Buying your first home is one of the most important and exciting financial milestones of your life. But before you hit the streets with a realtor, you need to have a good sense of a realistic budget. Just how much house can you afford? You can determine how much house you can afford by following three simple rules or percentages of your monthly income.

The Rules of Home Affordability

Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less. We have taken average qualification ratios to come up with our three rules of home affordability.

Your Maximum Mortgage Payment (Rule of 28): The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28 percent of your gross monthly income (your income before taxes are taken out). For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.

Your Maximum Total Housing Payment (Rule of 32): The next rule stipulates that your total housing payments (including the mortgage, homeowner’s insurance and private mortgage insurance (PMI), association fees and property taxes) should not exceed 32 percent of your gross monthly income. That means for the same couple, their total monthly housing payment cannot be more than $2,133 per month.

Your Maximum Monthly Debt Payments (Rule of 40): Finally, your total debt payments including your housing payment but also auto loan or student loan payments and minimum credit card payments should not exceed 40 percent of your gross monthly income. In the above example, if the couple with $80k income wanted the highest mortgage payment they could get, they could have up to $533 in other debt (car payments or credit cards).

This rule means that if you have a big car payment or a lot of credit card debt, you won’t be able to afford as much of a mortgage payments. In many cases, banks won’t approve a mortgage until you reduce or eliminate some or all other debt.

How to Calculate An Affordable Mortgage

Now that you have an idea of how much of a monthly mortgage payment you can afford, you’ll probably want to know how much house you can actually buy. Although you cannot determine an exact budget until you know what interest rate you will pay, you can estimate your budget. Assuming an average six percent interest rate on a 30-year fixed-rate mortgage, your mortgage payments will be about $65 for every $10,000 borrowed.

• $1,866 / $65 = 28.71
• 28.71 x $10,000 = $287,708 (Your maximum mortgage amount)

Include Your Down Payment: Hopefully you have a down payment of at least 10 percent up to 20 percent of your future home’s purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a home. Note: If you put less than 20 percent down, your mortgage lender will required you to pay private mortgage insurance (PMI), which will increase your non-mortgage housing expense and decrease how much house you can afford.

Ready To Go House-Hunting? Save time, money, and aggravation by lining up your financing first with a mortgage pre-approval. Read my post on how to get no-obligation mortgage quotes online.

Related posts:

1. What Percentage of Income Can You Afford for Mortgage Payments?
2. Are You Ready to Buy a Home? An Easy Way to Check
3. How to Find the Best Mortgage

If you’re getting ready to buy your first home or are a new homeowner, here’s what you need to know—in plain English—about the home mortgage interest deduction.

Who Can Take the Home Mortgage Interest Deduction?

In order to deduct your mortgage interest, you must:

• File Form 1040 and itemize deductions on Schedule A.
• Be legally responsible for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. (For example, if you are splitting the mortgage with a live-in partner and the mortgage is only in his/her name, you can’t take the deduction). Also, you cannot deduct interest you’re paying a family member for a home unless you have established a legal debtor-creditor relationship.
• Have a mortgage secured by a qualified home. A qualified home must be your first or second home. The IRS states that “A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.”

To simplify even further, if you took out a mortgage from a bank in your name to buy your first home, you qualify for the deduction. In other circumstances, check with a tax pro.

• Thinking of Buying? Get Mortgage Pre-Approval Online →

What You Need

Claiming the home mortgage interest deduction is fairly simple. You’ll need:

• Form 1098, Mortgage Interest Statement from your mortgage lenders. They should mail this to you just like your employer mails you a W-2. The mortgage interest statement shows how much you interest you paid during the tax year.

• HUD-1 Settlement Statement (if you bought or sold a home within the tax year). This form usually comes from your escrow company and is used to itemize all the charges paid by both borrower and seller during a real estate transaction.

Limitations

There are some limitations on the home mortgage interest deduction. You cannot deduct interest on more than $1,000,000 used to purchase your first and/or second home(s). (Or $500,000 if married filing separately). In addition, you cannot deduct interest on more than $100,000 of home equity debt. If you deduct interest paid on home equity debt, it will affect the calculation for paying the Alternative Minimum Tax (AMT), so it is a good idea to understand the tax consequences before borrowing against your home.

If you have a joint mortgage, you can only deduct the interest you actually paid, regardless of who receives the 1098 Mortgage Interest Statement.

• TurboTax: Start Your Return Online for Free →

Mortgage points on a home purchase are fully deductible in the tax year in which they are paid (points are interest payments you make up-front, in a lump sum, to reduce your lifetime loan cost). If you pay points on a mortgage refinance, however, you must amortize the deduction over the life of the loan.

Should You Get Help?

Most of the time, taking the home mortgage interest deduction is straightforward. You add up the interest you paid listed on your mortgage interest statement forms and take the deduction. Things get tricky when you buy or sell property or start to carry multiple mortgages.

If you feel like some self-study, all of the rules are available in IRS Publication 936. But in most cases, tax preparation software like TurboTax will calculate your actual deduction for you. Finally, if your situation is more complicated, you might consider talking to a tax professional.

Related posts:

1. 2008 Tax Deductions You Don’t Want to Miss
2. Itemized Deductions: A Beginner’s Guide
3. Don’t Miss These Important Tax Deductions

Want to avoid a similar fate? It’s all about knowing how to shop for a mortgage.

Banks and Credit Union Loan Officers

The simplest way to apply for a mortgage is to walk into your local bank or credit union and sit down with a loan officer. He or she will take your application and, hopefully, present a number of different loan options for your situation. Depending on the bank, you may get a really good deal, especially if you’re already a loyal customer.

Small local banks and credit unions often offer the best mortgage rates. Trouble is, many of them only lend to people with truly immaculate credit. This alone can rule-out many first-time buyers who simply don’t have long enough credit histories yet.

But let’s assume your bank offers you a loan. Unless the rate the bank offers is lower than national averages, how do you know it’s the best deal? Unfortunately, you don’t. So you head down the street to get a quote at another bank or you go to a mortgage broker.

Mortgage Brokers

Mortgage brokers match borrowers with lenders. They work as “free agents” for multiple different lenders and earn a fee or commission when they sell a mortgage to a bank. Just like talent agents shop aspiring actors to movie studies, mortgage brokers approach different lenders with borrowers’ applications.

Good mortgage brokers should be able to find borrowers the most competitive rates and also find loans for borrowers with less-than-perfect credit. But there’s a downside: The more expensive the mortgage, the more the broker gets paid. So brokers may have an incentive not to show you the absolute best loans (not to say they all do this).

So shop around and negotiate for your loan just like a home or a car: Don’t blurt out the highest rate you will accept and never be afraid to push for a better deal.

Finding a Mortgage Broker

Many mortgage brokers are independent and work out of small offices or their homes; the best way to find a good one is often to ask friends or family for a referral or pick up a local directory.

Another option is to work online: Sites like LendingTree are essentially virtual mortgage brokers; you enter your application and they shop it around, often instantly, to multiple lenders.

• Start Now: Get Up to Four Mortgage Quotes from LendingTree

Final Tips

Shop, shop, shop. Before signing on the dotted line, investigate at least two of the three options above: a local bank or credit union, a mortgage broker or an online broker. As you shop, try to compare apples-to-apples. Ideally you should be able to compare loans that are for the same term and the same amount with the same down payment. Then, get a detailed breakdown of rates, points, fees and total closing costs.

Finally, even if you have never checked your own credit before, now is the time to get a free copy of your credit report and score. Print out your report and take it to your first meeting with a bank officer or broker; they should be able to give you a rough idea of what kinds of loans you’ll be approved of before they do a hard inquiry on your credit report (some banks charge a fee for a credit pull to discourage “tire kickers”).

Related posts:

1. FHA Mortgage Loans: A Good Idea for First-Time Buyers?
2. Your First Mortgage: How to Apply and Get Approved
3. Mortgage Rates Briefly Explained

Obviously, both are important. The younger you are when you start contributing to a 401(k) or IRA, the longer compounding interest will work its magic. At the same time, many of us want to own a home before we turn a certain age, get married, or have kids. And if we’re able, the money-savvy among us would like to buy our home with a substantial down payment (ideally 20 percent).

That’s no small goal.

But can you save for both retirement and a down payment at the same time? And, if you must choose, which should be your priority? The answer is, of course, complicated, and depends on some individual financial factors. But, in general, save for retirement first.

Emotionally, most us of will want to save for a home first. Even if we’re being pragmatic and saving a down payment, a home is tangible, a Roth IRA is not. Financially, however, saving for retirement before a home is the right move.

Historically, over 20-25 years or more, stock market gains far outpace real estate. (And, as an aside, I don’t believe anybody should buy their primary residence as an investment. Yes, professional real estate investors have made fortunes, but it doesn’t mean you will—especially on your own home. Buy your house to live in. Period.)

Examples

Let’s say Jane Investor saves $6,000 a year for five years before turning 25. For the simplicity of this example, Jane tucked the money under her mattress and didn’t earn any interest during that time. Jane has $30,000 to use as a 20 percent down payment on a $150,000 home or invest in a retirement account that will earn an average of seven percent annual returns over the next several decades.

If Jane Makes a Down Payment

Jane’s first home turns out to be ample for her needs, and she stays in her home for 25 years. According to the Forbes report linked above, the average increase in real estate prices between 1980 and 2004 was 274%. Using this figure, Jane’s home would be worth $370,500 and the $30,000 she “invested” as her down payment would now be worth $74,100. (Obviously, she would have been making mortgage payments, building equity, and would make more of a profit on her home, but I omit those gains here to focus only on the initial $30,000 down payment).

If Jane Saves for Retirement

Jane decides to pull the $30,000 out from under her mattress and invest. She works with an investment advisor to build a well-diversified portfolio and, together, they adjust it at least every year. (Although Jane continues to put money into her 401(k), she put this money into its own account and makes no more contributions). Her conservative but intelligent investing yields an average seven percent annual return over 25 years meaning her $30,000 is now worth $162,823. (Note that over the same 24-year period in the Forbes article, the S&P 500 gained more than 1,000%. That would make Jane’s investment worth over $300,000). What would that same $30k be worth when Jane turns 65? A cool $449,234.

The Bottom Line

Unless you are very lucky or very skilled, real estate can’t beat the stock market as an investment. Add the tax advantages of retirement accounts, and I think the answer becomes even more clear: save for retirement first.

There’s No Need to Rent Forever

If you’re concerned about renting for longer than you had planned, don’t be. Rent is not wasted money any more than your electric bill is wasted money. You need electricity, you pay the power company; you need shelter, you pay rent.

But all of this doesn’t mean you need to rent forever and put all of your money into the stock market. But you should probably put money towards retirement—especially in tax advantaged accounts—before you start putting away for a down payment. What does that mean? Follow this simple algorithm to determine what you should save for retirement:

• If your employer offers a 401(k) or 403(b) and matches employee contributions: Contribute the maximum percentage of your salary your employer will match (usually six percent). Then contribute up to $5,000 (if eligible) to a Roth IRA. If you have money left over, save as you wish.

• If your employer offers a 401(k) or 403(b) and does not match employee contributions: Contribute up to $5,000 into a Roth IRA (if eligible) and any extra either to your 401(k) or for other savings goals. (If you earn too much for a Roth, contribute as much as you can to your employer’s plan).

• If your employer does not offer a 401(k) or 403(b): Contribute up to $5,000 a year to either a traditional or Roth IRA and save additional funds as you want.

Once you are saving a reasonable amount for retirement (the greater of the $5,000 IRA cap or 10-15 percent or your salary), feel free to put additional funds towards saving for a down payment. To accelerate your down payment saving, especially when rates at savings accounts are so low, you might consider opening a regular brokerage account and investing some of your savings in the market.

Using an IRA for Your Down Payment

Finally, the IRS allows you to withdraw up to $10,000 from an IRA for a home purchase without paying the standard 10 percent early-withdrawal penalty. There are some rules: the IRS treats a withdrawal from a traditional IRA as income and you must pay taxes. Withdrawals from a Roth IRA for a home purchase are both tax- and penalty-free as long as the Roth is at least five years old.

Although this loophole provides cash-strapped home buyers with an additional source of funds for a down payment, I wouldn’t recommend using it; any money you withdraw now is money that won’t be earning returns, tax-free, for 30 or 40 years.

Do You Need Twenty Percent?

If you follow my recommendation to save for retirement before saving for a down payment, you may be watching your dream of home ownership fade several years into the future. This can be especially true if you live in areas with pricier-than-average real estate markets. (In some parts of the country, $150,000 can buy a very adequate first home; in others, a buyer might have to spend $350,000 or more for a comparable property). Although regional salary differences can make up some of this difference, in these areas cost of living typically jumps faster and higher than pay, according to the Salary.com Cost-of-Living Wizard.

In this situation, you could consider putting less than 20 percent down. (I would still recommend at least 10 percent). If you have been saving for retirement for a few years, have few other debts, and have a responsible notion of how much home you can afford, putting less than 20 percent down on your home shouldn’t be too much of a problem. You’ll need to pay private mortgage insurance (PMI) for as long as you have less than 20 percent equity in your home, but over the long-run the gains your retirement account is making will make up for the money spent on PMI.

What do you think? Do you agree or disagree that saving for retirement should take precedence over putting away for a down payment? What did you do? Are you happy with your decision? Please weigh in with a comment.

Related posts:

1. What to Do If Your Employer Cuts Its 401(k) Match Benefit
2. What To Do If Your Employer Doesn’t Offer a 401(k) Plan
3. How Much Should Be in Your 401(k) at 30?

And though home ownership has certain advantages, it’s not all fun and games. As you age, you will most likely start to feel pressure to buy a home from friends, family and the media. I’m here to tell you that it’s perfectly alright—perhaps even preferable—to wait. You should buy a home if:

• You want to be a home owner. (Not everybody does, and that’s OK.)
• You’re financially ready. (Meaning good credit, secure income and a 20 percent down payment.)
• You’re not going to move. (If you think you’ll change cities within five years, why bother buying?)

You should not, however, buy a home for the following reasons:

You Want The $8,000 Tax Credit

Buying a house just because of the new, albeit tempting, home buyer’s tax credit is like going out and adopting a baby just to claim the adoption credit. (The adoption credit is much higher than $8,000, I might add, so if you just want a tax credit, forget the home and go find a baby).

But if you haven’t saved a 20 percent down payment and a solid emergency fund (among other things), you should not be purchasing a home.

Uncle Sam waving an $8,000 check in your face may be enticing, but it doesn’t make you any more prepared for the responsibility of home ownership. Plus, Uncle Sam won’t be around when you need $5,000 for a new air conditioner. You’re probably better off saving more of your money now and waiting until you’re actually ready to buy a house.

You Just Graduated or Got a Job

Hooray, you got a degree! Maybe you’re even a doctor or a lawyer. You might even have a fancy first job all lined up. That’s great, but it doesn’t mean you should line up your first house just yet. (Unless, of course, you’re among the small percentage of twenty-somethings that come out of school with no student loan debt (or any other debt) and a well-padded savings account.)

If, however, you’re like most recent grads—especially those just out of college—you’re barely able to pay rent, let alone buy and maintain a household. If you just graduated, give yourself a couple years to find a solid job, build up your savings account, and pay off your debt. After you’ve gotten your finances in order, then you might consider buying a home. Doing so any sooner could be a decision you live to regret.

Someone Told You It’s A Good Investment

I have people tell me to buy a house all the time. They think I’m a lunatic for renting. “Renting is such a waste of money,” they say. (Even though they’re actually drowning in a mound of credit card debt because they’re “house poor”).

Yes, buying a house can be a wise investment if you’re ready. But if you’re not financially stable, a house can lead to being house poor and relying on credit card debt to cover ordinary living expenses. And the last I checked, credit card debt is a very bad investment.

To combat friends who tell you renting is a waste of money, think about all the people who bought homes a few years ago and now owe more than their homes are worth. Like any investment, real estate carries risks. And if you’re smart, you won’t take that risk until you’re ready.

Mortgage Rates Are Low

It’s true. Mortgage rates are as low as they’ve been in decades. Got good credit and 20 percent down? You could walk out of your local bank with a 30-year fixed mortgage for less than five percent. And if you’ve got good credit, 20 percent down, and you’re otherwise ready to buy a home, perhaps that’s what you should do. Mortgage rates will probably start climbing sharply later this year. But only if you’re ready. Again, don’t be tricked into buying a home just because mortgage rates are low.

All Your Friends Are Doing It

If you’re reading this or any other financial Websites, the chances are good that you’re the most financially savvy guy or gal in your group of friends. That said, why use them as an example for how to manage your finances?

It’s tough to play it smart when all of your friends are buying their own pads, but your patience will pay off in the long run. Right now, your friends will be busy maintaining their home and stretching each of their paychecks to make mortgage payments and repair leaky faucets. Why not enjoy being able to rely upon a landlord when the toilet overflows for now? You can focus instead on saving as much of your income as you can. When you have an emergency fund and a solid down payment that even Dave Ramsey would be proud of, you’ll be ready to buy a house without ever having to worry about whether you can really afford it.

You’ll be able to say “Hell yes I can afford it!”

The Moral Is: Don’t Rush

Buying a home isn’t a race. For the rest of your lifetime people, companies, stores and even the government will try to push incentives your way so that you’ll agree to buy something that you don’t need or before you’re really ready. If you are ready to buy a house, that’s great—go for it. (We’ll even help you figure out how much house you can afford or show you how to start getting mortgage quotes online).

But if you’re not ready, don’t jump into home ownership just yet. Enjoy today while saving for tomorrow. Trust me; you’ll be glad you waited.

About the Author: Carrie is in her mid-twenties and currently studying for the CPA exam, so she can give us some desperately-needed tax advice. She blogs about her journey to financial independence at Carrie…On the Cheap from her home in Kansas City, Missouri. You can also find her on Twitter: @CarrieCheap.

Related posts:

1. How Much House Can You Afford?
2. 5 Critical Things to Remember When Buying Your First Home
3. How to Prepare to Buy Your First Home

Authorized FHA lenders may approve borrowers with less-than-perfect credit and with as little as three and a half percent to put down for FHA mortgage loan. Although FHA loans were designed to serve low- and moderate-income home buyers who would otherwise have trouble getting a conventional mortgage; anybody can apply for an FHA loan up to FHA lending limits (by region).

As traditional lenders respond to the recession by making it more difficult to qualify for a mortgage, more borrowers are turning to FHA loans. That’s good news for able buyers, but it may not be good news for the recovering housing market in general. Recent reports indicate the FHA is losing money as current borrowers continue to default. (Anybody surprised?)

That said, you can still get an FHA loan, and with low mortgage rates and the $8,000 first-time home buyer tax credit and $6,500 home buyer tax credit in effect until next Spring; it’s still a very good time to buy a home.

The Pros and Cons of FHA Mortgage Loans

There is one simple reason FHA mortgage loans are attractive to many buyers; it is easier to get approved for an FHA loan. You can get approved for an FHA loan as long as you have:

• “Decent” credit; with a score at least in the 600s
• Three and a half percent for a down payment

Compare that to traditional mortgages, which often require:

• A credit score of 700-plus
• As much as 20 percent down

Although the FHA insures these loans (meaning that if you default the government will pay the lender for any losses on the loan), the borrower still pays for a part of this insurance through FHA mortgage insurance. FHA mortgage insurance is similar to private mortgage insurance (PMI) that lenders require on traditional mortgages when borrowers put less than 20 percent down.

FHA mortgage insurance is paid both as a small one-time payment at the loan closing and as a small monthly payment. Unlike PMI, which must be paid until the loan-to-value ratio drops below 80 percent; FHA mortgage insurance must be paid for at least five years, regardless of how much equity you build. If, after five years, your loan-to-value ratio is below 78 percent, you can cancel the FHA mortgage insurance.

Like your interest rate, how much insurance you pay is determined by your creditworthiness, the value of your loan, and your down payment. Buyers with less-than-perfect credit and less then 20 percent down will always pay slightly higher rates and insurance. In many cases, however, FHA mortgage insurance will cost less than private mortgage insurance for less-creditworthy borrowers.

Is a FHA Mortgage Right for You?

Home ownership is a rewarding milestone, but also a huge financial responsibility. An FHA mortgage loan can help if you have at least three and a half percent to put down. (Gone are the days, thankfully, of 100 percent mortgages). And even though FHA loan credit requirements are less stringent than traditional loans, rumor has it the FHA has updated its “desirable” minimum credit score to 693 from 633.

• What’s Your Score? Check Your Credit Online Now

If you meet these requirements, you still need to be ready. What do I mean? You should have:

• A low debt-to-income ratio. Meaning your monthly auto loan, student loan, and credit card payments are roughly only 15 percent or less than your monthly income. For more, see: How much home can you afford?
• An emergency fund in addition to your down payment. Buying a home comes with all sorts of potential unexpected expenses. Things break. Expensive things. Plus, if you lose income, you’ll now have a mortgage payment you need to make!

Where to Go From Here

Not all mortgage lenders offer FHA loans, so you’ll need to find banks or brokers in your area that do offer FHA loans. Mortgages are complicated, and looking at several different offers can save you a lot of money, so be sure to shop around. Online mortgage comparison sites are a good place to start, even if you end up calling up local banks, too.

• Ready to Buy? Get Mortgage Pre-Approval Online (Includes FHA Loans)

Americans face enormous pressure to buy homes. Most of us look forward to having our own house, but our society also makes home ownership seem like a right, when it’s actually a privilege. So be smart, and make sure you’re prepared to buy a home. If you feel you’re ready, an FHA mortgage may be able to help you get into the house of your dreams. Good luck!

Related posts:

1. What Percentage of Income Can You Afford for Mortgage Payments?
2. Mortgage Application Declined? Here’s What to Do
3. Are You Ready to Buy a Home? An Easy Way to Check

The Senate voted 98-0 Wednesday to extend and expand the tax credit and the House could vote on the bill as early as today. If passed, the $8,000 tax credit would remain in effect for first-time home buyers — or anyone who hasn’t owned a home in the last three years.

• Going to Buy? Get Mortgage Pre-Approval Online

Buyers who have owned their current homes at least five years would also now be eligible for tax credits of up to $6,500. To claim the credit, both groups of buyers would have to sign purchase agreements before April 30, 2010 and close before June 30. The tax credit would be extended until June 30, 2011 for servicemen and women serving overseas for at least 90 days.

The actual credit amount home buyers are eligible for is ten percent of their home purchase price up to a maximum of $8,000 for first-time home buyers and $6,500 for buyers who already own homes.

Who is Eligible for the Tax Credit?

To qualify for either credit, you must be purchasing a primary residence of less than $800,000 and cannot be purchasing the property from a direct relative.

You are eligible for the first-time home buyer tax credit if you:

• Have never owned a home
• Have not owned your primary residence for the last least three years

You are eligible for the $6,500 home buyer tax credit if you have lived in a home you own for five consecutive years out of the last eight years. Unfortunately, it does look like these new provisions still exclude some buyers from the credit. Buyers who have owned a home within the last three years, but did not own it for at least five years, cannot take the new credit.

Income Limits

The amount of the tax credit you can claim will be phased out for single taxpayers who earn more than $125,000 and joint taxpayers who earn more than $225,000.

• Read More: How to Claim the $8,000 Home Buyer Tax Credit

Related posts:

1. $15,000 Home Buyer Tax Credit?
2. How to Claim the $8,000 Homebuyer Tax Credit
3. $8,000 First-Time Home Buyer Tax Credit

That’s where enlisting a buyer’s agent can be a wise move.

What Real Estate Agents Do

Historically, real estate agents work for sellers, not buyers. Agents list sellers’ properties, market the listings, and really sell the homes. When they’re successfully, the earn a commission based upon a percentage of the sale price. The more the buyer pays, the more the agent earns. Agents will do everything that’s legal to sell homes. It’s their job.

For novice home buyers unfamiliar with real estate laws and the numerous problems properties may have, a buyer’s agent can help shed light on the actual pros and cons of different homes.

A buyer’s agent may also help you negotiate a lower price, but watch out—buyer’s agents usually split the commission with the seller’s agent, so they have an interest in a higher selling price too. Like the seller’s agent, your buyer’s agent is going to want to see you buy a home; his or her paycheck depends on it.

Finding a Buyer’s Agent

If you decide you want a buyer’s agent to help you navigate your first home buying experience, start asking friends for referrals to agents they’ve worked with and trust. If that doesn’t work, call up local real estate companies and ask to schedule brief “interviews” with prospective buyer’s agents. Ask prospective agents how much experience they have working as buyer’s agents and working with the kinds of properties you’re interested in.

Whatever you do, make sure you choose an agent that you like and trust.

When my wife bought her first condo a few years back, she jumped into the market without a buyer’s agent. Soon, a seller’s agent for a property that didn’t interest her latched on and got my wife to use him as her buyer’s agent. The agent did a lackluster job, but probably collected a sweet commission check for it anyway. My wife was probably better off with him as her buyer’s agent, but could have been even better served had she hand-selected the agent she worked with.

On the hunt for a new home? Check out 10 Tips for Hassle Free House Hunting and don’t forget to get mortgage pre-approval before you start your search.

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2. A Buyer's Market…Or Not
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Having this letter from a mortgage lender in advance can save you from major disappointment if you find your perfect home, make an offer, and then find you the bank has denied your mortgage application.

Pre-qualification and pre-approval is simply when a lender takes a fast look at your credit and decides, preliminarily, that you’re eligible for a mortgage. Although this does not guarantee your ability to get any mortgage, it does give you an upper hand when negotiating with sellers.

So, what’s the difference between pre-qualification and pre-approval?

Pre-qualification is the less formal of the two. Basically, a lender tells you how much of a mortgage they would be willing to lend you based upon information that you provide. The lender doesn’t check your credit or vet your income and assets; they just reply upon what you tell them. Banks don’t charge for pre-qualification, and there’s no reason you have to go with a bank that gives you pre-qualification. At the same time, there’s no guarantee you’ll get the loan based upon pre qualification. If the lender later discovers that your credit is less stellar than what you said it was, the loan may fall through.

When you obtain pre-approval, the bank checks your credit, employment history, assets, and other debts. Most reputable lenders don’t charge for pre-approval, either, although some do—so be sure to ask. Again, you’re not under any obligation to go with a lender that provides you with pre-approval, although if their rates look good, some of your work applying for the mortgage is already done for you.

I recommend you get mortgage pre-approval online with leading mortgage comparison site LendingTree. It’s fast and free, and will give you a sense of the kinds of mortgages you’ll be approved for in minutes.

Related posts:

1. How Much House Can You Afford?
2. Beware Loan Modification Scams
3. His Credit’s Good, Hers is Bad: Can You Get a Mortgage Anyway?

1. Make a plan. What do you want and need from your first home? Take a moment to write it down. This is especially important if you’re shopping with a partner or spouse. You’ll save a time and aggravation if you agree on what’s most important in your house before you hit the streets shopping. Is it all about the location? Do you want an impeccably-kept modern home or would you consider a fixer-upper? The more factors you identify as important early-on, the faster you’ll be able to hone in on properties that meet your needs.

2. Set a budget. This goes hand in hand with tip number one. How much house can you afford? If you’re not sure, I’ve written on this subject in How Much House Can You Afford and What Percentage of Your Income can You Afford on Mortgage Payments? Do you want to stretch and buy more home than you need so you can grow into it, or do you hope to pay off your mortgage quickly by buying a home you can afford with a 15-year fixed mortgage?

Ultimately, your income, savings, and local real estate market will determine your viable housing budget. Once you set it, commit to it. Your real estate agent will inevitably show you properties that exceed your budget “just for comparison”. You need to prepare to be firm and stick with a house you can afford.

3. Get mortgage pre-approval. You don’t want to find your dream home only to let it slip through your fingers because you can’t qualify for a mortgage at the last minute. Getting mortgage pre-approval is a vital first step in the home buying process because it gives you an idea of what mortgages you can qualify for and how much they will cost, plus it lets sellers know that you’re serious about buying so they will be more likely to take your offer. Learn more about getting competing mortgage quotes online.

4. Consider the location. There’s a reason for that old line “location, location, location.” Where you buy your first home will not only determine how much you pay, but the location will also shape your life for as long as you live in the home. Will you be having kids in this home? How are the schools? What will your commute be like? If you change jobs, what is the employment market like within commuting distance from the location? Before you start looking at properties, focus only on areas where you could see yourself living for years to come.

5. Do some research. Thanks to the Internet, home buyers today no longer need to rely on their realtors to suggest listings to look at. You can start searching available properties and real estate values in your target areas from the comfort of your own home. For example: Search for listings in your areas with ZipRealty now.

6. Create your own house hunting checklist. Once you start touring properties with a real estate agent, house hunting can be fast and furious. You’ll see so many properties you won’t be able to keep them straight, and there will often be pressure from sellers and their agents to make a quick offer. Create a checklist that you can use for each property you view. Include your criteria and include a space for notes. This way, at the end of the day, you can take your checklists home and compare properties easily.

7. Find a buyer’s real estate agent you trust. You don’t have to work with a buyer’s real estate agent; you can simply visit listings yourself and deal directly with the seller’s agent. First-time buyers, however, are probably wise to enlist a buyer’s agent. (Usually, having a buyer’s agent on your side won’t increase the commission you pay, it will be split with the seller’s agent. But be sure to ask how your agent is paid, anyway).

Ask friends and family for recommendations for real estate agents they’ve worked with. If that won’t work, call a few local agencies and ask to set up “interviews” with a few prospective agents. Explain to the agents that you’re shopping around, and choose an agent you’re comfortable with and that seems to be knowledgeable about the market and price-level in which you’re shopping.

8. Get comfortable and relaxed. Prepare for all-day house hunting sessions by dressing comfortably and bringing water and snacks. You never know how many properties your agent may want to show you or how long you’ll have to wait for a seller’s agent to let you into a property. Be ready!

9. Be prepared make an offer. A lot of people shop for houses before their truly ready to buy a home. Maybe the timing isn’t right yet, maybe they don’t have enough saved up for a down payment, or maybe their credit needs work. Before you go out house hunting, ask yourself: Could you buy a house today? Using this gut-check will save you a lot of agony (and possibly money) if you make an offer but don’t close because, for one reason or another, you weren’t ready.

10. Have fun! Buying your first home is a major milestone and has the potential to be a lot of fun! Just remember to relax and take things one step at a time. Everything may not go perfectly smoothly, but if you’re committed to buying a home and are working with a reliable agent, you’ll eventually find yourself in an awesome new pad!

Resources

• Get Mortgage Pre-Approval Online
• Search Properties in Your Area with ZipRealty

Related posts:

1. What a Buyer’s Agent Can Do For You
2. 5 Critical Things to Remember When Buying Your First Home
3. First Time Home Buyer’s Mortgage Checklist