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How much should millennials plan to spend on a home?
What if you fail the 28% rule of thumb test?
What about if you don’t have enough for a down payment?
What else should millennial homebuyers know?
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Starter Home vs Forever Home
Here’s a fun Friday night activity to do with your significant other. When you think you wanna buy a home independently, make a list of all of your wants and needs, then present them to one another and go point by point on why each of you are outta your F***ing mind.
Yes that’s actually happened to me. And it’s not unusual for people to disagree when deciding to buy a home.
Which begs the question: why disagree at all? Isn’t there a way to find a property that has everyone’s wants and needs? This is the elusive concept of a forever home.
And I’m not a big fan of first time home buyers aiming for that forever home.
Below I’ll cover why settling is actually a good thing when it comes to buying a property and, towards the end, I’ll get into how to navigate the home buying wants and needs without getting into a knock down drag out brawl.
Here are the main topics if you want to jump into any one area:
Why getting started with a starter home is a better idea than waiting for a “forever home”
First off, I don’t think of this as a decision to never get that forever home of your dreams. I like to think of this as a stepping stone that’ll lead you to that forever home.
For example, my first home was in an area that wasn’t the safest, and I heard “ghetto birds” a couple times a week, but it was a great first step to start getting all of the benefits of home ownership.
When you get into the market sooner, you begin taking advantage of the following:
- tax benefits
- forced saving through paying down your principal each month
- owning a steadily appreciating asset
The sooner you get in, the sooner these benefits will add up and give you an opportunity to move onto that next home.
I don’t chase em, I replace emNOTORIOUS B.I.G. – One More Chance
For those trying to jump into the real estate market, a starter home can be the perfect launching point. Many people put off buying a newer and larger “forever home” until they have enough money saved or earned, but getting started on the right foot can seem intimidating. However, by thinking outside of the box with a starter home purchase you can begin building equity while still enjoying the perks of property ownership. With an eye to the future and wise investments along the way, that starter home could easily become your much-desired forever home after all.
How much should a starter home cost?
By definition, a starter home is more affordable than a forever home which means the cost shouldn’t involve financially overextending yourself.
Don’t borrow everything the bank will give you.Said no loan officer EVER…until me 🙂
Just because you can get approved for a higher amount doesn’t mean that’s what you need to borrow. You are the one that’s gotta make that monthly payment. So make sure it’s comfortable for you and your partner.
Generally your housing expense should be around 1/3 of your gross income but everyone’s situation is different. When buying a starter home, you don’t want to risk being overextended so here are some tips to make the financing work.
Tips on financing your starter home
One option is buying a duplex. You can go FHA three and a half percent down, so very low down payment. Or look at a single family that has an ADU so you can possibly do long-term or short-term rental.
Hey, even look for a roommate that can help subsidize a payment that way. At least you’re getting into the market and starting to build wealth. Ask a pro, A local realtor will help you when looking at those wants and needs and give you a good idea of how much is this all gonna cost. They’re also great at helping settle those disagreements.
Disclaimer, the fun part is definitely over as a consolation price. You can now start referring to your significant other by their new pet name co-borrower. So you’re gonna wanna talk to a mortgage professional early in the process so you can start planning how much you’re gonna need, what your credit needs to look like, the documents that you would need.
The earlier you plan, the less stress you’ll have when you’re actually ready to start making offers. Speaking of credit, credit scores heavily impact the rate and the cost of the loan. So get ahead of it early and make sure you know your credit scores if they’re not where you need ’em to be. Find a specialist to help you get them there.
It’s not gonna fix itself, so don’t ignore it. If you really wanna buy work on your credit. So you’re convinced, scrap that dream home, we’re gonna do the stepping stone. So now look and see what’s the most important thing. Look at those wants and needs and what you must have. So a few things. Where must the home be?
Financing your first home is a major commitment, but it doesn’t have to be a scary one. The key is to properly prepare and equip yourself ahead of the journey. Start by ensuring your credit score is up to par, as this can put you in a favorable position when you go to borrow from lenders. Be sure to figure out the mortgage type that works best for you, as well as consider loan-to-value ratios and other important metrics when calculating how much you should borrow and what terms are most attractive. There’s never been a better time to purchase your first home, so make sure your credit score reflects that!
The benefits of owning your own home vs renting
Owning your own home offers many benefits to consider. From cost savings to the potential for appreciation, homeownership provides stability to create a stress-free life. To weigh the cost of waiting versus immediate gains, you can look forward to gaining equity in the cost of your home while also having physical possession of what will likely be your greatest financial asset. If you’ve ever lived through rental fee increases, then know that cost control is one of the major benefits of owning vs renting. That said, when it comes to investments, there’s always appreciation; whatever money you put into your home will have the potential for increased value and return if you ever sell in favor of something larger. Owning often comes with unpredictable rewards in addition to long-term cost savings, so don’t let fear stand in your way!
What to look for in a starter home
Even though a starter home is more affordable, buying a starter home can still be overwhelming. The pressure shifts from finances to finding the best home based on your wants and needs.
Keep in mind though, most people’s first home is not the same home that’s gonna serve their needs in five, seven years. So don’t factor too much of your future lifestyle (ex: kids, hosting big holiday gatherings, breeding your own livestock) into your starter home criteria.
Even so, being able to differentiate between those amenities you want and those you truly need doesn’t come naturally to everyone too so take the time to sit down and make a list so that when you do meet with your real estate agent so they have a clearer idea of what the home you’re in the market for.
And if you’re buying with a partner, ensure success (or at least avoid divorce) during the home buying process by having an open dialogue with your co-borrower about each of your wants and needs. We’ve got an entire article about buying a property with a partner here. But my experience is that it starts getting REALLY REAL when your hubby becomes your co-borrower…so make sure you navigate this process with patience and respect for each other. Some questions to bring out in the open:
- What must the property be close to?
- What kind of neighborhood is most important for you?
- How much space do you really need?
- What condition of the property are you willing to live with?
- What features must it have?
- How big of a backyard is needed so the in-laws have a place to sleep? KIDDING!
But obviously there are lots of important things to think about when it comes to buying a starter home and the process becomes complicated as two people are involved in the decision. The important thing is to put a plan together and just take action.
With these tips, you’ll be more confident that you’re making the right decision when it comes to deciding which amenities should be at the top of your priority list.
And if there are items that get left out, try and remember that this is just a stepping stone to your forever home.
Is there a case for the forever home?
So far we’ve made a case that the forever home is just a fairytale idea for first time home buyers…but is there a reason to still hold out for the foreva-foreva-eva home of your dreams?
I’ll start by admitting that starter homes, while more affordable, come with some tradeoffs. There is usually limited space and features compared to a forever home, which can provide more room for entertaining guests and a longer-term investment that can appreciate in value. On the other hand, owning that perfect dream house may seem like a great idea, but it can require more effort to maintain if you choose a large property and might not appreciate as quickly as expected. Ultimately, which type of home is right for you depends on your goals and resources.
Now that we’ve looked at the pros and cons of starter homes and forever homes, as well as what to look for in each, it’s time to make a decision. If you think you might be ready for a home of your own, whether it’s your first or fifth, give us a call. We can help answer any financing questions you have so that you can move into the perfect home for your needs—a starter home that will set you up nicely for future success or a forever home where you can put down roots and enjoy all the benefits of owning your own place.
Just remember that it’s not your forever home if you can’t afford it forever. And also remember that financial stress (the #2 cause of divorce) can turn that dream home into a nightmare real quick.
No matter where you land on the starter home vs forever home decision, we’re here to help you find the perfect fit—wherever that may be! Good luck on your home buying journey and happy house hunting!