very nice looking town
concerning coloring it in PS you have a couple of choices
1. you can make a new layer (or several I would suggest one pr color) and use a soft brush and manually stroke the colors on - the look wouldn't require the brush to stay within the lines... you could even switch on wet edges for a watercolor look
2. you can use the magic wand (select all layers), and when you've selected the chosen area, go to SELECT > MODIFY > CONTRACT and contract the selection by 1-2 pixels before filling it.
and basicly don't forget to zooom zooom zooooom ... work at 4-600% then its easier to control the strokes...and don't use too big a brush
looking forward to seing more