Recession Watch: What to do if you're trying to buy a house

door knobIf you are interested in purchasing a home, now may be the right time to begin investigating your options. We are in the throes of a double downswing of the costs associated with entering the single family home market. What this means is that as real estate prices are deflating regionally, the interest rates on first mortgage loans to buy those properties are at rock-bottom levels. Deflated real estate markets aren't always bad things, when you're in the mood to buy some.

The tough part of the proposition right now is that bank money is very tight. When I bought my first home, a 2% down payment would get you a mortgage. In the current banking conditions, banks are sometimes seeking as much as 10% to 30% down payments on first mortgages. Here are some of the things you should consider if you want to do business in today's mortgage climate.

Our credit score is critical. Go over your credit reports with careful detail. Bring any errors to the attention of the reporting agency and clear up any outstanding issues. If your credit report and budget are a total mess, consider paying for a couple hours with a CPA who specializes in household finances and investing. They can help you understand how to get back on track. As always, a poor credit rating will be reflected in the mortgage terms you are offered. Today's bankers are more closely scrutinizing how we look on the books.

We'll need a hefty down payment. Consider where your down payment might come from. Did you plan on borrowing your down payment? Banks have desperately recoiled in reaction to mortgage lending losses and they now want you to assume more risk. It's not surprising that getting a home mortgage these days might be a bit more difficult, but if you have cash to put on the line, the banks will work with you. Be prepared to be asked for down payments of 10% or more, but once again, a stellar credit rating could greatly reduce your required down payment.

Search for distressed properties. I define distressed properties as those which have motivated sellers yet which have been on the market for six months or more. The key is, you'd like to buy real estate from someone who's hot to get it off their hands. In seeking these situations, working with a deeply seasoned real estate professional can be well worth the price. Dig around a little and see what property listings have been just hanging around. Real estate is one field where you can still buy gems in the rough.

Know what you're getting into. Before you buy any house, or better yet, before you sign any financial agreements, make sure you understand the costs, terms and conditions of the agreement you're entering into. My theory in finance and business is that I haven't done anything stupid until I've put my signature on it. There's a handy document called the Federal Truth in Lending Disclosure that they give to us before we sign any loan papers here in Wisconsin. If they have that form where you are, and if you don't already know how to read and understand that form, make the loan agent fully explain it to you. It outlines every dollar you'll be paying over the life of that loan.

Is it time to jump into the real estate market yet? I think it's a good time now and I think it may get much better regionally as the year goes on. I expect to see a mild surge in home buying from April through July as compared with one year ago. I believe that if about two thirds of the federal economic stimulus package is directed specifically at stimulating grassroots home ownership, by the middle of this year we could all be feeling a bit more economically viable.

This post is part of a series offering consumers advice on what to do during a recession.

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