What is a starter home? How can you finance this type of property? What goes into your decision when buying one? All these questions concerning starter homes deserve an article.
In all fairness, buying a starter home is like buying any other home. You look for it and at the same find a suitable mortgage, make an offer, and work toward closing the transaction. There are considerations involved in buying starter homes, just like in any homebuying decision.
Starter Homes Defined
The Wikipedia community defines starter homes as houses that a family or an individual buys first before transitioning into a long-term home (often referred to as forever home). The definition can also refer to the property’s size and location.
Since there is no uniform classification of starter homes, think of them as a condo unit, a smaller home (sometimes it can be bigger), an older home, or any home that is priced at the entry-level.
Affordability is arguably the biggest reason behind the purchase of starter homes, especially in expensive places like New York and California.
With its price as its major selling point, buying a starter home also sells because:
- It appreciates in value faster than a move-up home. The demand for starter homes is driven by two generations of homebuyers at opposing ends: millennials who are looking for affordable homes and Baby Boomers who are looking to downsize per Realtor.
- It offers a higher return on investment. Counting on the above demand for starter homes, it’s easier to sell them when the time comes. The actual return on investment varies on the improvements made on the home, its location, and market forces.
- It has a lower purchase price that means borrowing less for a mortgage and thus making lower monthly payments. This essentially makes starter homes less expensive to keep and maintain, e.g. property taxes and insurance premiums.
Financing Starter Homes
You’ll have plenty of mortgages to choose from when buying your starter home. You can start with FHA loans whose down payments can go as low as 3.5%. Their credit score requirements are also not that high, e.g. for 580 you can be eligible for the 3.5% down payment.
You can also check USDA loans if you are buying a home in a rural area and VA loans if you are a Veteran or a Servicemember. But if you do qualify for either guaranteed loan, you won’t make any down payment.
Conventional loans are also available for starter homes. They are made by private lenders so they have differing rates and costs. They can be conforming loans if they meet Fannie Mae and Freddie Mac’s guidelines.
One important tip: each loan program has its own minimum property requirements so the home has to pass these before you can get a loan for it.
Is a Starter Home Right for Me?
Of course, not everything is rosy in this corner of starter homes. There are details to thresh out should you go for a starter home.
The length of stay in the home. There’s no rule on how long you plan to occupy the home. What’s important to consider though is your mobility and future plans. If you are still figuring things out, the choice might be between buying the home and renting for the time being.
The cost of selling the home. Why it’s important to think of short term? Capital gains. While a starter home makes for good investments, capital gain taxes take a slab off your profit when you sell it within a shorter period of time of buying it, i.e. less than a year.
The life you lead. Consider your lifestyle in choosing the location of your home. Consider the tradeoff if you move far out of places where you socialize, work, go to school, or eat out.
So, is a starter home worth it? It can be if it is aligned with your cash flow and current circumstances.
Need more help in deciding? Speak with a lender today.Click to See the Latest Mortgage Rates»