Guide to Starter Homes: 7 Tips for Buying Your First Home

A starter home refers to a property purchased by a first-time homebuyer. Starter homes are often small, single-family homes, townhouses, or condominiums that may have fewer amenities than other, larger homes. These residences are often less-costly investments for young homeowners who are just getting started in their careers or building families. Homeownership can help families invest for their future as the monthly mortgage payments they pay contributes to their home equity.

Even if your starter home is not technically your “dream home,” it is important to know what to look for when purchasing your new home.

1. 1. Affordability: The most important factor in choosing your starter home is finding something you can afford. Consider the property taxes, closing costs, homeowners insurance, and the potential renovation costs on top of the upfront down payment you will need to pay upfront to guarantee your mortgage loan. Some homes will also come with homeowners association fees, and other monthly payments depending on the type of property.
2. 2. Condition: Make sure to get a thorough home inspection before moving forward with buying your first home. You may even want to include a home inspection contingency, because if a home is appraised at a rate below its sales price, it may affect your mortgage broker’s willingness to give you a loan.
3. 3. Longevity: Even if you’re purchasing a starter home, you want to make sure that you can see yourself making a life in this new place. Consider the neighborhood, the school districts, and whether you can imagine building a community in this place. Keep in mind that you might be living in this house for 30 years or more.

Before you consider buying a home, perform a thorough overview of your financial health. You can work with a bank to figure out an affordable price range for your first home. First-time buyers may also consider working with real estate agents to guide them through the paperwork and price negotiation, which can streamline the process and make it far less confusing. Consider the following tips before you start your search.

1. 1. Understand your financial situation. Thoroughly assess your personal finances before you even start the process of looking for a home. Look at your credit score, how much debt you have, your monthly income, and make sure that you have an emergency fund. You want to make sure that you’re financially healthy enough for mortgage lenders to consider you as a viable loan recipient. Furthermore, you want to make sure that you’re not taking on too large of a financial risk.
2. 2. Shop around for your mortgage. A mortgage loan is likely the largest and longest-term loan that most people, especially first-time homebuyers, will take out in their lifetime. As such, it is important for you to go with the right lender. Different lenders may offer you different rates and mortgage options, and shopping around can help you save.
3. 3. Understand what type of loan you want. The two most common types of mortgages are fixed-rate mortgages and adjustable-rate mortgages. In a fixed-rate mortgage, the interest rate on the loan does not change even if the interest rate market fluctuates. In an adjustable-rate mortgage model, the interest rates are fixed but only for a certain amount of time. After that time, the rates are adjusted according to the federal interest rate which may go up or down. A Federal Housing Administration (FHA) loan is another loan option (usually for those with lower credit scores) that typically carries a low down payment, but also requires the borrower to pay a private mortgage insurance (PMI) rate to protect the lender. Tools such as mortgage calculators and affordability calculators can help you budget accordingly.
4. 4. Work with a real estate agent. The home buying process is lengthy and involves a great deal of paperwork. A real estate agent can help you understand and streamline everything when you’re ready to start shopping. They can also help you negotiate a price for your home. These agents work off of commission, but the seller of the home is responsible for covering that cost in the listing price.
5. 5. Consider a home’s potential. Turnkey homes are usually more expensive than fixer-uppers. Consider what a home could look like with small, economical home improvements that you can easily perform yourself. If a house is in your price range and has a good structure with a few outdated cosmetic features, it could be a great option. Often, first-time buyers will choose to purchase a fixer-upper and turn it into a place that can eventually carry a higher resale value.
6. 6. Keep the extra fees in mind. From home appraisals, to renovations, to title insurance, to closing costs, your first home will involve many fees in addition to your home’s down payment. Work with your real estate agent to outline these fees and track how they work with your budget.
7. 7. Choose a house that’s right for you. You can walk away from a home sale any time before your closing. If anything doesn’t feel right—including the location, the condition of the house, or anything else—you are allowed to back out of the sale up to the point of your final walk-through. Make sure that you feel that you’re making the right choice because you could be locked into a mortgage for up to 30 years.

All you need is a MasterClass Annual Membership and our exclusive video lessons from prolific entrepreneur Robert Reffkin, the founder and CEO of the real estate technology company Compass. With Robert’s help, you’ll learn all about the intricacies of buying a home, from securing a mortgage to hiring an agent to tips for putting your own place on the market.