Buying a starter home isn't as easy as it used to be.
First-time home buyers are out in waves, and the stock of reasonably priced homes is diminishing daily.
According to a recent National Association of REALTORS® (NAR) report, sales for homes priced under $250,000 are up just 2.5% year on year, while homes costing north of half a million dollars are posting 27% gains.
Some areas are experiencing even slower sales of starter homes. In the west, homes sales under $100,000 have dropped more than 15% since last year.
But paltry sales can't be blamed on lack of demand.
Rather, shockingly low inventory and tough competition for first homes nationwide is taking its toll.
Plus, builders are putting up fewer affordable homes, opting for high-end (and therefore high-profit) homes. Plus, individual investors are snatching up low-priced homes with cash, a tough offer to pass up for a seller.
It's no wonder renters trying to "get in the game" are frustrated.
Fortunately, there are some tactics to employ to improve your chances of landing your first home. One of them is rethinking the starter home completely.Click to see today's rates (Sep 19th, 2017)
Most first-time home buyers think "small" when they imagine their starter home.
Going with less square footage is one way to bring the price down, but it's not the only way. To get the edge as a first-time home buyer, you have to take a cue from Apple and "think different".
Other property types offer great value, but are not traditionally as sought-after as the white-picket-fenced rambler with two bedrooms and 900 square feet plus a yard. So, you could experience less competition when going after these properties.
Condominiums make perfect starter homes, for example. It's not that they are any smaller than many free-standing homes on the market. The fact that it is an "attached dwelling" brings the purchase price down.
The NAR shows lower average prices for condos compared to free-standing homes in most areas of the country.
|Area||House Price||Condo Price||Difference|
In most areas, condominiums are cheaper. The exception is the Northeast, where New York condo prices push the average above single-family home prices. But, outside of that city, you'll likely find a more affordable price with a condo.
However, check homeowners association (HOA) dues, which can push monthly cost above what it would cost to own a single-family home.Click to see today's rates (Sep 19th, 2017)
Not many first-time home buyers have heard of zero-lot-line homes. They are not incredibly common, but can be a good value if you can find one.
A zero-lot-line house shares a wall with another home. These are also known as row homes or townhomes. Their name comes from the fact that there is no physical lot line between the homes. Technically, the lot line is the exact center of the shared wall.
Like a condominium, prices are lower due to the attached wall. But unlike a condominium, there are no HOA dues, or significantly reduced ones.
The shared wall doesn't diminish the enjoyment of owning. You can still remodel, paint the interior, and customize to your liking. Plus, there are fewer shared walls compared to condominiums, lessening chances of noisy neighbors.
Zero-lot-line homes appreciate just like single-family ones, and can be sold more easily, thanks to fewer restrictions from lenders on these properties compared to condos.
If you're like nearly every other first-time home buyer, you want a "turn-key" home, i.e., one you can start living in right away without any required fixes.
That's okay. Not everyone is able to take on the challenge of a fixer-upper.
But in a hot market, competition is fierce for top-quality homes. You can find and buy a home in need of repairs much more easily.
Especially attractive are homes on which no one can get standard financing. Lenders will require the home to meet certain livability and safety standards before they will lend on it. Most buyers will pass on those properties.
Fortunately, there are loan programs with which to buy the home and renovate it with one loan. And, they are widely available.
The FHA 203k loan is just like the standard FHA loan, but comes with the option to finance up to $35,000 in repairs. You line up contractors before the purchase. Then, the work is started as soon as you officially own the home.
When the work is done, you get your liveable starter home, have probably built equity via the repairs, and you didn't have to get trapped in a dangerous bidding war for the home.
Another similar program is the HomeStyle® Renovation loan by Fannie Mae.
Just like the 203k, HomeStyle® Renovation allows you to fix up a property to lendable standards, or even complete "nice-to-haves" like an upgraded kitchen or bathroom.
You'll likely need a higher credit score and bigger down payment to qualify compared to FHA, but, with 20% down, no mortgage insurance is required.
Both of these "rehab" loans are available nationwide from most lenders. Check with your local bank, mortgage company, or credit union, and also inquire with online lenders.
Sometimes, the home of your dreams is just a few construction projects away.Click to see today's rates (Sep 19th, 2017)
Some first-time home buyers assume they have to "start small". They might be able to afford more, but are afraid to get in over their heads.
While consumer conservatism is a noble trait, it's often not the best strategy when home buying.
Many first-time buyers don't consider the cost of selling that starter home and buying another upon marriage, children, or needing more space.
It typically costs around 9-10% of the homes full sale price to sell it. Not the profit from the sale -- the full sale price!
Plus, you're looking at 1-5% of the new home's price is loan closing costs, moving fees, and more. Here's an example of what a homeowner would spend to sell a home and buy another, larger home.
|Transaction||Agent & Closing Fees|
|Sell starter home: $250,000||$22,500|
|Buy bigger home: $350,000||$10,500|
So, find out if there is a greater selection of "second-stage" homes in your area. You might be able to skip the starter home altogether.
Even though you are going after niche property types, you still need to be ready to make an offer on a moment's notice.
There will be less competition for these homes, but it won't be non-existent.
Many investors, waving wads of cash in the air, could be eyeing the property, too. That's why it pays to have a pre-approval from your lender in hand.
A pre-approval is a simple piece of paper that says the lender has reviewed your file and approved your file, minus the property itself. With it, you can make a solid offer on the home.
To get ahead, think like a seller. Make an offer that appears to be a "sure thing". Above all, the seller wants a quick closing that doesn't fall through.
How Do I Check My Eligibility For A Starter Home Loan?
Starter homes are in short supply, but thinking differently can give you the advantage over other buyers.
Get started on your pre-approval now by getting a rate quote. There's no obligation, and it only takes a few minutes to start the process.Click to see today's rates (Sep 19th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)