When you decide to purchase your first home, you may have visions of granite countertops and a luxury spa shower in mind.
And depending on your budget and your local real estate market, your vision just may come true. For many first-time homebuyers, however, getting all of the bells and whistles in that first home may not be feasible or practical. But a starter home can still be the perfect home for right now — and get you on a solid path to your forever home.
Understand Your Budget
The first step on the road to homeownership is determining how much house you can afford and that goes hand in hand with location as prime or popular neighborhoods may be out of your budget. So, it’s important for first-time buyers to understand all of the costs that go into buying a home and paying for it every month.
“Each buyer’s unique financial situation plays a significant role in which kind of home they purchase, especially in how much they can put down,” says Ray Rodriguez, regional mortgage sales manager at TD Bank.
He adds that starter homes typically have a lower home price value, meaning your down payment will likely be lower than that of a forever home.
Morgan Franklin, a Realtor at United Real Estate Lexington in Lexington, Ky., concurs.
“The largest obstacle is the down payment. The larger your down payment, the more favorable your financing terms will be. Often, first-time buyers have a minimal down payment, which means that they will carry mortgage insurance (MI), which can have a huge impact on their mortgage payment.”
Franklin says he advises clients to find a starter home on which they can put 5 percent down, allowing them to use conventional financing instead of FHA loans, which are more common with down payments of less than 5 percent. “They’ll still have mortgage insurance, but conventional MI is significantly less than FHA MIP.”
Want to Move Up?
Franklin offers several criteria for buyers who know they’ll want to move up into a larger home in the future. He advises looking for a home in which:
- The volume of sales in the neighborhood is steady.
- There is a track record of appreciation in the neighborhood.
- The school district has a high rating.
- The home is not the most expensive in the neighborhood.
“Purchasing a starter home in a growing market where home values are continuing to increase is a smart move,” agrees Rodriguez. “If the value of your home increases over time, you can profit from your starter home when it comes time to move up and put those extra dollars toward purchasing your forever home.”
Being aware of potential family needs is important when buying your first home. For example, keeping area schools in mind is important whether you plan to have children or not because owning a home in a good school district increases the resale potential.
“You should keep your next step in mind and be prepared with a house that will sell quickly,” Franklin says.
But you don’t necessarily need to sell your starter home if you decide to trade up in a few years. Another benefit to purchasing a starter home is the potential for rental income.
“Investing in a starter home now that you can turn into a rental property later in life can be a great source of added income,” Rodriguez says, adding that you can put that income toward your next home or use it as extra cash flow. “Multi-unit properties seem to be a popular option, especially among Millennials. They live in one and rent the other.”
But he cautions that not everyone has the appetite to be a landlord.
“Being a landlord is a hard job and has its own set of stresses,” Rodriguez says. “Find someone you know who owns rentals and talk to them. You have to do your research.”
But if you decide to take on the challenge of becoming a landlord, you may be well positioned to help pay for your forever home.