Reuters Money

Dennis Lee, 26, is a model first-time homebuyer. Recently married, he and his wife, Dana, have financially secure jobs as a youth minister and accountant, respectively. They have good credit scores, and have been studying property price graphs and charts in their local San Francisco Bay Area for months.

With enough cash for a 20 percent down payment, and ample time to look, you would think Lee would be excited to take advantage of a probable bottoming of the market in 2011. Not exactly. “It’s a little overwhelming,” he says.

Cheaper prices and low interest rates make now a good time to invest in bricks-and-mortar, but with all the talk of tightened credit and foreclosures, knowing where, when and how to buy can be tricky.

Where and when to buy
First, the bad news: “The process is more expensive, there are more hoops to jump through, and not as many good properties out there,” says Justin McHood, of mortgagecommentator.com.

Now, the good: real estate search engine Zillow.com’s estimated median valuation of a home in the U.S. was $175,200 in the fourth quarter of 2010. Home values in Zillow.com’s index have fallen 27 percent from their peak in June 2006.

The same report shows the housing market varies wildly by city. New York and San Francisco home values fell an average of five percent year-on year. On the flip, Detroit and Miami-Fort Lauderdale still posted home value declines of more than 15 percent.

So while it is notoriously difficult to pinpoint the bottom of a market, analyze the home price data for your area. It’s the best way to make an informed assessment of any potential upside.

How much do you need?
Remember the heady days of 100 percent financing?  Gone.  Ditto for those one percent down payments. Now the minimum requirement with a government-backed FHA loan is a 3½ percent down payment.

A standard down payment ranges between three and 10 percent, but even higher is increasingly common. “We are definitely seeing more people put down five, 10 or 20 percent,” says Tara-Nicholle Nelson, consumer educator for real estate search engine Trulia.

There are also far fewer mortgage options. A few niche programs from private lenders with a more flexible assessment are popping up, but they are typically for pre-indentified, low-risk groups, such as doctors and lawyers.

If you want to take advantage of an FHA loan, the first step is making sure you are eligible. It has a tight cap on debt-to-income ratios.

The second is making sure you know the FHA lending limits for where you want to buy, and that your seller is aware of them.

Matt Flynn, 32, a corporate restructuring professional, is currently in contract to buy his family’s first home in Morris County, New Jersey. FHA loans specific to that area are eligible for properties up to the value of $729,750 for a single family.

Their lender, Wells Fargo, approved him and his wife, but convincing the seller took a little longer. “They didn’t have an understanding of what an FHA loan is,” he says.

Brace yourself for tighter lending
Coming up with the down payment is only the first hurdle. Having had their fingers burned in the subprime mess, lenders are wary. A record high rate of 34.1 percent of U.S. homes were sold at a loss in December 2010, Zillow.com reports. And that means tightened credit.

Be prepared for a possibly long process to close, with numerous players involved along the way. “People are surprised by how much work it is,” says Nelson. From pre-approval to pre-funding, to appraisals — lenders wish to see documents that prove your credit-worthiness, and a lot of them.

They may even ask for the borderline absurd. “I had a buyer write to me saying ‘the lender has asked me for my son’s report card from school’ and she didn’t know why,” says Nelson. “I have never heard of anyone ask for a kid’s report card.”

Making sure your accounts are in shape early in the process will help you avoid complications and further expenses later on.

Credit scores
Lenders are also pickier with credit scores.  A required score in the region of 630 and above is now typical. And it’s possible your lender won’t just test you once. “A lot of lenders will re-pull your credit score just before you go to closing,” says McHood.

It’s here that having a savvy mortgage broker can pay off. Many have access to a wealth of insider information including how best to improve your credit score.

Plan ahead
But the best advice is the simplest: plan ahead. First, be honest with yourself about what you can afford by working out your monthly mortgage budget.

Ask real estate agents, family and friends what lenders and mortgage brokers they would recommend, and get several estimates.

Start early. Pick a broker you want to work with and who you trust, even if you don’t qualify for a loan at first. Don’t just walk into your local bank, warns Nelson. Bank salespeople are typically on commission and often have less incentive to find you a good deal than a broker who will want your repeat business.

A sustainable choice
The Lees are taking a considered approach. While seeking out the best advice, they’ve seen four properties and are giving themselves up to a year to find the perfect place.

Not for them the bubble-era quick-appreciation purchase. Perhaps most sensibly of all, they view any property as a long-term investment. “We’re in it for the long haul,” says Dennis Lee.