Land of Opportunity

Kimberly Sloan and her husband Michael Saunders thought it was time to buy a house. “We wanted more room and a yard for our 4-year-old son,” says Sloan, a nurse living in suburban Los Angeles. “A few years ago though, homes in the neighborhood we liked were selling for $350,000 to $400,000, which we couldn’t afford.”

Times are certainly different now. Sloan and Saunders, both 31, just purchased a home on a nice block in a neighborhood they know well: “It’s right across the street from where I used to go to school,” Kimberly says. The purchase price on their three-bedroom home: $179,000. Such bargains aren’t unusual these days. “In some areas, home prices have fallen by 50% to 60%,” says Stephon Carradine, a broker and owner of Century 21 Success in Signal Hill, California, who helped the couple. “Mortgage rates are down for buyers with good credit. This is a great time to buy a home.”

Indeed, it is. As everyone knows by now, the housing market is in the aftermath of a decade-long overheating, which saw home prices increase at unsustainable rates. In the post-housing bubble market, prices are still cooling off. By the beginning of 2009, the median price for an existing single-family home had fallen to $180,100, 19% less than the mid-2006 high of $221,900.

The downward trend was broad, but some regions experienced steeper price drops than others. In the Northeast, the median price dipped 11% to $248,800. In the Midwest, it fell 15% to $139,500. In the South, the median home price dropped 14% to $158,300. The most dramatic price-slashing of all occurred out West, where the median home at the beginning of 2009 was $243,200, nearly 31% lower than in 2006.

New Rules

In today’s environment, financing is key. Just as the financial crisis creates opportunities for homebuyers, it is ushering in a new era of tighter standards for obtaining a mortgage. It’s not that banks aren’t lending, but gone are the days where lenders had no problem backing “no money down” deals, and offered so-called NINJA (No Income, No Job or Assets) loans. To get the lowest interest rate on a mortgage today, in most cases, you’ll have to make a 20% down payment–and show proof of income. In addition, you’ll probably need a credit score at least as high as the national median of 723.

If you don’t have the cash for a large down payment or a stellar credit score, there’s still hope. Donnell Williams, a broker with Destiny Realty in Morris Plains, New Jersey, says he has seen borrowers with credit scores above 580 who are able to secure mortgages. What’s more, you can buy a house with only 3.5% down with a federal assistance mortgage (or Federal Housing Authority (FHA)) loan. In fact, that’s how Sloan and Saunders bought their house this year. The catch? You’ll pay a higher interest rate for an FHA loan.

Coming Up Short

If you decide to buy a home now, be prepared to enter into a new world. You might be buying ahome from a seller who can’t keep up the mortgage payments or from a bank that has foreclosed on the previous owners. If you’re buying from a homeowner in distress, you will probably be entering into a “short sale”: a deal where the seller owes more on the mortgage than the home is currently worth. In this case, it’s the owner’s lender who must accept (or reject) your bid or offer price. Here’s how it works: Say the current occupant bought the home in 2006 for $400,000, and took out a $380,000 mortgage loan from the bank; that loan balance is now $375,000. But due to declining home values, the house is worth less than the loan’s principal. So if you offer to buy the house for, say, $325,000, you’ll have to get the lender to agree.

“From what I’ve seen and heard, lenders allow short sales to go forward no more than 10% of the time,” says Emerick Peace, a real estate agent with Keller Williams Preferred Properties in Upper Marlboro, Maryland. “Lenders might think the borrowers have the ability to keep making the payments, so lenders are reluctant to take a loss on the loans they’ve made.”

In many instances, short sale buyers may get a house in move-in condition because the previous owner has been living there, but that’s not always the case. Williams recently worked with a couple who put a contract on a short sale home.