Photo source: City of Austin

With the first-time homebuyer’s tax credit set to expire in April and home prices at generational lows, people–especially young people–are able to buy their first homes a lot sooner than many expected.

But it’s easy for first-time buyers to get blinded by the excitement of purchasing a new home.

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Photo source: City of Austin

With the first-time homebuyer’s tax credit set to expire in April and home prices at generational lows, people–especially young people–are able to buy their first homes a lot sooner than many expected.

But it’s easy for first-time buyers to get blinded by the excitement of purchasing a new home.

Here are some tips from local experts to make sure you don’t fall prey to rookie mistakes.

Mistake #1. Not evaluating all your financial life goals

When it comes to considering a new home, potential buyers need to evaluate all their financial goals in life, holistically, before making a budget and determining how much of a mortgage they can afford.

Do you plan to have kids? Do you plan to save for their education? Will you be contributing to a 401k or a Roth IRA? Will you be purchasing a new car? Saving up for a vacation? What about paying for life insurance? A rainy day fund?

“They need to have a clear picture of their personal finances and meet with a personal financial adviser,” said Gisella R Tomasio, financial adviser at Ameriprise Financial in Chicago. “They have to look at their cash reserve. We used to recommend three to six months, now it’s six to 12 months [of cash reserves].”

There are many questions to ask yourself before committing to purchasing a home. While the numbers may crunch well for you today, down the road your priorities may change and it’s important to be prepared.

Mistake #2. Not considering the additional costs

There are many more costs than just the mortgage. From property taxes to landscaping costs, the onus for maintaining the property and all its expenses will now be on you.

“A good rule of thumb is to have home debt not be higher than 28 percent of your gross income. Then utilities and other home costs not be more than 36 percent,” said Tomasio.

Try using this bankrate.com “How much home can you afford?” calculator to get an idea of what the real cost will be.

Mistake #3. Failing to get a good real estate agent

“Home buying is very stressful and scary, even more so for first-time homebuyers. But that doesn’t mean it doesn’t apply to everybody. Knowing that somebody has your interest at heart and is looking at every single detail is critical,” said Genie Birch, president of Chicago Association of Realtors and broker associate with Koenig & Strey GMAC Real Estate.

Let’s face it. Real estate agents aren’t in this for philanthropic reasons. They are here to make a buck as well. But there are realtors out there who are truly a “buyer’s” agent. Just remember there are also agents who just want to shuffle clients in and out as quickly as possible. How can you tell the difference? 

“Trust your gut, if you don’t think you can trust this person, then find another. Don’t override it,” said Birch. “Get recommendations from your friends who have already bought a home and were happy with the agent that they used.”

Look out for any agent who asks for large fees upfront or who wants to lock you into a very long-term agreement.

With those caveats, most advise that it’s best to get a realtor. Doing this on your own for the first time is almost always going to end in heart—or wallet—ache.

Mistake #4. Getting impatient

There are a lot of things first-time homebuyers need to do to get their ducks in a row before completing a purchase. It’s imperative that you get pre-approved for a mortgage so you don’t fall in love with something far outside your price range. To get pre-approved, make sure your credit is strong, at least a score of 750 in this market.

There are easy ways to improve your credit score before heading to the bank, such as paying down credit cards to improve your debt ratio. MSN Money has seven quick tips for this here.

Once you’re pre-approved, make sure you only sign on for what you need and can afford, not the largest loan the bank or broker may offer you.

“Just because you are qualified for a mortgage at $300,000, that doesn’t mean that’s what you can afford,” said Birch. “And there’s a huge difference between what $250,000 gets you in the city and what it is in the suburbs, so know what you can afford.”

Then, there’s doing your proper research into the home. Be sure to research the neighborhood and take a drive through the area at night.

“Know what you’re looking for,” said Birch. ” Know what’s gonna fit your lifestyle; then you start looking.”

Also be sure to consider how viable the home will be to resell in the future. Since first-time homebuyers tend to be purchasing “starter” homes, they don’t usually remain in the house for longer than five years. Consider any potential developments in the area and how they will affect your home’s value.

Mistake #5 Being too patient

The other end of the spectrum is also a problem.

“For those thinking about buying and think this first-time homebuyers [tax credit] is going to be extended, don’t make that mistake,” said Birch. “Accelerate your plans and take advantage. There’s not another time when you get an $8,000 gift” along with mortgage rates at historically low levels. 

This applies to your selection of a home as well. “Be ready to make a decision. Too many times you think that there is so much out there that you need to see more things. So you won’t make an offer and find out later that it’s gone. Then you find nothing that compares to that,” Birch warned.

Mistake #6. Making an unattractive offer

With a depressed real estate market and news about home prices dropping on what seems like a daily basis, new homebuyers put in bids at ridiculously low prices thinking they’ll be on the right side of supply and demand.

“You think the seller should go down in price. A lot of times, you see people walk away based on an amount that isn’t going to make a difference [sometimes as low as $500] and they lose what they want on principle,” said Birch.

A bad offer is a bad offer, no matter what the market. This could cost you your potential home. Make sure you work with your real estate agent about what a legitimate and appropriate offer would be.

Mistake #7. Forgetting to include contingency clauses

Any reputable, professional real estate agent includes these clauses automatically in any contract, but be sure to double check they are there.

There are two major clauses you need to be sure to include in your contract. Sellers don’t always respond well to them, but they are important for you, the buyer.

First is the mortgage financing contingency. This allows you to cancel or renegotiate the price if the home’s appraisal doesn’t match the offer. If you can’t come to an agreement, you can get your deposit back. You can learn more about that here.

Second is the inspection contingency clause. This also allows you to cancel or renegotiate if your professional inspector finds major flaws in the home.

“Demand to buy homes is really weak,” said Patrick Newport, economist at IHS Global Insight.

While U.S. Department of Housing and Urban Development’s report of new single-family homes sold isn’t considered significant, given its [...]]]> Some gloomy numbers loomed over the real estate market this week when national home sales and prices dropped, while mortgage rates creeped up.

“Demand to buy homes is really weak,” said Patrick Newport, economist at IHS Global Insight.

While U.S. Department of Housing and Urban Development’s report of new single-family homes sold isn’t considered significant, given its huge margin of error, it still showed a national decline in home sales of 11.2 percent to 309,000 in January, from 348,000 in December. It’s a 6.1 drop from January 2009′s 329,000 home sales.

But locally, the situation isn’t as grim.

The Midwest was the only region to post an increase in new single-family home sales last month with a rise of 2.1 percent to 49,000 in January over the year ago month’s 48,000 sold, according to the Department of Housing and Urban Development. But economists call the measurement too volatile and don’t put much stock in a month-to-month number. Instead, they look at trends.

Year-over-year,  Midwest sales were down 7.5 percent from January 2009, when 53,000 homes were sold.

The first-time homebuyer’s tax credit of $8,000 has been attributed with improving sales numbers since it was implemented last year.  It was extended in the end of November and will now expire at the end of April.

“I saw a surge in the market on Dec. 1,” said Michael Poland, senior mortgage banker at Baird & Warner Financial Services.

January was a record month for pre-approvals for Poland, who cited a 55 percent increase in January to 38 pre-approvals, from 21 in December. It has declined slightly in Feburary to 25. Winter months are typically very slow though, he said.

In Chicago, single-family home prices continued to drop for the third consecutive month in December, according to the Standard & Poor’s/Case-Shiller home price index, which measures a three-month moving average and reflected prices from October, November and December.

Chicago prices dropped 0.6 percent on a seasonally adjusted basis in December from the previous month and 7.2 percent year-over-year, according to the report. It was the biggest drop in the 20 cities that the index covers.

But neither Poland nor Newport felt that the dip in prices had a strong effect on sales.

The index as a whole rose a seasonally adjusted 0.3 percent in December from the month earlier, putting  national prices around their summer 2003 levels. Prices went up in 15 of the cities.

The extension of the first-time homebuyers $8,000 tax credit–what some call a second round of stimulus for the housing market–doesn’t seem to be taking a uniform effect nationally.

“The first tax credit exhausted the pool of first-time homebuyers,” said Newport.

Unlike Newport, the Baird & Warner banker has seen more interest in the homebuyers tax credit this second time around, but is worried about what happens when the tax incentive ends.

“But I don’t know what the summer is going to look like,” said Poland.

To make things more grim, rates for 30-year fixed rate mortgages rose above 5 percent to 5.05 percent for the first time in three weeks, according to a Freddie Mac survey.