Despite the gloom and doom of the financial market, buying a home that you plan to live in for 5 to 10 years is not a bad idea if you meet the financial requirements.

Let's run some rough numbers: First-time buyers purchase a home for $400,000 with 20 percent down ($80,000). The loan amount is $320,000 (let's assume the buyer paid all the fees, costs, etc.). At a 6% interest rate your interest payment is around $1920 per month for a 30-year loan. Incorporating the cost of property tax ($400) and insurance ($70) your mortgage payment is $2390. If you are also paying principal on the loan, let's guestimate another $300. So your monthly mortgage is between $2390 and $2690.

While that's some serious change, and I'm not recommending anyone purchase a home they can't afford, let's look at the comparison. Say you rent the same home for $1700/month. Using the interest-only figure for the comparison ($2390), after 5 years:

Renting: $102,000 spent over 5 years
Owning: $143,400 spent over 5 years

So how likely is it that in those five years your home will go up in value $41,400? Yep, it's quite possible. Even probable. If you're handy around the house, you certainly can do a number of improvements yourself and gain sweat equity that benefits you even in a difficult market.

Yes, you put down $80,000. I'm not forgetting that. But it's unlikely you stuck that saved $41K in the bank while you were renting and "saving all that money." If you paid principal in addition to the interest, then you gain equity by paying against the balance of the loan. So at $300/month you've paid off $18,000 of your $320,000 loan.

Sure, you may own a home and drive an older car. But economically, borrowing to buy a house is money far better spent than borrowing to buy a new car. Fat chance that car will go up in value in five years.

Lenders are looking at communities and geographic areas to determine "depreciating markets." If you are buing in a depreciating market, the lender may be extremely cautious or refuse to loan on the property based on the loan-to-value ratio. Here's the catch-22: If it takes 30 to 45 days to get approval for a loan, your escrow period will be approx. 15 to 30 days more. Over a 60-day period it is possible your purchase in a depreciating market may depreciate below the contract sales price. Your lender may want to renegotiate the terms–the loan amount or sales price–before funding.

Having flexibility in your cash down is wise…and one way to offset this type of situation. More cash down drops the loan-to-value ratio. Alternately, proceed as far toward the approval process and get a fixed figure not to exceed in mind. If you can get approved for a $600K purchase, find a home under $600K to allow some wiggle-room.

I'd like to relocate to be closer to family but my house is not worth what I owe. Can I just call the bank and do a short sale?

Short sales aren't easy or a sure thing. On one of the short sales we have, the bank took almost six weeks to reply and the two lenders still couldn't come to terms with what they would accept. They were still bickering by the time the buyer found another house. In the meantime we see every other non-short-sale-listing go into contract, usually within 30 days of listing.

Banks also aren't the most communicative people to work with. Many buyers and agents avoid them for this reason. If you can call your bank and have them agree to a short sale just like that, it's a good sign. Far more likely you will call and call and be redirected and call and redirected and….you get the picture. So if you think this is the best solution, start communication with the bank now and see if you can get in touch with someone who can really respond. You need a point of contact first and foremost. If you don't have contact with a decision-maker you can not sell the house for less than the payoff amount. If you have a first and a second mortgage it becomes doubly difficult.

Consider renting your house out if that is a financial option. If you can get 80% of your mortgage covered by rent it is better than paying it all while you're not living there and the credit issues that may arise to position yourself for a short sale. Or, postpone your relocation if possible, especially if you have the finances to keep your mortgage current.

We found a home that is PERFECT for us! How do we make a competitive offer? Are there prerequisites to making an offer?

The answer to this is question is rather complex. Depending on the parties and property involved, many details need to be assessed to make an offer "competitive." Some key factors you need to consider and prerequisite items are:

1) Competitive offers are not just based on price. A "clean" offer with a fast close, 20% or more cash down, and/or an as-is purchase are factors that help make your offer competitive. However, you should work with an agent who can advise you which options to include based on the specific home you wish to buy, your maintenance skills and time availability, and your overall financial situation.

2) Be sure you have discussed the anticipated purchase price with an experienced loan broker BEFORE your offer. Loans are difficult to get and a strong offer comes from a buyer who has already begun the approval process.

3) Making an offer over asking price may not guarantee you get the house. The market value should be researched carefully. If you offer a price well over the median value, the house may not appraise at your offer price. This means the lender may not be willing to give you enough money to purchase the house at the price you offered. Unless you have a cash to make up the difference, you may not be able to complete the transaction.

What should we do to prepare for a first home purchase?

Unless you have the opportunity for a cash purchase, most of the pre-purchase preparation of home buying (aside from finding the right location and home) is getting established credit, income, and assets.

Lenders scrutinize their clientele much more thoroughly now. To get the best rates and terms it is wise to have:

- 700+ credit score

- Little to no debt (ie., credit cards, car loans, student loans, etc.)

- Established career whether it be employment, self-employment, or business ownership with traceable and stable income

- Excellent financial records (IRA statements, bank statements, W-9s and W-2s, several years of tax returns preferably done by a CPA, P&L statements if business, etc.)

- 20% or more cash down toward the purchase price of your home plus closing costs (approx. 1% to 3% of the purchase price)

- Cash in the bank left over after the purchase, roughly 2 to 3 months of living expenses (inclusive of your new mortgage payment)