Starter Homes: What They Are and How to Buy One
Source: Homes
If you’re a first-time homebuyer, you might not be able to afford your dream house right out of the gate. However, that doesn’t mean homeownership is out of reach. Buying an entry-level home, commonly referred to as a starter home, can help you take the financial leap from paying rent to building equity in a property you can call your own.
What Is a Starter Home?
A starter home is an entry-level property for new homeowners. “It doesn’t check all the boxes of a dream home but meets your needs for where you’re at now,” says Susan Larson, a real estate agent with eXp Realty in Seattle, Washington.
Buying a starter home makes sense if you’re on a budget, you expect your lifestyle to change in the next few years, or if you want to make the jump from renting to homeownership. While there’s no set definition for a house to be considered a starter home, there are some common characteristics:
Affordability: These home prices are typically lower than the median sales price within the same housing market. According to the National Association of Realtors (NAR), a starter home typically costs 15% less than the median price of a single-family home.
Size: These are usually smaller homes of less than 1,250 square feet, with one or two bedrooms. Condos and townhouses make popular entry-level investments for first-time buyers.
Amenities: While most have basic amenities, some starter homes may lack the latest features you’ll find in newly built homes.
Condition: Starter houses are often older, existing homes. Some might be fixer-uppers that could use renovations compared with higher-priced houses in the same area.
Location: A great neighborhood that’s close to everything can drive up home values, and the affordable price of a starter home may mean that you make a bit of a tradeoff regarding location.
Length of ownership: Starter homes are often a short-term investment; it’s not uncommon for a buyer to upgrade to a more permanent forever home in a few years.
Who Is a Starter Home For?
A starter home may appeal to many first-time buyers, often young couples or singles, who intend to live in the home and build equity for two to five years before moving on to a long-term (usually larger) property that better meets their needs. According to the NAR 2024 Profile of Home Buyers and Sellers, first-time homebuyers have a median age of 38 and earn a median household income of $97,000.
Starter Home vs. Forever Home
The decision between purchasing a starter home or a forever home is often determined by your budget, lifestyle and plans for the future. It’s important to consider if the tradeoffs you’ll make by purchasing a starter home will work for you. “You should think through how long you could comfortably stay in the home in terms of size and amenities,” Larson says.
If you’re in a transitional stage, such as starting a new career, planning a family, or still determining where you want to live long-term, a starter home is likely the right path toward homeownership.
A forever home is ideal if you’re financially stable and clearly envision your long-term needs. Since you’re less likely to outgrow it, purchasing a forever home can also save you from the hassle of moving in a few years.
Benefits of Buying a Starter Home
An opportunity to start building equity: Equity is the difference between your home’s value and what you owe on it. Unlike paying rent, the money you put toward monthly mortgage payments will help you build equity in your home.
Freedom to personalize: When you rent, you can’t make significant changes to your living space. Buying a starter home allows you to customize your residence to your specific tastes.
Less commitment: Since you plan to move again in a few years, a starter home means you’re not committing to a single location or type of home. You can use this time to figure out what you want from your next property.
Fewer homeownership expenses: A home with less square footage has some advantages, like easier upkeep, cheaper utility bills and fewer furniture expenses.
Tax deductions: As a homeowner, you can take advantage of some tax breaks on your yearly return, including the money paid toward your mortgage interest and property taxes, which will reduce your taxable income.
Financial Considerations for First-Time Home Buyers
If a starter home will also be your first home, you’re not alone. NAR reports that 24% of buyers in the real estate market are purchasing a home for the first time. As you search for a smaller, more affordable home, consider these upfront and recurring costs.
Down payment: A starter home’s more affordable purchase price means a lower down payment. Some conventional loans will allow you to finance with as little as 3% down, while FHA home loans are available with a 3.5% down payment. If you qualify for a VA loan or USDA loan, you may be able to finance your home with no down payment required.
Closing costs: Closing costs are fees that must be paid at settlement and are separate from your down payment. You should budget 2% to 6% of your mortgage balance to cover your closing costs.
Monthly mortgage payment: You’ll want to determine how much house you can afford. Every home for sale on homes.com includes a mortgage calculator to estimate your monthly payments toward principal and interest, property taxes and homeowners insurance. If needed, our mortgage calculator will also factor in monthly HOA fees and private mortgage insurance (PMI) costs.
Your other expenses and debts: Lenders use your debt-to-income ratio to evaluate the potential risk of approving a mortgage. A good rule of thumb is that the cost of your mortgage and other debts – such as payments toward student loans, credit card balances and car loans – should not exceed 36% of your pre-tax (gross) monthly income.
Renovation costs: “If you plan on making updates or repairs, you need to really know what you’re getting into and how much it’s going to cost,” Larson says. Get a home inspection to assess the need to address major issues before you buy.
Resale Value: Since you only plan to live in the home for a few years, you need to consider its resale value. Access to great schools, the location and your home’s condition all contribute to how fast — and for how much — you can sell it for down the road.
Buying a Starter Home: Next Steps
Determine how much house you can afford.
Decide what you want from your home and what you’re willing to sacrifice.
Find an experienced real estate agent to guide you through the process.
Choose a mortgage lender and get preapproved for your loan.
Look at your monthly expenses and savings to determine a budget.
Search the available homes for sale in your area and find the perfect starter home.
Work with your agent to submit an offer and determine the contingencies you should include.
Get a home inspection to catch any issues and an appraisal to assess the home’s value.
Close on the home and move in.
Source: Homes
