Easy Guide to Buying Your First Home

Don't let the gloomy mortgage news scare you; buying your first home is still a step-by-step process.

Buying your first home is like assembling furniture: When you open the box and see those tiny bags of Allen wrenches, dowels, and nails, the number of steps involved may overwhelm you. But as you work through those assembly instructions, the process always turns out to be a little easier than you expected.

As a first-time homebuyer, it's important not to let the transactional details distract you; most of the time, they're easily managed with the help of your agent and lender. Your energies are better served by staying focused on the end result of home ownership. To help you in that regard, here's a four-step summary of the financial side of the home-buying process.

Money guide to your first home

1. Know what you can afford. A conservative estimate for how much house you can afford is two to two-and-a-half times the amount you earn in one year. If you have a sizeable down payment, your home buying budget might be as much as three times your annual income.
2. Know your down payment. Your down payment will come from money you have in the bank, money you receive as a gift, or money obtained through a down payment assistance program. If you receive a monetary gift from a friend or relative, your lender may require a signed affidavit stating that the money doesn't need to be repaid.
3. Select your financing. A good part of the financing decision will be driven by the size of your down payment. Also consider the risk associated with your various mortgage options. FHA mortgages are particularly attractive right now, because the terms are lenient relative to other programs. The down payment on an FHA mortgage, for example, can be as low as 3 percent. If you're short on funds, and you don't qualify for an FHA mortgage, you can take out two mortgage loans to fund your purchase. One would be for 80 percent of the amount, and the other would be for a 10 to 20 percent down payment. Be prepared to pay dearly for it, though, because these arrangements can be expensive.

As for risk, fixed-rate mortgages are the safest, because the payments don't change. There are certain situations, however, when adjustable-rate mortgages make sense. An example would be a borrower who expects her income level to change significantly during the course of the loan.

4. Budget your closing costs. These can add up to several thousand dollars. If cash is really tight, ask your lender about rolling these costs into your loan. Or you can try to negotiate for seller's concessions, where the seller contributes to cover some of these expenses.

Once you move through these four steps (without leaving any little screws or wrenches lying around), you should be ready to close your loan and start packing.

Extra8/26/2008 12:30 PM ET

Home prices plummet to 2005 levels

Economists say a real-estate recovery is at least months away, but that isn't stopping bargain hunters from snapping up property in some of the nation's most distressed markets.

By Marilyn Lewis

U.S. home prices dropped further in the second quarter -- a record 4.8% from the second quarter of 2007 -- and sent average home values back to 2005 levels, according to a government report released today.

The national numbers, however, were dragged down by foreclosure disaster zones in California, Arizona, Nevada and Florida. In 30 of the 50 states, prices have risen since last year's second quarter, if only by a little, says the report by the Office of Federal Housing Enterprise Oversight, or OFHEO.

For the 20 major cities tracked by the S&P/Case-Shiller home price report, prices for existing homes fell 15.8% in June from the same month last year -- the 19th straight month of declines and the biggest drop the index has recorded.

Las Vegas remained the weakest metro market, reporting a year-to-year decline of 28.6%, followed by Miami and Phoenix, down 28.3% and 27.9%, respectively. Charlotte, N.C., and Dallas recorded their fourth straight months of increases.

The OFHEO index is calculated using mortgages that are bought or backed by Fannie Mae or Freddie Mac. That excludes properties bought with some of the riskier types of home loans.

Foreclosures bring out buyers

Bargain hunters from across the globe are stoking sales in many of the cities that have the biggest backlogs of foreclosed homes.

Sales are "very, very hot -- almost in a frenzy," says Bill Mitchell, an agent with Marc Joseph Realty in Fort Myers, Fla., since 1991. There, about one home in 64 is in foreclosure. Mitchell says his company is unloading 10 to 15 houses and condos a week -- nearly three-quarters of them for cash. Sales are hopping in other foreclosure capitals, too, such as Sacramento and Riverside, Calif., Las Vegas and Orlando, Fla.

In the Sun Belt cities where prices rose fastest, many prices have dropped below the cost to build, luring investors. "You can now buy some properties in some areas and rent them for a 7% to 8% return on your investment, versus putting money in Treasurys at 3%," says Sean O'Toole, the founder and CEO of ForeclosureRadar, a California analytics firm.

That was retired shop teacher Steve Eichner's strategy in July when he bought a beat-up foreclosure property -- a two-bedroom, two-bathroom home in Cape Coral, Fla. -- for $55,000. Eichner, 62, had pulled money out of stocks, unable to bear the poor returns.

As prices slid locally, "it became clear that my money would do better over the next couple of years in property," Eichner says. Prices there may still fall for a while, he says, but when they do rise, he plans to sell the house for a $15,000 profit and buy another to rehab. Meanwhile, he'll add it to his collection of 12 other rental units, which bring in about $750 a month each.

"It is in a nice area with nice shops around it," he says. "I didn't think it would be a potential loss."

Sales also are picking up in a less frenzied way in smaller cities such as Oklahoma City, Colorado Springs, Colo., and Charleston and Spartanburg, S.C., where demand for agricultural crops and other commodities are fueling local economies. The sales of existing (not new) homes rose in the second quarter in 13 states, according to the National Association of Realtors.

No end to slump in sight

The worst housing slump in more than 25 years isn't over, not by a long shot. Most analysts say the bust's bottom is at least months away. Economist Mark Zandi of Moody's Economy.com, for instance, has predicted prices will fall for nearly a year more, not rising again until early 2010.

"I'm not a believer that we are near a bottom," says Jonathan Miller, the president of Miller Samuel, a Manhattan appraisal company. "Credit is much tighter and harder to get. That keeps prices at a lower level. The law that just passed will help some people that are in pain, but that's not going to change the housing market. That's going to take years."

The latest home price data shows record declines across the country, but sales are slightly up. CNBC's Diana Olick looks at whether the market can rebound.The optimists -- former Federal Reserve Chairman Alan Greenspan is one -- say prices could stop falling in the first half of 2009. Paul Bishop, the managing director of research for the National Association of Realtors, says sales must pick up much more before prices can rise.

"I don't think it's too optimistic to say we'll see some improvement by mid-2009 in terms of sales and shortly after that in terms of prices," assuming the economy suffers no new blows, Bishop says.

Though there have been some improvements, the economic indicators that fuel such predictions still aren't promising:

• The OFHEO study, which tracks the sale of existing homes and refinances, says prices dropped 1.4% between the first and second quarters of this year, led by the most overbuilt areas of California, Nevada, Arizona and Florida. But most states showed flat growth or a little increase in prices. The metro areas with the biggest depreciation were all in California: Merced (-34.5%), Stockton (-31.7%) and Modesto (-28.5%).
• Sales of new homes last quarter rose 2.4%, but economists had hoped for more. New-home sales for June were down less than a percentage point from May but down 33% from June 2007.
• A big oversupply of homes for sale still chokes many markets. It would take 11.2 months to sell all the homes that were on the market in July, well above the five to seven months of inventory that is considered ideal.
• Homebuilder confidence, as reported by the National Association of Homebuilders, still hovers at low levels.
• Foreclosures are still climbing. Notices of default, bank repossessions and auction sales jumped 8% between June and July and 55% over the year before. One U.S. household in 464 received a foreclosure notice in July, RealtyTrac reports.

Bottom-feeding in foreclosure land

The falling prices are attracting foreign investors, whose currencies go even further with the weak dollar.

About 50% to 60% of real-estate agent Mitchell's clients are from outside the U.S. -- most from Germany, the United Kingdom and Canada, he says. About one buyer in 10 snaps up two or three homes after taking a three-hour tour of Florida's Cape Coral or Fort Myers. The ForeclosureToursRUs bus is wrapped in ads that say "Watch your investment grow." (Search for other foreclosure tours on MSN Live Search.)

In Cape Coral, the county court sends about 70 more foreclosed homes onto the local market each day, Mitchell says, adding to the 4,000 properties -- most of them single-family houses -- already for sale. Mitchell says he's currently closing on the $270,000 sale of a custom home that was built and mortgaged in 2005 for $900,000.

On the nation's opposite coast, real-estate "wholesalers" Kurtis and Cindy Squyres buy five or six foreclosed homes a month in Southern California desert towns, reselling most immediately for a profit of $7,000 to $25,000 each. During the boom, they flipped homes, fixing up and reselling properties. Now, they scour the foreclosure listings for extreme bargains, make lowball bids to banks and pass along the successful contracts, plus a markup, to buyers who watch sale-property videos at the Squyreses' site, FarBelowMarket.

Recently, Kurtis Squyres says, they got a bank to accept $75,000 for a boarded-up, stinking, darkened but potentially beautiful home priced at $90,000 -- about $100,000 below the market value. They found an investor to buy it for $90,000 and pocketed the $15,000 difference.

The latest home price data shows record declines across the country, but sales are slightly up. CNBC's Diana Olick looks at whether the market can rebound.Buying began to pick up, Squyres says, earlier this year when banks finally agreed to negotiate on prices of foreclosed homes. California's June home sales were up 17.5% over a year ago. Unsold inventory dropped in July to 7.7 months from 16.8 months in January.

"I think we're bottoming out," Squyres says.

Tighter credit rules a drag

The prices are luring investors such as Kage Njaka, who buys, holds and manages about 20 commercial and residential rental properties in Southern California's Coachella Valley. He's bought throughout the downturn, but now his more conservative friends are starting to wade into the market, too. Many more want to buy but can't get financing, he says.

Njaka has purchased and rehabbed four properties this year for 35% to 45% off the market price, including a duplex he snagged from FarBelowMarket in July for $180,000. "There are a number of properties that will actually generate cash flow for you, especially multiplexes that the bank owns and will give a nice discount for," he says. The booming rental markets in towns such as Cathedral City, Rancho Mirage and Indian Wells are full of people who've lost homes to foreclosure, he says.

Another Coachella Valley investor, Darryl Izakowitz, is, along with his father, "trying to buy as much as we can right now." They pay about $150,000 on average for foreclosed tract homes, renting them out to resell when prices rise.

Lenders' timidity keeps a lid on the market, Izakowitz believes. "I have phenomenal credit -- above 800 -- and lots of cash, yet it took me three or four weeks to get a loan on the last house I just did, and I had to provide everything from my child's blood type to you name it."

"I've been waiting for this," Izakowitz adds. "These are tract homes that people got into with adjustable loans, built by KB Home, Lennar, Centex -- the major home builders. . . . If I'm holding them for five years, I'm guaranteed appreciation. I don't care if the market falls another 5% or 10%. It doesn't affect me."