2010 First-Time Home Buyers' Guide

Everything you need to know about jumping into the real estate market this year.

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Second, remember that all those headlines about the national housing market aren't nearly as important as what's going on in the area you are looking to buy into. The trajectory of home prices will vary a great deal from one place to the next. Home values in Tacoma, Wash., for example, are expected to increase more than 40 percent over the next five years, while prices in Atlantic City are projected to fall more than 10 percent, according to Moody's Economy.com. Markets with a diversified economic base of faster-growing job providers—like high-tech or business service firms—are in a good position to experience growth in employment, population, and wages, says Celia Chen, the senior director of housing economics at Moody's Economy.com. Such factors will help stimulate housing demand and juice property values over the long term.

A market's current pricing trends are important as well. Although the housing bubble popped more than three years ago, prices in some markets remain significantly higher than fundamentals suggest they should be. Homes in Asheville, N.C., and Portland, Ore., are more than 20 percent overvalued, according to IHS Global Insight. To determine if buying today makes financial sense in a given market, check out the local rental stock. "If you can find houses in that market that are renting for considerably less [than what you would pay each month to buy a comparable property], then you are in a marketplace where it still makes more sense to rent," says real estate analyst Jack McCabe.

Staying put. In recent years, many homeowners got into trouble because they purchased properties that were more expensive than they could reasonably afford. To avoid this pitfall, first-time home buyers should plan to devote no more than 30 percent of their monthly household take-home pay to housing costs, which include principal, interest, taxes, and insurance combined, says Gail Cunningham of the National Foundation for Credit Counseling. Homeownership comes with a number of expenses that renters don't have to worry about. In addition to utilities and in some cases homeowners association fees, property owners are responsible for landscaping, servicing heating and cooling equipment, and taking care of any unexpected headaches that pop up. "It's essential to have that rainy-day fund for the leaky toilet or the leaky roof," Cunningham says. This conservative budget also gives homeowners additional flexibility to weather a job loss, illness, or other financial setback. And because home prices are still declining in many markets, would-be buyers should avoid purchasing property unless they plan to remain there for at least five years. This time horizon helps allow prices to recover even if they decline initially.

[See the 5 Best—and Worst—Home Remodeling Projects.]

Although they should increase from last year's record lows, mortgage rates are expected to remain quite favorable in 2010. Rates on 30-year, fixed mortgages plunged after the Federal Reserve unveiled a program to buy up debt and mortgage-backed securities from Fannie Mae and Freddie Mac. But the asset-purchase program is slated to expire at the end of the first quarter. And if private investors don't step in, rates could move significantly higher. The unwinding of this Fed program, the slowly recovering economy, and mounting concern over government spending could boost mortgage rates to perhaps 5.5 percent by mid-2010 and nearly 6 percent by the end of the year, Larson says. But remember, even rates of 6 percent are extremely attractive compared with long-term historical averages.

Unfortunately, many first-time home buyers won't be able to obtain the lowest possible mortgage rates in 2010. Banks have raised lending standards in the face of soaring delinquencies. As a result, buyers will typically need a FICO score of around 720 and fully documented income and assets to get the best rates, Gumbinger says. Minimum down payments have also increased. Although the requirements will vary depending on the market, borrower, and property type, most buyers will need to put between 10 and 20 percent down. "That doesn't mean you can't get a mortgage if you have less of a down payment," says Guy Cecala, the publisher of Inside Mortgage Finance. "It just means that you are not going to get the best interest rates."