How to Find and Finance the Perfect Starter Home

Posted: Aug 15, 2009 12:01 AM
How to Find and Finance the Perfect Starter Home

They're a madly-in-love couple in their mid-20s. He just started a good job with the federal government; she's held an equally steady teaching position for several years. Their dream? To marry in a small ceremony and then buy their first home.

Yet this couple -- like many in their age group -- are scared of making the wrong decision. They wonder if they should wait until real estate values stabilize and the market feels like a safer place.

But Tom Early, a veteran real estate broker, urges this couple and others like them to act now, seizing the opportunity to acquire a starter home at a bargain price.

"During my 25 years in real estate, I've never seen a better time to buy a home. The choice is fantastic and mortgage rates are as low as they're going to be for the foreseeable future," says Early, former president of the National Association of Exclusive Buyer Agents (

A "starter home" is typically defined as one valued at or below the median price for the local market. There are many variations on the theme. But in most areas, first time buyers have multiple choices. They can go to the suburbs and pick a classic detached house or a townhouse. Or they can go to a trendy city neighborhood and buy a condo-apartment.

"Whatever lifestyle you're seeking, the selection of well-priced houses is almost unbelievable now. That's because so many of the homes that have gone through foreclosure are in the 'starter home' category," Early says.

Of course, mortgage lenders are now especially cautious about lending to people who have low credit scores or shaky job histories. And the self-employed can expect to face increased scrutiny when they apply for a home loan.

But given that home sellers now greatly outnumber buyers in many communities -- and that banks are still trying to unload numerous foreclosed properties -- solid purchasers like the teacher and her fiance are in great demand at lenders' offices.

Here are several tips for starter-home buyers:

Use forethought in choosing your starter home.

"Far too many 20-somethings buy only for their current housing needs. If they can afford to, they should look for a starter home that will serve their wants and desires for at least five years. That way they can maximize their investment dollars," says Sid Davis, a real estate broker and author of "A Survival Guide for Buying a Home."

Suppose, for example, that you're a newly wed couple who's still in the romantic phase of your marriage. Right now you'd happily settle for a one or two bedroom condo in an urban neighborhood near friends. But in a couple of years, you expect to want a detached house of your own in a tree-lined suburb studded with parks and hiker-biker trails.

"In most cases, you should buy ahead for as much house as you can afford in terms of space and location. You want to make your first purchase in the most desirable area possible," Davis says.

Of course, you'll probably wish to defer your purchase of any starter home if one or both of the jobs in your household seem unstable. But if you're both confident of your careers, now could be the time to stretch, according to Davis.

As Early says, "You want that first home to pinch, though not to squeeze your budget too tight. When you buy, you should think both about your present needs and resale down the road."

Look for a starter home with appeal to families.

Those in the big bulge of the American population -- boomers born between 1946 and 1964 -- are beginning to downsize. But behind them are millions of younger families, including many immigrants who still hanker for a house spacious enough to raise small children -- one with several bedrooms.

To improve your future resale prospects, you should look for a house with at least three or four bedrooms and multiple bathrooms -- features that people will appreciate.

To get the most square footage possible in your price range, he recommends you consider solidly built older properties in established subdivisions or in a new area with a glut of properties.

"When buying a starter home, you can't expect a lot of puffery -- like a house with one of those gourmet kitchens that includes professional-grade appliances and an island. Nor can you count on lots of land," Davis says.

Put a premium on access to good schools.

For the same reason that value-minded starter home shoppers should search for multiple bedrooms and bathrooms, so should they look for a neighborhood served by well-rated public schools.

Nowadays, it's easy to compare one set of schools with another on the basis of student test scores. All you have to do is to tap into the Internet. Most school systems freely disseminate test results, and other organizations also publish them online.

You can also find out more about the public or private schools in the area by paying a relatively small fee for a report from an educational research service such as SchoolMatch (

But Davis insists the best information on school quality comes through word-of-mouth sources. For a quick (though unscientific) survey of school quality, he encourages you to go door-to-door in the neighborhood where you're searching for a home. Ask local residents about their views.

Consider a government-backed loan for your starter home purchase.

These days, many lenders are demanding substantial down payments for their conventional mortgage programs. And a big down payment represents an especially high hurdle for many 20-somethings who have little in savings due to college-related debts.

However, as Early notes, many first-time home purchasers are eligible for low-down-payment loan programs through the Federal Housing Administration of the U.S. Department of Housing and Urban Development. To find lenders near you who make FHA loans, go to this Web site:

"The only catch on a FHA loan is that you have to pay premiums for government insurance to protect against your possible default. Otherwise, FHA mortgages are ideally suited for many first-time buyers who are strapped for cash," Early says.

To contact Ellen James Martin, e-mail her at