It's not easy being a first-time homebuyer, especially now. At the end of last year, housing affordability hit an all-time low.1 Additionally, mortgage rates have risen significantly since 2021, while inventory remains tight for many property categories, but especially for starter homes. Even lower-priced condos are harder to snag these days, as investors and downsizers muscle out first-timers by offering stronger, cash bids.2
According to the National Association of Realtors, only 26% of last year's homebuyers were first-timers—the lowest share on record and down from 34% a year prior. First-time homebuyers are finding they need to get creative or risk renting for longer than they planned.
Here are some potential workarounds to consider in this market.
1. Buy a home with an income unit.
A roommate could split your single family or condo housing costs with you after closing, but perhaps consider buying an income property. You might rent out part of your property, such as a legal basement apartment or accessory dwelling unit (ADU)—perhaps a detached garage that's been outfitted with a bathroom and small kitchen.
In some cases, a lender may approve you for a larger mortgage if you purchase a home with current income, such as a legal duplex or a property with a secondary suite that has a kitchen and full bathroom.4
Before you make plans for rental income in any neighborhood, you will need to understand the area's laws and HOA rules. Consider neighborhoods where zoning and rental regulations are less restrictive for ADU’s.
2. Team Up With Friends or Family
Another option, consider co-purchasing with a friend or family member. This housing arrangement is growing more popular as friends and family members alike cope with higher living costs by pooling resources.
According to the National Association of Realtors' 2022 Profile of Home Buyers and Sellers, the share of first-time homebuyers living with people other than children or a romantic partner is currently at an all-time high.3 Meanwhile, research from Pew found that multigenerational living has accelerated especially quickly, with a quarter of U.S. adults aged 25 to 34 now living in a multigenerational home.5
Co-ownership could work out especially well for you long-term if it helps you to buy a home that's bigger, has more investment potential, or is located in a high-demand area and so appreciates at a faster rate. Plus, you'll get to see your loved ones more often and enjoy shared living with people you like having around.
On the other hand, sharing a big financial responsibility, like a mortgage, with friends or family could get messy—especially if you don't create a clear-cut co-ownership agreement beforehand that outlines your mutual expectations. So plan carefully before you proceed.
Set priorities and search for a suitable property.
3. Tap Your Network for Help With Funding
Family members can often offer financial help, perhaps assist with the down payment or other borrowing costs, even if only moving costs, to help you get into your first home and build your own equity savings.
Alternatively, family might be able to co-sign your loan your loved ones could help by co-signing your loan. For example, if their credit score is a lot higher than yours, it could enable you to secure a lower interest rate so that your monthly payment is more affordable.
According to a recent YouGov poll, more than a third of homeowners (and a whopping 79% of those under 30) received financial help from their parents when buying their first home.6 So you wouldn't be the only one leaning on family to help afford a home at today's prices.
Your parents or other family need to be away they're giving a gift, not a loan, and are willing to put that in writing. A lender will want proof that this money isn't adding to your debt burden and may require documentation from your benefactors.
Another way to tap your network for help is to crowdfund part of your down payment or ask for monetary gifts instead of tangible ones. For example, if you're getting married soon, you could skip the wedding gift registry and ask guests to contribute funds to your hoped-for home purchase instead.
4. Look for Special Programs and Assistance
You could also cut some of your upfront mortgage costs by applying for special grants and funding opportunities.
There are frequently a number of public and private grants and down payment assistance programs that are expressly intended to help first-time buyers.
Just like a gift, you don't have to pay a grant back. But, depending on your personal situation, you may find some grants difficult to qualify for—especially if you make a relatively high income.
Many grants are reserved for lower-income buyers only.7
Check out grant programs, such as the HomePath Ready Buyer Program, National Homebuyers Fund, the Good Neighbor Next Door Program, and specialized grants from banks. Also look to state and local sources for potential grants and down payment assistance programs, including forgivable and deferred payment loans, Individual Development Accounts, and DPA Second Mortgages.7
Similarly, if you have enough income to support a house payment but can't spare much cash for your down payment, you may qualify for a government-sponsored loan, such as an FHA loan that allows you to put down as little as 3.5% to 10%.8
In addition, you may look to even less conventional options, such as seller financing. But be aware these kinds of arrangements are rare and hard to find. Depending on the market, you will likely get more help from a seller if you ask them to pay closing costs or contribute to your mortgage rate buydown. Your Realtor can help you negotiate seller concessions that make your home purchase more affordable.
5. Expand Your Home Search
If you’re having trouble finding a home within your budget, consider broadening your search criteria. You may be surprised by the kinds of deals that are available when you're willing to compromise.
For example, if you're struggling to find an affordable home in your target neighborhood, expand your search area and consider homes that are further out of town or that are in transitional neighborhoods, located in up-and-coming areas with lower starting prices.
Or consider compromise, for example, do you really need two bathrooms and a large backyard? Or could you settle for a single bathroom with space to add a second one in the future? And would a small garden, cozy balcony, or rooftop terrace still give you the outdoor time you crave?
Also, if you are handy and have time to roll up your sleeves or work with a contractor on minor jobs, you can look for homes that need a little TLC, take your time to save more and fix it up to your taste.
Starter homes are just that… and rarely forever homes. They are a first step up the property
According to the National Association of Realtors, in 2021, the net worth of a typical homeowner was $300,000, while that of a renter was only $8,000.9 We can help you find an affordable first home so you can start building equity to reach your long-term financial and real estate goals.
You can do it and we can help.
joan
The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.
Sources:
1. Housing Wire -
