How to Make Your First Time a Charm

By Elizabeth Razzi
Special to The Washington Post
Sunday, October 1, 2006

The transition from renter to first-time homeowner is a major one. While today's real estate market has softened enough to provide buyers the luxury of selection, a first-time buyer has new worries: Will the value of my new home hold up? Will I be able to sell when my needs change?

To minimize those concerns, buy smart the first time around. If you invest in a home that meets your long-term needs -- at least five years -- and keep the financial burden manageable, you stand a good chance of weathering whatever the market dishes out. Here are 10 steps to making that happen.

· Look into the future. Big tax breaks come with homeownership. And it can be nice to watch an investment in a home increase over the years rather than watch rent payments grow. But that doesn't mean buying is the right choice -- or that today is the right time -- for you. Renting can be prudent if you're likely to relocate within a year or two, your employment or income is unstable or your credit needs work. And if you can't spare the time (or cash) to handle plumbing emergencies and other expenses, you may want to hold off. Finally, if you are ready to buy, try to envision your needs in five years: A place with extra room or remodeling potential might be a better investment than a home that suits you perfectly today.

· Prepare a budget. You, and not a real estate agent or a lender, know how much you can comfortably spend on a home. To figure it out, start with a no-holds-barred examination of your current income and spending. What can you trim? Phone services? Dining out? Entertainment? If you're looking for help, Ginnie Mae has a good calculator that can help you estimate how much you can afford to spend ( http://www.ginniemae.gov ). Some practice can be helpful, too: Pretend you're already making a big mortgage payment each month, get serious about budgeting and save the extra money for a down payment.

· Build a down payment. While no-money-down mortgages are widely available, using one burdens you with higher monthly payments -- and often entails mortgage insurance, which lenders require for buyers who put down less than 20 percent. A down payment of 5 or 10 percent can really trim monthly costs. You can borrow against your 401(k) retirement savings plan, up to half your vested balance to a maximum of $50,000 -- though you face a 10 percent early distribution penalty if you don't pay back the money before switching jobs -- and you can also withdraw up to $10,000 from an IRA for a down payment on your first home.

· Look for help. A number of programs are out there for first-timers looking to get into a home. Some are geared toward teachers, police officers or other public service providers and others to low-income buyers, but some are broadly available. Buyers in the District and Montgomery County can learn more about federal and local home-buyer assistance programs through a Web page maintained by the Greater Capital Area Association of Realtors ( http://www.gcaar.com ), while buyers in Northern Virginia can find similar information at the Virginia Housing Opportunities Alliance's Web site ( http://www.nvar.com/affordable ). The chart in this section (Page R12) provides more detailed information on specific programs.

· Get your credit in order. Before shopping for a mortgage, find out where you stand in the eyes of lenders. Borrowers with poor credit histories are charged higher interest rates and offered fewer mortgage choices. Take about $45 and buy your credit scores and reports from the three major credit bureaus -- you can do this at the MyFICO.com Web site, run by Fair Isaac Corp. You can achieve significant improvements with just one or two years of diligent money management.

· Get preapproved for a mortgage. You can present a much stronger offer to sellers (and spare yourself worry) by getting your mortgage loan set up before you start house hunting. (This is what's called "preapproval," which means you have applied for the loan and the lender has checked your credit and agreed to give you a loan up to a certain dollar amount.) Shop widely for loans, but apply to only one or two lenders to save money on fees. Check the interest rates and fees charged by your current bank or credit union, other local lenders and a few Internet-based loan companies such as E-Loan and Lending Tree.

· Find a buyers' broker. When you're interested in a house, don't just call the real estate agent listed on a for-sale sign or the agent hosting an open house. Those agents are obligated to get the highest price and best terms for the seller. Instead, ask friends for referrals or check Internet referral services such as HomeGain.com Inc. and RealEstate.com to find a buyers' agent or buyers' broker. They are usually paid out of the commission that has already been agreed to by the seller.

· Shop neighborhoods. You can change practically anything about a home, but it's nearly impossible to change a neighborhood. When you have selected a few areas, drive and walk around them to get a sense of what life may be like there. Pay a visit after dark and on weekends to see if the character changes. Ask residents about homeowners associations and inquire into particular rules that might affect you, such as prohibitions on trucks, boats in the driveway, fenced yards or basketball hoops. And be sure to make a trial commute during rush hour.

· Negotiate. Once you have found a place you want, angle for a deal that works for you. Price is always the biggest negotiating issue, but there are others. Will the sellers pay points on your loan so you can snare a lower interest rate? (One point equals 1 percent of your loan amount, and is paid at closing -- each point cuts the interest rate by about one-eighth to one-fourth of a percentage point.) Or will they pay some closing costs? Hammer out contingency clauses such as a home inspection contingency, finance contingency (which says the deal is off if you can't get a reasonably priced mortgage) and appraisal contingency (which says the deal is off if the appraiser doesn't think the home is worth as much as you've agreed to pay).

· Settle in and settle down. Now that you're a homeowner, prepare for a sudden obsession with Home Depot shopping and catalogue browsing. There's no superintendent to call when the faucet leaks and no landlord to tell you what can't go on the walls, so it's only natural to dig in and customize your surroundings. Enjoy . . . but mind your budget and don't forget to build your savings so you won't be rocked by inevitable surprises.

Elizabeth Razzi is a Washington journalist and author of "The Fearless Home Buyer" (Stewart, Tabori & Chang, 2006). An interactive version of this article appears at www.washingpost.com/realestate.