How to Buy a Home in a Tough Economy

Is it time to buy a house now? When it comes to buying a house to live in for a long period of time (5-10 years), the answer is "yes". Buying a house has never been this good when you take in consideration we have had a major hair cut (a crew cut, so to speak) and during the low interest rate environment.

These interest rates are not going to stay this low forever. The main reason is because of inflation. We are seeing signs already that mortgage rates are going up. The way inflation is controlled is through higher interest rates. So, as long as you see oil going up and other commodities, expect rates to continue to go up. The only way, they don't go up is if the consumer slows down quickly, causing a deflationary period to happen. Yet, this is also possible.

Prior to Looking for a House

1. Qualifying yourself - First do not give your social security out to anyone yet. You can get a free credit report from Experian, TransUnion, and Equifax. Go to AnnualCreditReport.com. However, they don't give you the credit score. Nevertheless, you can see what is on your report to fix before going to a lender. If you wish to know your score, it's only about $8-10 to get the score. Once you know your credit situation, check out 3 lenders and ask for a "Good Faith Estimate" to be faxed or mailed to you. You can do this all over the phone.

You do not have to make an application for this. A Good Faith Estimate is like an estimate of the closing costs you will incur and the bank's interest rates including points. Until you are ready to make application, you do not need to give the lender your social security number. Every time your credit is inquired about, it can actually lower your score. So, be prepared and know your details first.

If all the negative reports about falling housing prices are keeping you from buying, do the what ifs? We have dropped considerably over the past 2 years across the nation. Play around with numbers.

Here is a mortgage calculator from "INTEREST.COM". See what happens when you put a 6 1/2% interest rate in for a mortgage you are looking for now. Now put a 7 ½% interest rate in there. Most likely you're looking at over $100 a month increase. Now, play with the mortgage amounts and do a "what if" the prices in your area fall another 10%. The outcome might be very similar. The point is that if rates go up you could be paying the same as if prices fall by a certain percentage.

The point is to set up some worst case scenarios for your financial household. If the results are that you are a survivor; then that should reassure your decision. As long as you are going to live there for a long period, today's entry prices are a good risk to reward scenario, depending on the location you select - which I'll get into later.

Once you decide on a lender and make application, get yourself a pre-commitment (pre-qualified) letter. This will show the seller you are ready to go and all you need is the right house.

2. Find a good Realtor who farms the area. Please read "Questions to Ask a Realtor when Buying a Home". Finding a Realtor who knows the area is important.

Location, Location, Location

1. In order to lower your risk of falling prices, always buy on the low end of a neighborhood.

For instance; let's say that you want to buy a home priced around $250,000. You have two choices of subdivisions within a similar location - Neighborhood A with a price range of $150,000 to $250,000 or Neighborhood B with a price range of $200,000 to $500,000.

Which do you chose?

Answer: Neighborhood B.

A good strategy is to buy the cheapest home in the neighborhood. It all has to do with valuations. It's a well known fact in real estate the cheaper end will typically appreciate better percentage wise than the higher priced home, providing there are no real red flags for a particular cheap home - structurally speaking.

2. Look at the school districts to help determine a good location. Homes with a good school district will have better resale values.

3. Ask about the crime in the area by going to the local police or sheriff department.

4. Buying closer to the city holds value better than driving long distances.

Single Family Residences versus Condos

Single Family homes are normally a better resale value than condos.

Condos have no outside maintenance compared to single family residences.

Condos do have a maintenance fee.

Depending on your location, condos can take a longer time to sell.

This is the best buyer's market I have ever seen in my 25 years of being involved in real estate. Most sellers are willing to take on some closing costs to unload their homes. Sellers are dropping below appraised values to sell their homes quicker. You have low interest rates that might change directions soon with depressed prices.

Even if the prices dropped in the future, as a long term holder with a good location, you should reap the rewards in the future - especially if the location is centered on job growth.

I do not believe we have seen a bottom in real estate. I do believe we still have one big wash out to come. Nevertheless, we are closer to the bottom than the top and interest rates could be 2% higher or more from what you see now. It wasn't that long ago, 7% seemed like a cheap rate. It's hard to believe when I bought my first home interest rates were around 14%. Like they say, everything is relative.