House & Home Calculators

Start Here When Buying a Starter Home

Most first-time home buyers should begin their home-ownership journeys with starter homes. That may seem obvious, but many people believe whatever home they buy first is a starter home because it’s the home they start with. However, that line of thinking can quickly put you in a financially unstable position if you purchase more home than you can safely afford. The situation isn’t helped by popular real estate shows that would have you believe starter homes come with granite countertops, a huge master bathroom, and a three-car garage—at minimum!

To avoid disappointment and set realistic expectations, read how to get into the right mindset and then take a look at our starter home–buying checklist.

Get in the right mindset

A good place to begin is affirming your goal to live within your means and how that affects your future, i.e. avoiding crippling debt, which in turn can give you the freedom to change lifestyles or travel, to be financially ready to start a family, or to start saving for retirement earlier. Keep this goal and its associated benefits in mind whenever you need to make a compromise or are tempted to stretch your home-buying budget.

Put together a list of desired amenities and a few locations for when you’re ready to tour homes. It can be helpful to rank home features—especially if you’re purchasing a house with a partner—so you’re clear on how you value yard space versus an insulated garage, for example. It will help when the time comes to make compromises.

When it becomes tempting to look at homes at the top end or above your budget, it’s important to remember one of the reasons you’re looking at lower-priced homes is because that also means lower property taxes (if based on sales price), lower utility costs, and less in insurance premiums.

Finally, remember there will always be a demand for affordable starter homes, so even if your first home doesn’t tick all of your desired boxes, most likely you won’t be trapped into owning it for long when you decide to sell. The home will appreciate faster than a move-up home, giving you more financial buying power when you’re ready to upgrade.

Checklist for buying a starter home

  1. Line up your financing. If you want to avoid paying PMI (private mortgage insurance), you’ll need to save up for a 20% down payment. Decide how much you can afford per month in mortgage payments and let these two numbers be your guides in deciding how much house you can afford. Ideally, once you have saved up a good-sized down payment, let it “season” in your savings account—which just means don’t make any large deposits or withdrawals from it—for two to three months. This shows lenders your finances are stable. While you’re saving, build up your credit score and pay down other debts. A higher credit score will earn you a lower mortgage interest rate. Finally, save money for closing costs, unless you plan on rolling them into the mortgage (warning: that will make for larger mortgage payments, which means affording less house). On average, closing costs are 3% to 4% of purchase price and include appraisal and home inspection.
  2. Find a real estate agent. Look for an experienced professional with a good track record and happy referrals who knows your market. You want an agent who listens to your concerns, answers your questions quickly and knowledgeably, and works to get you the best deal.
  3. Find a mortgage lender. There are online lenders with flashy commercials, but local lenders like your credit union offer competitive rates, keep your money in the community to support businesses, and offer the reassurance and confidence that comes with a personal relationship with your loan officer. They can walk you through the pre-approval process and explain your mortgage options.
  4. Find potential homes. With a pre-approval letter in hand from your lender, you should look at homes with your agent. Depending on the market and your timeframe for move-in, be prepared to make compromises. You can always do renovations or save up and pay someone else to do them down the road.
  5. Make a purchase offer. When you find a home that meets your needs, you will need to make a purchase offer quickly (remember, starter homes are always in demand). Have your checkbook and down payment ready, along with your pre-approval letter.
  6. Close on the home. With your offer accepted, you’ll close on your new home. Talk with your agent about the types of inspections you might want to order and the timeframe for your contingencies. This will include a home inspection for your own edification and an appraisal by your lender. You’ll also need to secure homeowners’ insurance.

In the end, remember this home is a place to start, grow into, and help build a financial foundation on before moving onto bigger and fancier things.

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