We’ve heard the news about the failing housing market, how prices are plummeting and sales are stagnant. Now is the time if you’re looking to buy, but be careful. Even in this buyers market you can still trip up. Here are a few tips and things to consider before signing on the dotted line.

More Than Just Rent

Looking to move beyond renting? This is without a doubt an excellent time to buy. With interest rates so low and home prices finally coming back down to earth, the time is now. Before you go diving in headfirst however, sit down with your local lending officer or financial advisor and really plan out your next step.

Always remember that you’re going to be paying a lot more than just your mortgage when you buy a home, and those payments can fluctuate. Depending on your financial situation, a steady rent might be better than an adjustable loan with taxes, utilities, maintenance costs, insurance, etc. In order to see if your income can support a mortgage, calculate your Debt to Income Ratio.

Debt to Income (D/I), is calculated (to a point) by your lender, but you can do a more accurate one yourself. Obviously you take your monthly income (I suggest the net amount, after taxes), then subtract the bills you have to pay each month. These include your car payments, any credit cards, utilities, etc. What is left is how much you are able to put towards your mortgage payment, and hopefully your own savings and use. By doing this you can work backwards to see what price range you can afford.

While your credit score and report are important parts of getting a home loan, your D/I is just as important. When the bank looks at your credit score, they are looking to see if you have a history of paying back your loans. If your history is good, they are more likely to approve you. But however good your credit is, if your income can’t support the monthly payments (which, if you’re a first time homebuyer are probably adjustable) you still won’t be approved. By paying down your credit cards and other debt you not only increase your credit score, but you also lower your D/I. The lower your D/I, the more cash you have on hand to put towards the mortgage, and therefore the banks feel better about writing you a check for several hundred thousand dollars.

While this all sounds a little scary for first timers, sitting down and getting your expenses on paper will help take a lot of the guesswork out of buying a home. Many don’t realize exactly how in debt they are until they list every expense they have during a month. If you calculate your D/I, you’ll know whether you need to get a higher paying job, pay down credit cards, or simply skip the mocha latte every morning in order to achieve your goal of buying a home.

Classic advice for handling any amount of debt — mortgages, credit cards, etc. — is to pay more each month than is actually required. For instance, if I had a monthly credit card bill of $100, but I had an outstanding balance of $10,000, with 10% interest, it would take me 213 months (or 17 years and 9 months to pay off that card). But if I could make payments of $200 each month, the length of time I’d be making payments drops to 65 months (or 5 years and 5 months), and if I could kick it up to $500, I would be out of debt in 22 months — less than 2 years. While the numbers for the credit card balance and payments are made up, the math isn’t. You can use BankRate’s credit card calculator to figure the numbers for your own situation.

A lot of people suggest handling a mortgage in exactly the same way. Any payment you make beyond your monthly required payment goes directly towards the principal amount of the mortgage — meaning that you’re not paying off extra interest, and will, in the long run, save you money.

But there are some drawbacks to prepaying a mortgage in this fashion, and even to paying off debt quickly, depending on your interest rates. There’s no question that you should at least make the minimum payments each month, but there may be ways to take better advantage of other money.

Do you have a 401(k)? Depending on the interest on your debt, you may actually come out ahead in the long run if you can invest your money in a retirement account. You’ll have to run the numbers for yourself, but if your employer matches the money you invest in your 401(k), there is almost no reason that should convince you to not invest up to the matching limit. While prepaying your mortgage can save you money on interest, your employer is essentially offering you free money that you cannot get any other way if one of your benefits is a 401(k) matching program! And who wants to turn down free money?

You might also decide against making extra payments on any debt if those extra payments could put you in danger of building up more debt. If you have no cushion of cash, no emergency savings, you can put yourself in danger of racking up more debt if something unexpected happens. Having the money to deal with emergencies should take precedence over paying off debt quickly. However, if you can place the money you were planning to direct towards your mortgage or credit cards into savings and build up a decent emergency fund, there is no reason that you can’t start up those extra payments after you’ve built up a healthy cushion.

Right now, a lot of home owners are struggling to handle their mortgages: we’ve all heard the stories of rising foreclosures. But Bankrate.com has put together an excellent resource for homeowners trying to figure out the procedures for dealing with their bank and learning just what they need to do to keep their homes by bank. They conducted a series of interviews with nine top lenders to learn the precise steps necessary. These guides are especially useful because each bank follows different steps. They’ve even gone to the effort of including phone numbers. However, the guides are a bit scattered, so I’m including a table of contents here, as well as links to the lenders’ specific websites, which were omitted from the guides.

1. Bank of America: Guide. Website.
2. Chase: Guide. Website.
3. Citigroup: Guide. Website.
4. Countrywide: Guide. Website.
5. IndyMac: Guide. Website.
6. National City: Guide. Website.
7. Wachovia: Guide. Website.
8. Washington Mutual (WaMu): Guide. Website.
9. Wells Fargo: Guide. Website.

Beyond these guides, there is one simple rule of thumb that you should keep in mind when thinking about your mortgage: stay in touch with your lender. If you’re worried about your ability to make payments or about interest rates, or really anything at all, give your lender a call. Keeping in close contact will let your lender see that you really are making an effort, and, in general, that makes your lender more willing to exhibit a little flexibility if you have a problem. Many foreclosures are preventable in early stages, but borrowers might avoid contact with lenders because of embarrassment or other concerns. But avoidance is pretty much the worst approach one can take when trying to handle a problem with a mortgage or other loan.

If your bank or lender isn’t listed, you might want to consider reading through the information from at least one or two lenders. While your lender’s procedures will probably differ, everyone has at least a few similar steps. Then, start making phone calls. It’s a matter of getting in touch with someone in your lender’s office — preferably an individual with the authority to set up a repayment or forbearance plan, or otherwise able to help you make modifications to your current mortgage.

And, even if you are comfortable making your mortgage payments, you should look over this information. Consider it a preventative measure. I’ve actually printed out the information for my bank and tucked it into the file folder I keep for that institution — not because I expect trouble but because I want to be prepared for any eventuality.

There are several ongoing efforts to make the American credit market a little fairer for borrowers: regulating the market to prevent predatory practices, informing consumers so that they can make better decisions, and other similar approaches. One of the crucial organizations in this crusade is Americans for Fairness in Lending. AFFIL is a non-profit organization dedicated to bringing regulation to the American lending industry. They’ve been in action since 2004 and been successful in bringing a number of credit issues to the attention of both government and consumers.

As a part of AFFIL’s mission, the organization provides a number of resources for consumers, such as helping prospective home buyers learn the signs of a predatory mortgage — the type that lenders don’t expect a borrower to ever be able to pay off but that a lender will make anyway in an effort to make some money.

AFFIL suggests the following to help home buyers avoid taking on a predatory mortgage:

• Use the basic rule of thumb: if it seems to good to be true, it is.
• Always shop around for a mortgage — the first numbers you see probably won’t be the best.
• Ask questions about the terms of the mortgage, and if you don’t understand them, ask for help from someone you trust (and who isn’t connected to the mortgage broker).
• Double check that, if your mortgage will have an adjustable rate, you will be able to afford an increase in payments.
• If an ad says “No Credit? No Problem!,” you should say “No Deal!”
• Walk out on any lender trying to use high-pressure sale tactics to get you to sign now.
• Never ever sign a document that is not completely filled in. If a lender says that he’ll fill something out later, run.

If you’re looking at buying a home, take the time to educate yourself about the terms that a predatory lender might offer you. In 2001 alone, predatory lending practices cost homeowners over $9.1 billion — and nobody’s been able to run the numbers on the subprime mortgage crash yet. Even if it takes you a little more time, finding a mortgage with no strings will pay off for you in the long term.

AFFIL also offers a free mortgage shopping guide (PDF). The organization also provides extensive information about lenders beyond those who offer mortgages, including credit cards, payday loans and student loans. And while AFFIL can’t do much for someone already in a credit jam, the organization maintains a list of ‘allies’ — organizations and individuals who specialize in specific issues. Other resources include help reporting debt collection abuses and a glossary of terms — an absolute necessity if you’re just starting to try to figure out your finances.

Hunting for a house — the right house — can be beyond stressful. You may have a whole list of criteria, from schools for your children to commuting options to get to work. And if you don’t get it right, you can be stuck. Once you’ve bought a house and moved in, you’ll be looking at a painful financial situation if you want to move right out again.

While you are looking at houses, you need to focus on the pros and cons of each individual property, rather than focusing on more general issues. To remove some of the worry of house hunting — and save money in the long run — complete these four steps before you even look at a single ‘for sale’ sign.

1. Get preapproved. Preapproval for a mortgage means that you know exactly the amount of money you can spend on your new home. You won’t waste time  and effort on homes out of your price range if you know just what sort of mortgage you can get. Furthermore, many people don’t know their credit score off the top of their heads, let alone the amount a lender will give them for a mortgage. That includes me, by the way. Rather than guessing, you should know.
2. Make a wish list. Before you start looking, it’s worthwhile to make a list of exactly what you’re looking for. Dream big: list all the qualities you want in a home, and then prioritize. You might also want to note which items on your list are things you can change in a house that meets most of your other needs. I, for instance, have a preference for energy efficient homes — but I can make the average house more energy efficient with a little time and money.
3. Know the market. There is an amazing amount of real estate information online for every zip code in the country. Do some research: recent sales prices, neighborhood statistics, market trends — even where the local landmarks are in relationship to your preferred area. Even if — especially if — you are unfamiliar with the area in which you’re looking for a home, you should research your potential neighborhood thoroughly. You might even go to the effort of contacting people living in the area to get their impressions of specific locations.
4. Discuss your expectations with your agent. If you are working with an agent to find your new home, you should do your best to tell your agent exactly what you are looking for in a home. Agents want the process to move as smoothly as you do, and if they know your spending limit and what you are looking for in a home, they’ll avoid showing you houses that don’t meet your needs. Both you and your agent can save time with a little communication.

I was out in Las Vegas last week along with a few relatives to visit my cousin — and to see the house he’s buying. We all piled out to the suburbs to see the new place.

The new house is still in the process of being built. My cousin is getting it basically because the original purchasers had some problems with getting a mortgage due to the credit crunch. The builders dropped the price to find a new buyer before the place is done. Of course, we are talking about the Las Vegas real estate market, which is still pretty high-priced despite economic turbulence.

For a little under $200K, my cousin is getting a house that literally has about 100 square feet more than his current apartment and a cement patio out back. And I’m of the opinion that he’s also get a generally bad deal.

I have a few cardinal rules for house buying — and my cousin is breaking just about all of them.

Make a 20% Down Payment

While there are times when it’s worthwhile to be flexible on a down payment, generally paying at least 20% of the price up front will make your mortgage much more comfortable. The ability to afford a decent down payment can also act as an indicator of whether you’ll be able to comfortably afford the house in the long run.

My cousin’s breaking this rule — he can’t afford any kind of down payment. And it’s harder to get those ‘no money down’ loans these days. My cousin’s down payment is coming from helpful relatives, instead.

Plan to Stay Long Enough to Build Equity

One of the great things about buying a house is equity: by making mortgage payments, you can build up a little personal worth. But you have to take the long view when it comes to equity: the first couple of years you’re in a house, the majority of your payments go to interest. I’m firmly of the opinion that, if you plan to move to a new house in less than four years, you should just stay in a rental.

My cousin is guaranteed to be in his new house for another three years, but he’s planning on leaving Las Vegas — and selling the house — after that. It isn’t absolutely certain yet, but it is extremely likely.

Make Payments You Can Afford

One of the reasons for the current credit crunch is the fact that so many people took on mortgages that they couldn’t afford in the past several years. While some people can figure out a way to make payments that seem out of their price range, most people can’t.

My cousin is in school currently, and has minimal income, beyond student loans that he can use for housing. He’s planning to use the money from his loans to make his monthly mortgage payment — just passing the debt from one pocket to another.

My Cousin Doesn’t Have the Financial Footing to Buy a House…

…but he’s buying one despite recommendations to the contrary.