Tips for first-time home-buyers

During the height of the heady real estate market a few years ago, many first-time buyers were frustrated by untouchable prices and the short supply of homes for sale.

Now, prices have come down substantially, there's plenty of inventory, and interest rates remain close to historic lows. On top of all that, the federal government's $8,000 tax credit for first-time home buyers was extended to April 30.

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Even so, it's not an easy market for first-timers. Once-liberal lending standards are much tougher - some say they've swung too far the other way. Meanwhile, the lower end of the Long Island market, say $350,000 and under, is actually "pretty tight," says Henry Weber, president of RE/MAX of New York in Garden City. As home prices have softened, first-time buyers have found themselves competing with investors with ready cash. "Investors have eaten up a lot of the lower market," Weber says.

Many observers remain cautiously optimistic. "The theme for first-time buyers in 2010 will be: 'Act sooner, rather than later,' " says Jonathan Miller, president of Miller Samuel, a Manhattan-based appraisal firm that produces quarterly reports on the Long Island and New York City markets. Miller says several factors are likely to spur buyers to close deals in the first half of the year, including the expiring tax credit.

"There's a window now where both prices and interest rates are low," says Dottie Herman, president and chief executive of Prudential Douglas Elliman Real Estate. "If you're (financially) OK, this is an ideal time for a first-timer."

Here are six factors first-time buyers should consider:

PRICES
The fundamentals of the housing market nationwide are getting better, but slowly, says John Tuccillo, a consultant and former chief economist of the National Association of Realtors, at a recent gathering of professionals and consumers in Melville.

On Long Island, median sales prices are still down 35 percent from their high in 2006, but they slipped only 4.2 percent during the fourth quarter of 2009 compared to the last quarter of 2008, according to a Miller Samuel report prepared for Prudential Douglas Elliman. Median sales prices in Nassau County dropped 3.1 percent to $400,000, while prices in Suffolk County fell 4.4 percent to $325,000.

Some experts predict that prices overall may come down another 10 percent, as foreclosure sales and short sales (where a home is sold for less that the balance owed on the mortgage) continue to affect many neighborhoods. But "not all homes are coming down in price," Herman says. For example, one house may be listed at $400,000 - the right current market value - and sell at that price. Another house, however, may be overpriced at $500,000 and end up selling for far less.

Herman advises buyers to first decide where they want to live. "Are you willing to live farther from the city but have a bigger house?" Herman says. "Focus on an area, then go to open houses and get a feel for prices, so when a good deal comes up, you'll know it."

INTEREST RATES
Many observers expect 30-year fixed mortgage rates to hover between 5 percent and 6 percent during the first quarter, but then start moving up, nudging closer to 6 percent by year-end.

It's important to keep a close eye on these rate movements, so buyers can calculate the full cost of a home purchase, says Steve Harney, former owner of a large Long Island real estate firm who lectures nationwide on real estate trends. Harney notes that even if home prices drop 10 percent, a 1 percent rise in interest rates would likely result in the same monthly mortgage payment.

THE TAX CREDIT
Under the extension of last year's federal tax credit program - which had been set to expire in November - an eligible buyer must sign a contract to purchase a principal residence by April 30 and close on the home by June 30. (Members of the armed forces have an extra year to buy a principal residence in the United States.)

The tax credit of up to $8,000 again has been authorized for qualified first-time home buyers, in addition to a tax credit of up to $6,500 for qualified repeat home buyers. The credit is available to individuals with a modified adjusted gross income of up to $125,000, or $250,000 for couples (the original rules put those numbers at $75,000 for individuals and $150,000 for couples).

Most experts agree that the tax credit has been a huge success in boosting the sagging housing market. Still, the betting in Washington political circles, Tuccillo says, is that Congress won't offer another extension.

AFFORDABILITY
When deciding what kind of house they can afford, buyers generally should plan on not spending more than 30 percent of their gross income on the monthly "PITI" (mortgage principal, interest, taxes and insurance) payments, says Don Giorgio, president of United Northern Mortgage Bankers in Levittown. "Regardless of what somebody says they can qualify you for, you should know all the elements of your particular lifestyle, like how often your family goes out to eat," Giorgio says. People should "know their budget and stick to it."

Be realistic about what it costs to maintain a home, adds Herman of Prudential Douglas Elliman. If you're buying a home that needs updating or repairs, consider "what it's going to take to get the home in the shape you want," she says. "Sometimes, buying the more expensive home is cheaper."

THE MORTGAGE
Mortgages are "pretty cut-and-dried right now," Giorgio says. Gone are the "smoke-and-mirror" mortgages, like loans that required no documentation of a borrower's income. Lenders are returning largely to standard 30-year and 15-year fixed mortgages and Federal Housing Administration loans. "It's back to basics," Giorgio says. "You document everything - income, assets and credit - and the mortgage is there for you."

New rules issued by the Department of Housing and Urban Development should make it easier for borrowers to figure out closing costs and fees. Within 72 hours after prospective borrowers apply for a loan, lenders are now required to provide a uniform three-page document that spells out the good faith estimate of the loan's total cost. (You can find HUD's guide to settlement costs on the agency's Web site, hud.gov.)

Still, Dean Hartman, chief planning officer of Continental Home Loans in Melville, points out that it will cost more to qualify for an FHA mortgage, a popular loan for many first-time buyers. The FHA recently announced plans to tighten loan requirements by early summer, including a 10-percent down payment for borrowers who have lower credit scores - a significant jump from the current 3.5 percent down payment.

FORECLOSURES
While the large inventory of foreclosed homes is down significantly from a year ago, the problem won't be going away anytime soon, most experts say. "Foreclosures take a long time to work out, especially in New York," Tuccillo says.

Most real estate experts predict another wave of foreclosed homes for sale in the coming months as banks decide to release more of the properties they own into the market. These foreclosures will help keep prices down, although banks are likely to feed these "toxic assets" out gradually, not flood the market all at once, says Weber of RE/MAX. He cautions that buying foreclosures can be complicated, so buyers should look for an agent who has experience in such sales or is certified as a Distressed Property Expert.

Need advice with buying your first home? Submit your questions now to a team of real estate experts and join them in a live chat Monday at noon.

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