Home Buying for Beginners

My wife, Christina, and I watched last year as home prices in Washington, D.C., seemed to bottom out, bummed that we couldn't take advantage of the generous federal income-tax credits for first-time buyers because we didn't have enough money for a down payment. Then the credit, which is worth up to $8,000, was extended to first-timers who have a home under contract by April 30.

It's never a good idea to make a life-changing decision based on a tax credit. But we've been talking about making the leap from renters to owners for a while, and we did a gut-check to gauge our commitment. Are we ready for the extra expenses? Yes. In the months since the tax credit was extended, we have put aside enough to cover a down payment and closing costs. Our jobs -- and income prospects -- are stable. We have good credit and no debt. Can we stay put for the next five years and make a home purchase worthwhile? Sure. Washington has a stable job market and plenty of opportunities for fun.

Our first step was to get preapproved for a mortgage. I thought finding a lender would be the hardest part of the journey, but it turned out to be a snap. We are preapproved for up to $400,000 by two lenders, one of which took less than three hours to decide. We wanted to be conservative in our budget and figured we could afford to pay $3,000 per month to cover the mortgage, insurance, taxes, utilities and maintenance. That's 25% of our monthly income. The nut we have now will cover a Federal Housing Administration mortgage, which requires a 3.5% down payment, and closing costs. The longer we wait, the more we will have for a down payment.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

The search. Just one problem: Although the median home price in D.C. is $306,200, the townhouses on Capitol Hill, where we rent, cost $800,000 -- way out of our price range. But we're committed to staying in D.C. because we enjoy city living and want a short commute to work. To get a three-bedroom home, we'll have to buy in an up-and-coming (that is, gentrifying) neighborhood. Or we'll have to settle for a two-bedroom condo if we want to be downtown near a Metro station.

Our home search was initially scattershot. Dots of homes in our price range freckled the Google map, and we perused the online listings. We attended a half-dozen open houses, mainly condos, in several neighborhoods. Most places we looked at had been renovated during the boom with hardwood floors, stainless-steel appliances and granite countertops. However, the condos seemed small for the price and, in some cases, poorly built. The seller's agents were friendly, but we didn't know whom to trust.

Paralyzed by the number of choices, we recruited a buyer's agent. A buyer's agent usually splits the commission of a sale with the seller's agent, which worried us because we felt the agent would have an incentive to keep the price high. Ultimately, we decided an agent has more reasons to do right by us than not because the agent is obligated to help us get the best price. Plus, a 10% drop in a home's sale price would barely dent the agent's commission, and all commissions would be disclosed.

Colin, the eager agent we picked, has focused our hunt. Using an online service called ListingBook.com, we narrowed the catalog of 300 properties that fit our requirements to a list of 30 homes. It will take time to sort through the housing haystack, and we'll probably miss the deadline for the federal tax credit. (My feeling is that the credit may have jacked up home prices anyway and, once it expires, prices will drop. Some of the homes on our list have already fallen in price over the past few weeks.) The consolation prize is that D.C. has its own $5,000 first-time buyer's tax credit (you can't get both credits). And mortgage rates are still cheap. I think time is on our side.