Suze Orman Money Matters

Even though every nook and cranny of the housing market is draped in doom and gloom, it may be a good time for potential buyers to take a contrarian look.

I'm not minimizing the risks in the housing market, because they're very real in many locations. Nor am I predicting any sort of miraculous turnaround in the next six months, since I doubt that we'll see that happen. But I'm still a believer in the long-term viability of housing as a solid investment if you buy at the right price. This has me thinking that the current shakeout is in fact creating an interesting sweet spot for first-time homebuyers to at least start checking out the market.

That said, potential first-timers need to be extra-strategic and cautious when considering a purchase; there's no room for making any mistakes these days. But simply sitting on the sidelines to wait for signs that the worst is over, or that your local market has turned the corner, means you may miss out on the best deal-making opportunities.

Here are some tips:

• Take a new look

Right now, some of the markets that were hot a few years ago are full of overextended builders looking to unload their unsold inventory. First-timers tend to focus on existing homes rather than more expensive new construction, but I advise them to take a look at new homes as well.

All those stressed-out developers are motivated to make deals. That can mean sharp price discounts or great offers to help with your mortgage financing. But be careful, too -- you don't want to be the only owner on a block where half of the homes haven't even been finished.

• Know what price is right

In today's markets, it's crucial to load up on as much data before you bid on a home. Get at least three to five recent comparable sales, what are known as "comps" from your real estate agent.

You want to know the differential between the initial list price and the sale price for those homes. The size of the gap, and whether it's been trending lower or higher, is what will determine your aggressiveness in bidding. Keep updating your market analysis every few weeks to stay on top of your market's twists and turns.

In today's market, being patient and bidding correctly is crucial. I know someone who had a $2 million bid for a new home in Florida turned down a year ago. A year later, the house was still on the market and the developer was desperate to deal. This time, the same buyer offered $1 million and the bid was accepted.

So don't be afraid to go for it. If you see a house you want and it's been on the market for some time, you have nothing to lose by going in and bidding 50 percent lower than the asking price. Don't be afraid to insult someone. Remember, 50 percent of something is better than 100 percent of nothing. If they counter at a higher price, be careful -- you can't afford to overbid to meet an unrealistic seller's price. Besides, there are plenty of other homes to choose from.

• Buy only if you have a five-year time frame

If you anticipate relocating anytime soon, it's probably smart to keep renting instead of buying.

Remember that once you're an owner, it's going to cost you a 5 to 6 percent sales commission when you decide to sell. To have a decent chance of selling with some equity left in your pocket -- even after paying the commission -- you probably need to stay put for at least five years.

• Shore up your score

Before you look at a single house, check your FICO credit scores. Home buying is the one time you want to pay up for all three scores, because many lenders base the interest rate you're offered on a calculation that takes all three scores into account.

If you're applying for a mortgage with someone else, make sure both of you have strong FICO credit scores. Some lenders will base the rate you're offered on the lowest score between the two of you. If your scores aren't in the top range of 760 to 850, chances are you'll be given a higher interest rate on a loan -- and that can make all the difference in whether you can afford to buy or not.

For example, if you need a $200,000 mortgage and have a score of 760, you might qualify for a 30-year fixed rate loan at 5.8 percent with a monthly payment of $1,775. With a 619 score, you're looking at a 9.2 percent rate for the same loan, and a monthly payment of $2,458. That $683-per-month difference is enough to cover property tax, insurance, and probably annual maintenance costs.

If one or both of you has low FICO scores, focus on getting them into the 760-or-higher range. Not only will it save you a lot in mortgage costs, it's also an important step in making sure you have the financial discipline to take on such a huge commitment.

• Get the lowdown on down payments

During the housing boom, lenders were all too happy to dole out mortgages that didn't require a down payment. That's coming back to sting many lenders -- and crippling the entire credit system -- as homeowners who never had to put equity into their home are now walking away from them when their outstanding mortgage is more than the current value of the home. The upshot is that to have any chance of getting a mortgage in today's tight lending market, you need to come to the loan table with a down payment.

A 20 percent down payment will speed up your loan approval, but not many people have that right now. One possible remedy is the recent change in FHA limits; FHA-insured loans require just a 3 percent down payment, but up until a month ago these loans maxed out at $362,790 in high-cost metro areas. The economic stimulus package signed into law in February authorized the FHA to raise those limits for the remainder of 2008. The new top loan limit for high-cost metro areas is as much as $729,750. You can check the new FHA loan limits in your area here.

Ideally, you can scrape together your down payment from savings. But if that's not going to cover everything, you might consider raiding your IRA. Yes, you read that right: The typical 10 percent penalty for early withdrawals made before age 59-1/2 is waived when the money is used for a down payment on a first-time home purchase.

If your money is in a traditional IRA you'll still owe tax on the withdrawal. Roth IRAs are a better deal; you can pull out money you contributed with no penalty or tax. Any Roth earnings you withdraw for the down payment are also tax-free as long as you've had the account for at least five years.