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Should You Buy a Starter Home?

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The concept of the starter home has changed dramatically since its introduction in the 1940s. That period’s typical two-bedroom, 1,000-square-foot home offered homeownership options for post-World War II adults trying to start lives anew in neatly designed neighborhoods with mortgage payments that were less than the rents they were accustomed to paying.

Today, starter homes look a little different, but they still exist. That’s because homeowners are still eager to move up to bigger homes. A recent report issued by the National Association of Home Builders (NAHB) shows that more than 5.5 million homeowners have been able to benefit from home price improvements by trading up to newer homes. Of these, more than 25% were able to use the money from the sale of their current home to complete the purchase.

With home prices continuing to rise in 2019, purchasing a starter home now could allow you to start your homebuying life cycle.

What is a starter home?

Many people experience three phases of homeownership in their lifetimes: the starter home, the move-up home and the downsize home.

The starter home is just what the name implies — a home to get your feet wet with homeownership, with the idea that you’ll be moving up to a bigger home as your family needs grow with time.

These entry-level homes are usually one or two bedrooms, or maybe a small three-bedroom home, according to Freddie Mac. “Starter homes are a great option for first-time homebuyers as they typically have lower price points,” said Tendayi Kapfidze, chief economist for LendingTree. “Buyers can avoid overextending themselves financially, especially as home ownership often has ongoing costs that are not immediately obvious when doing the home search,” he added.

In areas where home prices are rising faster than incomes, starter homes may take on the less appealing misnomer of “fixer-upper.” Neighborhoods that feature these homes for sale may be older, with less appreciation potential than newer, up-and-coming neighborhoods.

Even with rising interest rates, the monthly payments on a rental home will usually be more expensive than a starter home with similar features.

Which type of starter home do you want?

Turnkey ready, no-frills

If you are looking for a newly constructed home at a starter home price, you’ll need to focus on the basics. Granite countertops, stainless steel appliances, and crown molding may look great in a home, but they aren’t likely to be features in a starter-priced home.

If you have some basic construction skills or have a brother-in-law in the trades, then you can make the improvements after you move in.  Otherwise, the starter home turnkey upgrade options will be very limited.


Replacing carpet and repainting walls can be relatively easy fix-up tasks for a home, as well as putting in new or refurbished kitchen cabinets, or installing energy-efficient appliances. Houses with deferred maintenance items like these can often be purchased at a discount.

Again, it depends on your skills to do the repairs or to negotiate a low price for someone else to do the work.

If you’re talking about major fixes, the equation can change. Renovation loans are becoming more popular, but for starter homes, they add another level of stress and effort. The Federal Housing Administration offers a 203k renovation program, and Fannie Mae and Freddie Mac both offer renovation programs, allowing you to purchase a home and finance the improvements based on the estimated value of the home after you make the improvements.

One caveat — the loan costs are higher, and you’ll need to determine if you can live in the house during the renovations. If not, be sure to budget for the expense of renting, or contact a family member to camp out in their living room until the work is done.

Townhouses or condominiums

If you aren’t quite ready to jump into the rigors of property maintenance, a condominium or townhome may be a good choice. Maintenance and amenities may be similar to what you had if you lived in an apartment complex, and you’re only responsible for what’s inside the walls of your condo while the condominium association covers everything else.

Monthly fees can be steep for all the bells and whistles, but they may provide a cost-efficient option for city living if you’re not ready to commute to the outer suburbs to find a reasonably-priced, single-family starter home.

Manufactured home

Manufactured homes are making a comeback and may be worth considering as a starter home option. The stigma attached to manufactured homes has been replaced by spacious new models that are built to single-family residence construction standards.

The assembly line designs help keep the costs affordable, and safety requirements include affixing the property to a permanent foundation, which means they hold up just as well as a foundation-built home in high-wind weather events like tornadoes or hurricanes.

Fannie Mae and Freddie Mac now offer minimum-down financing for manufactured homes, and with costs much lower, they may be a good option to consider for a starter home search.

Income producing multiunit

Although not technically a starter home, one way to improve the affordability of a starter home is to have someone else pay rent toward your mortgage payment. This is possible if you purchase a 2- to 4-unit property, or multifamily home as it more commonly called.

The FHA allows you to purchase a multifamily home with 3.5% down payment, and as long as you’ve got some reserves in the bank to cover two months’ of mortgage payments, you’ll qualify for the mortgage. The other good thing — you can count the market rent of the property you’re buying toward the income you need to qualify.

What to consider before you start looking for a starter home

The urge to buy a home usually occurs when a renter gets tired of yearly payment increases, or of neighbors too close for comfort. They may want the freedom to paint walls any color, have as many pets as desired or just move away from the collective noise of civilization to the safety and stability of suburbs where they can start to raise a family.

In other cases, a consultation with a tax professional may have opened up a discussion about the tax benefits of homeownership. Most people can deduct mortgage interest and property taxes on their federal tax bill, and every payment you make on a mortgage gets you closer to owning the property free of any debt.

If you’re feeling the urge to buy your own home, there are some important things to consider before you step foot into an open house or meet a real estate agent.

What payment am I comfortable with?

Buying a house can be an emotionally charged experience for many people. Most homes are staged for sale in their best possible light to make them more appealing to buyers. It’s easy to get attached to a home before ever knowing if the payment will be comfortable.

The mortgage prequalification system is designed to look at the maximum you can be approved for based on your pretax income.  It does not take into consideration what your actual take-home pay is, and how much of that is used on food, gas, car insurance, cellphone expenses, cable bills, entertainment, piano lessons, happy hours or any other monthly commitments that don’t show up anywhere on a credit report.

An automated mortgage underwriting system may indicate you are approved, but it’s still up to you to make sure the resulting payment is what you’ll be comfortable making. Be sure to review your budget and set a threshold for how high you are willing to go payment-wise — and then stick to it.

Where do you want to live?

Real estate is about location, location, location. Affordable starter homes may not be close to where you work, play or want to pursue your higher education. You might need to consider a smaller property, like a condo or a townhome, instead of a stand-alone single-family residence with a yard that’s all your own.

If you have a family or plan to start one, you’ll need to think about school districts, and how close the house is to the local grocery, pharmacy and urgent care.

How stable is your job?

To get the full benefit of appreciation and fluctuations in the market, you’ll want to stay in the home you buy for at least five to seven years. If there is any chance there might be a nearby job market that is more appealing for your income and benefit-wise, you may want to put starter home plans on hold.

Mortgage lenders are mostly concerned about your last two years of employment history. The conventional wisdom is that the money you’ve made the past two years is a good indicator of your earnings going forward.

Job changes happen, or you might have just graduated with a degree, and are able to earn income at a much higher rate than prior years of part-time jobs or night jobs while you were going to school. If you are new in your field of work, or new on the job, there is a period of transition that can be stressful as you learn systems, get accustomed to the company culture and go through training.

Buying a home at this time may add to that stress, as you juggle the demands of getting approved for a mortgage, moving into a new home and getting settled into it. It may make more sense to wait three to six months until you’ve gotten into a groove at work.

Are you handy with house projects?

Once you depart the world of renting, you’re on your own for home repairs. You’ll be doing the work yourself or hiring someone else to do it. If you can’t do the work yourself, you should at least get yourself acquainted with the going hourly rate for plumbing, landscaping and minor handyman tasks in your area.

Do you have some rainy day or emergency repair savings?

Home repairs can run from the hundreds of dollars into thousands if you have to replace a roof or air conditioning. Having some extra money in savings will help you avoid charging credit to pay for these unexpected homeownership expenses.

Many loan programs don’t require that you have any additional funds in savings after you close. However, it’s a good idea to have at least a couple of months’ worth of your monthly payment in the bank in case you have a sudden change in income or employment.

How much do you have for a down payment?

Once you decide the payment you are comfortable paying every month, you need to look at your checking, savings, retirement and other assets to determine how much you have to put down and how much you want to put down.

It’s also important to think about when you may want to sell the house before you buy it. That might seem strange, but there are costs you’ll incur when selling a house that you don’t have to worry about when you’re a buyer.

As a buyer, you are generally not responsible for the commissions paid to real estate agents on the sale of a property. However, when you become the person selling your home, the standard commission rate paid out is usually 5-6% of the price of your home.

A larger down payment allows you to make more on the resale of your home, and reduces the chance that you’ll end up having to pay money out of pocket if you have to sell it unexpectedly. That also means you’ll have more money to put toward the next home you buy, which lowers the amount of interest you pay over the long haul.

How is your credit?

The key to making a starter home cost-effective is to get the lowest payment possible. The higher your credit score is, the lower your total monthly payment will be.

You need to make sure you get scores from all three credit bureaus — Transunion, Equifax and Experian — because mortgage lenders will use the middle of the three scores as the basis for your interest rate. If your score is less than 640, you’ll want to consider credit repair.

Below is an example of the difference between a 640 minimum score and a 720 score on your principal interest and mortgage insurance payment if you were to apply for Fannie Mae’s HomeReady® or Freddie Mac’s Home Possible® mortgages with 3% down payment:

Cost of a Mortgage, Based on Credit Score
3% down payment, $145,500 loan amount 720 FICO 640 FICO
Principal and Interest $759/month $849.10/month
Interest rate 4.75% 5.75%
Monthly mortgage insurance $73.96/month $114/month
Total PIMI (principal, interest and mortgage insurance) $832.96 $963/month

Source: MGIC Rate Card July 2018

The cost of a low credit score is more than $130/month — or $1,572 every year. If you stay in the house for five years, that comes to $7,860!

If you have major credit issues like bankruptcies, you will need to check with your loan officer to verify if enough time has passed for you to be able to get a mortgage. Although there are programs that will allow you to get a mortgage a day after completing a bankruptcy, the rates and down payments are much higher.

Final thoughts about buying a starter home

Millennials make up at least a third of all home purchases today, and there is evidence they are skipping starter homes altogether, buying houses that would be considered “trade-up” homes, with four bedrooms and prices up to $300,000.

As affordability becomes an issue for first-time homebuyers, discussions are getting serious about ways to cut the cost of producing new homes. Minneapolis is already studying zoning transformation to allow for more affordable housing.

Now that manufactured housing can be financed with low down payments, there may be new breakthroughs in production style homebuilding to add new options for buyers looking for their first home. DR Horton’s Express Home offerings are addressing the growing need for housing that appeals to all the stages of the homebuying life cycle, which means other builders may follow their lead.


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