Borrowers who can't meet these requirements can turn to the Federal Housing Administration, a federal agency that guarantees home loans against default. Because of the agency's more liberal lending standards, the FHA is currently backing nearly 30 percent of new home-purchase loans. Such borrowers will typically get slightly above-market mortgage rates and pay into an insurance pool, which is used to reimburse lenders when a borrower defaults. Although most borrowers are required to put only 3.5 percent down, many housing experts encourage buyers to take a larger stake—say, 10 percent—as a buffer against price declines.
Go slow. Home prices should improve slowly if at all this year, so there is no reason for buyers to feel rushed or act impulsively. Before beginning your real estate search, establish your price range by getting preapproved by a mortgage lender. Next, click through online real estate search tools like Zillow, Realtor.com, and U.S. News partner Trulia to get a broad feel for the market. Consider reaching out to a real estate agent with experience in the local market, but don't let the agent do all of the work. "If you are going to invest this much money and take on this much risk, you shouldn't rely on just a Realtor to give you advice," McCabe says. "You owe it to yourself and your family to do all the research possible."
To dig deeper, find a couple of good blogs that cover local real estate, says Patrick Kitano of Domus Consulting Group. Signing up to receive bloggers' Twitter feeds is even better. "Twitter is a breaking-news channel," Kitano says. "And if you are a consumer stepping up to the plate as a first-time buyer, you want accurate, real-time information." In addition, buyers should hit as many open houses as possible, poke around neighborhoods, knock on doors, and chat with nearby homeowners about the community.
The foreclosure crisis will provide buyers with opportunities to get into the market at a discount this year. Foreclosed homes sell in three primary ways, says Sean O'Toole of ForeclosureRadar.com. A preforeclosure, or short sale, requires the approval of the lender and can sometimes drag on months longer than a traditional home sale. "Real estate owned" properties, which have been repossessed by banks, are usually listed and sold by third-party brokers, O'Toole says. Such transactions often generate aggressive interest from buyers but don't differ a great deal from a typical sale. Foreclosure auctions are the third type. Since laws vary from state to state, properties typically can't be inspected beforehand, and transactions are usually handled in cash, first-time home buyers should leave auctions to the experts, O'Toole says. He also recommends that anyone looking to purchase a foreclosed home find a real estate agent specializing in distressed sales. "If you were hiring an attorney, you wouldn't just use whoever had a pulse," O'Toole says.