.
Ideally, you can scrape together your down payment from savings. But if that's not going to cover everything, you can withdraw up to US$10,000 from your IRA.