First-Time Home Buyers Should Consider Multi-Family Homes
For decades, the path to homeownership was fairly similar for many first-time home buyers. Typically, first-time homebuyers would save for a down payment, and then they would go out to find a starter home. The reason why starter homes are called starter homes is that this is where most homeowners start. They are typically less expensive than luxury homes and they are a little on the small side. First-time home buyers would commonly buy a starter home, save up some more, and then sell the starter home to buy a larger dream home. Trends in the real estate market are disrupting the notion of the starter home and it is leaving many first-time home buyers clueless about what they should be doing. While most first-time homebuyers imagine themselves in a single-family home, today’s market is different. It might be time for first-time homebuyers to consider multi-family homes.
Why First-Time Home Buyers are Striking Out with Starter Homes
The idea of moving from renting a place one day to moving into your own single-family home the next is proving to be difficult for many first-time home buyers. While this has been the path that many have followed for decades, market forces are different and first-time homebuyers are being forced to adapt. So, what has changed for first-time home buyers and why do we need to rethink our idea of what a starter home can be?
The biggest factor that is disrupting the idea of the starter home for first-time homebuyers is the current state of home prices. Home prices are at all-time highs. This is true for luxury homes as much as it is for starter homes. Every single category of single-family residence has increased in price dramatically over the past two years. The reason for this is well-known; there is a huge demand and not enough supply. To combat the economic impacts of the pandemic, interest rates were slashed, which caused mortgage rates to drop down to historic lows. Mortgage rates have been hovering near these historic lows ever since, which is causing a huge demand from home buyers. Buying a house and locking in a mortgage rate like the kind we are seeing can save homeowners lots of money over the life of their home loan.
While home buyer demand has been through the roof, the available supply of homes to buy has not been able to keep up. In fact, just as we saw record low mortgage rates we also started to see record low home inventory. Basic economics will tell you that for any good or service, whenever you see demand far exceed supply, then you will see prices go higher. That is exactly what has happened to home prices.
For existing homeowners, today’s skyrocketing home prices are welcomed and encouraged. Homeowners have seen their home values increase dramatically over the past two years and many of them are now flush with equity. For first-time home buyers, it has been a pain in the neck. While buying a house still makes financial sense given today’s mortgage rates, the number of starter homes available is diminishing by the day. Basically, all houses cost more, even starter homes. This is causing many first-time homebuyers to sit back and hope for a market correction. Unfortunately, there are no indications that today’s home prices will return to the levels of two years ago. Fortunately, there is a way for first-time home buyers to get more bang for their buck than the traditional single-family starter home.
The Case for Multi-Family Homes
One potential solution to the starter home dilemma is that first-time home buyers might want to think about buying a multi-family home. At first, this might seem somewhat counterintuitive. After all, the problem is that starter homes are now too expensive for first-time home buyers. So, how is it possible that multi-family homes, which cost more money than a single-family home, make even more sense for first-time home buyers? The reason it actually makes sense is that qualifying for a mortgage to buy a multi-family home is easier than you would ever dream.
When you apply for a mortgage, lenders take an in-depth look into your finances to figure out one thing – how likely are you to make your payments and pay back your loan. They want to make sure that you have the financial stability to make your payments on time and consistently. In a vacuum, as the price of a home increases, so does the total amount of the mortgage, which in turn increases the monthly payments. As home prices for single-family homes increase, lenders want to be absolutely sure that the homeowner can make the payments. Although multi-family homes typically cost a lot more than single-family homes, mortgage applicants can often afford the larger mortgage payments more easily. How is this possible?
The reason why mortgage payments are often more affordable for multi-family homes is that rental income gets included in your household income. For multi-family homes between two and four units, half to three-fourths of the potential rental income qualifies as your income for the mortgage application. This allows you to potentially qualify for a much larger mortgage for a multi-unit residence than a single-family residence. This is especially true in today’s rental markets. Rising home prices have garnered all the headlines, but rents have been increasing even faster than home prices. This is great news for those buying mult-unity properties because it means the likelihood of lucrative rent contracts can be used for your mortgage.
Another great benefit of considering mult-family homes as a first-time home buyer is that you can still qualify for an FHA loan if it is your first house. FHA loans are incredible government-backed loan programs that allow you to buy a house with a down payment as low as 3.5 percent. Many people who dream of owning their very own rental properties assume it is best to buy a single family home and then buy a multi-unit property down the road. However, it might make more sense to take advantage of FHA loans, smaller down payments, and rental income by going with a mult-family home first. Then, you can help save money and pay down your mortgage thanks to rental income, which you can use later on for a single-family home.
Final Thoughts
Not everyone wants to own a multi-unit property. Not everyone dreams of using real estate as an investment vehicle. However, for those that do, it is worth looking into whether it makes sense to buy a multi-family home first and then consider a single-family home later down the road. The bottom line is that even though the market is tough for first-time home buyers, there are creative ways to stop renting and start being a homeowner. Where there’s a will, there’s a way. At Peoples Choice Mortgage we believe that everyone deserves to be a homeowner. That is why our mortgage brokers will do everything in their power to help find a plan that is right for you. If you have dreams of buying a house but do not know when or how, contact us! Our team will walk you through the entire process and help you put a solid plan in place.
