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Tips for first-time homebuyers

By Jason Alderman

It's no secret that the bubble has fully burst in the real estate market and that millions of homeowners are facing severe financial hardships as home values drop and adjustable mortgage rates shoot upward.

On the flip side, those same rising interest rates, combined with increasingly stringent lending requirements, have left many potential homebuyers out in the cold. If that's your story, here are a few steps that can get you back in the real estate game:

Boost your savings. Many people are in financial hot water today because they bought homes they really couldn't afford using risky loans with features like 0 percent down, negative amortization (where your monthly payment doesn't cover interest owed and unpaid interest gets tacked onto the loan amount) or balloon payments due after a few years.

To avoid those traps, you should save enough for at least a 10 percent down payment. Also, when calculating how much you can afford to spend each month, don't forget other home-related expenses like property taxes, homeowner's insurance, private mortgage insurance (for down payments under 20 percent), repairs and utilities. Some experts suggest allocating up to an extra 40 percent of your monthly mortgage payment in your budget for related expenses.

Develop a budget. Step one to meeting any long-term savings goal is to create a detailed budget so you know exactly what's coming in, what's going out, how much you need to save and how long it will take. Practical Money Skills for Life, a free personal financial management site created by Visa, features a complete guide to creating a livable budget, along with interactive budgeting tools and calculators (www.practicalmoneyskills.com/budgeting).

The site also contains a nine-step guide to homeownership, including preparations to qualify for financing and how different mortgages work (www.practicalmoneyskills.com/homeowner). As always, consult a financial professional for questions about your particular situation.

Improve your credit score. Even with thousands of dollars banked for a down payment, you may find it's difficult to qualify for a mortgage if you can't demonstrate a solid track record of obtaining and paying loans - or worse, if you have a history of late payments or exceeding credit card limits.

The three major credit bureaus - Equifax (www.equifax.com), Experian (www.experian.com) and TransUnion (www.transunion.com) - track your credit history and use the information to compile credit reports. This credit history is also used to create three-digit credit scores that lenders employ to determine whether you're a suitable credit risk. Poor scores could either prevent you from qualifying for a mortgage or dramatically increase the interest rate you'd have to pay.

To know where you stand, order your credit reports and review them carefully for errors or fraudulent activity. You can order one free credit report per year from each bureau through www.annualcreditreport.com. If you go through the credit bureaus' own sites, you'll be charged a small fee.

To learn more about credit reports and credit scores and how to improve them, visit the Federal Trade Commission's website (www.ftc.gov/credit), www.myfico.com run by Fair Isaac, or Visa's free www.WhatsMyScore.org, site, where you can get a free estimate of your credit score.

The only silver lining in the current real estate crisis is that tougher credit standards may prevent you from inadvertently getting in over your head. Take advantage of that warning and get your own finances on a firm foundation before you build a house on it.

Jason Alderman directs Visa's financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.

This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to your situation and about your individual financial situation.

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