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Finding A Starter Home In A Competitive Market

You’re ready to purchase your first home. Congratulations! However, after beginning your search you may find yourself wondering, ‘where in the world are all the starter homes?’ or ‘how can I even compete with so many offers?’

These are valid questions to ask considering recent trends in the housing market. There is a starter home shortage in many popular housing markets. Housing inventory is pretty low, and demand is pretty high, which is driving entry level price points higher and creating multiple offer scenarios. Not an ideal combination for first-time homebuyers.

Not all hope is lost, however! Even though the market is competitive, there are still a few things you can do that will put you ahead of the pack, and we’re here to walk you through steps you can take to get into your starter home

What is a starter home?

Let’s first define what a starter home is – and how it compares to a forever home – so we’re on the same page. A starter or entry-level home is typically for first-time home buyers who are ready to test out homeownership instead of renting. These homes are typically more affordable but smaller in size – usually two or three bedrooms – with fewer amenities. They give their owners a chance to build equity, improve credit history and save money for a few years before they outgrow the home and their ownership needs change due to a life event, like getting married, having a baby or relocating due to their job. If you are a first-time homebuyer, be sure to check out our guide to homeownership.

Alternatively, a forever home is for those who want to settle down longer term in a certain area. Forever homebuyers have different housing needs, and the square footage and number of bedrooms and bathrooms in these homes reflects those needs. These individuals may be further along in their careers than first timers and may be thinking about the future needs of a growing family. These homes are usually more spacious (and more expensive) and have many more amenities.

So, is a starter home right for you? Because purchasing a home is such a momentous occasion and major financial decision, it makes sense to create a pros and cons list before you go house hunting.

Check out the good and bad of buying a starter home

Pros:

  • Affordability. Starter homes have lower price points and may require lower down payments. Property taxes on starter homes are typically lower as well.
  • Easier upkeep. When you become a homeowner, home improvements, maintenance and upgrades become your responsibility. But this is easier in starter homes than larger forever homes. Upkeep is also something to consider when you’re looking at new construction vs. a fixer upper.
  • Flexibility. You can move into a starter home to see how home ownership suits you and then upgrade to a larger space after a couple years. Forever homes tend to be more expensive and, thus, are more of a long-term commitment.

Cons:

  • Competition. Because starter homes are priced lower, there’s heavier competition among buyers and investors to snatch them up. In contrast, forever homes, being priced higher, may not have as much competition plus you likely have more room to negotiate your offer than with a starter home.
  • Smaller size. You’ll have less space and less flexibility to grow into your space, unless you plan to invest in home additions or remodels.
  • Less customization. You’re less likely to make major upgrades to a starter home, especially since you need to carefully consider the return on those makeover investments at resale. In contrast, a forever home is primed for customization that matches your lifestyle and family needs.

Top Tips When Buying Your First Home in a Very Competitive Market

If you’ve decided that buying a starter home is right for you, then you’re likely wondering how to find a starter home and get your offer accepted in a market with limited inventory. Here are the steps you can take to boost your chances of success.

Get Pre-Approved

Buying in today’s market is competitive, so having a pre-approval letter will help you stand out as a serious buyer to sellers. By working with a trustworthy mortgage lender, you can figure out how much house you can afford and whether you want to be prequalified or preapproved. You can also use our mortgage affordability calculator to estimate how much home you can afford. While a pre-qualification can give you a general idea of how much you can afford (and a general idea of the rate you could get) a preapproval is a verified approval based on your credit history that gives you a specific interest rate and loan amount. Keep in mind that while different lenders allow for different credit scores, AmeriSave offers a competitive feature called Certified Approval that helps clarify what you can afford. You get credit approval in three minutes based on a soft credit pull that doesn’t affect your credit score but gets you locked into a low rate. And within hours, we can provide you with a Certified Approval Letter that includes underwriting of your credit and income – so that we can guarantee your rate will stay as low as we’ve offered. When competing with other buyers, having a Certified Approval Letter gives you leverage with sellers and a competitive advantage.

Keep an Open Mind

Your first home may not necessarily be your dream home, and that’s okay. Many first-time home buyers don’t plan on staying in their first homes forever. Instead, they use the home as a financial launch pad for their ideal home in the future. This does not mean, however, that you should have lower expectations for a starter home; it just means you need to be flexible and determine what you can and can’t compromise on. For instance, can you let go of some of the updated amenities you originally thought were deal breakers? Can you expand the location you’re looking in and/or consider neighborhoods that weren’t originally on your list? Can you consider a condo or townhouse in lieu of a single-family home? Can you live with a one car garage instead of a two car?

Use a Real Estate Agent and Loan Originator

It’s fun and empowering to do your own research online and look at home in certain neighborhoods or even to do virtual walk-throughs of specific properties. But there’s a lot to be said about using professionals. First-time homebuyers benefit from the expertise of someone who knows the local area housing market and how to act quickly on their behalf when shopping for a starter home in competitive markets. A great real estate agent will know how to ask you questions about your homeownership needs, how to manage expectations and how to negotiate a deal that’s great for you. Equally important, a trusted loan originator can help you understand your budget, get you the best loan for your financial goals and give you confidence of funding in the offer and closing process.

Understand Your Needs

Think through how many bathrooms and bedrooms you need now but also in the years to come. Planning for life events (marriage, children, job change, etc.) is part of the starter home thought process. In addition to finding a home for your personal needs, location is a big factor for many buyers, and sometimes affordability has to be compromised when purchasing in a highly desired part of town. Alternatively, an affordable home in a less desirable location could leave you compromising on commutes to work or your social life. Only you can decide what’s most important to you, so as you begin looking at properties, be sure to look at the surrounding areas. Consider what the schools are like, as well as whether there’s convenient dining and shopping nearby. These things can not only affect you but also future resale value.

Make a Good Offer

You’ve found an amazing home in a desirable location at a great price; now what? Well, if you found the perfect home, other potential buyers probably have their eye on it. With your pre-approval in hand, make a strong offer! In today’s seller’s market, competing offers are common with many offers coming in over the asking price. Being preapproved for a mortgage helps if there is a bidding war, and this is why it’s important to have an experienced real estate agent and loan officer working on your behalf. They can help you navigate the home purchase process smoothly from making an offer to closing on your loan on time.

Other starter home considerations

  1. What about single applicants? Not a problem. Many starter homes are purchased by single applicants. The process of obtaining a mortgage when you’re single is handled the same as if you’re, say, newlyweds (i.e., co -borrowers).
  2. Pros of buying vs. renting – By investing in a home, you’re building equity, which you can’t do when you make monthly rent payments. You also can write off the mortgage interest when filing annual tax returns, which is a financial benefit. Speaking of renting, you may opt to rent out your starter home when you move after a few years, which could create secondary income and help you build future wealth.
  3. Budget planning. If you’re thinking about a starter home (or a forever home, for that matter), you’re already considering home affordability and saving for a down payment. Knowing your monthly budget is a good first step, including how much debt you already have, so you can reach out to mortgage lenders to begin the preapproval process. This will help you nail down what your monthly mortgage payment will be, your mortgage interest rate, and details around principal, interest, taxes and insurance. Speaking of taxes, keep in mind that property taxes will become part of your life as a homeowner. And speaking of down payments, depending on the lender, you can find some mortgage loan programs with down payment options as low as 3%. Some government-backed mortgages are even 0%, so talk to your loan originator about your options.
  4. Other tax considerations*. Perhaps you’re hoping to take advantage of the first-time homebuyer tax credit. Unfortunately, that exact legislation (created in response to the 2008 financial crisis) no longer exists, but there is now a $15,000 First Time Homebuyer Act of 2021. The program applies to all homes purchased on or after January 1, 2021. Talk to your loan originator about whether you meet the criteria. Be sure to also inquire about the home mortgage interest tax deduction, which allows homeowners to deduct mortgage interest paid on up to $75,000 of the loan principal. Check out our guide on tax deductions for homeowners to make sure you’re not missing out on any homeowner tax benefits.

Whether you’re a first-time home buyer looking for a starter home or someone who’s interested in a forever home – or anything in between – talk to us. AmeriSave loan originators can assist you on your journey to home ownership, answering questions along the way and helping you navigate the end-to-end home buying process.

* AmeriSave Mortgage Corporation and its affiliates do not provide tax or financial advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax or financial advice. We encourage you to consult with your own tax or financial advisors about the tax or financial implications of your home loan and to identify a plan that works best for your particular situation.

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