Prospective first-time homebuyers are facing stiff challenges as they enter today's housing market – including finding an affordable home. A profound shortage of starter homes is limiting choices and raising home prices. According to Trulia, as of April 2018, the inventory of starter homes decreased 48.6% from six years prior while prices rose 57.9%.
Many would-be first-time buyers are millennials, saddled with student loan debt and struggling to save for a down payment. To make matters worse, the run of historically low interest rates appears to be over as the Federal Reserve gradually increases interest rates and mortgage rates follow suit.
According to data from Freddie Mac, first-time homebuyers are buying in record numbers despite these challenges. Excluding refinancing loans, first-timers constituted 46% of all new mortgages in the first quarter of 2018. That's the largest share of first-time buyers recorded by Freddie Mac since they began collecting data in 2012 – and it's a continuation of a general upward trend.
What's behind the shift? It may be simple economics. The housing crisis knocked many potential homebuyers out of the market through job losses and tightened credit. Since that time, unemployment has dropped, the economy has recovered, and credit has loosened a bit – putting more first-timers in an economic position to buy a home.
The affordable home shortage is a logical product of this pent-up demand from millennials. If a greater number of affordable houses were to magically appear, the share of first-time homebuyers would be even higher.
It's also possible that some buyers are stretching to get into their first home before home prices and interest rates rise even further. They may be right. Economists are not optimistic about the supply of affordable homes in the near future.
Are you ready to make your plunge into the home-buying market before interest rates and home prices go up again? Before you begin, take a few moments to consider your overall financial situation.
Start with a review of your credit report and credit score. A low credit score or red flags such as missed monthly payments or excessive debt could disqualify you for a mortgage loan – and any loan offers you get will come with higher interest rates. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Conventional loans backed by Fannie Mae and Freddie Mac generally require a minimum credit score of 620, while FHA loans can go as low as 580 with 3.5% down payment or 500 with 10% down payment. With scores that low, you will probably need another factor in your favor to secure a loan (such as a high income or a very low debt load).
Next, consider all the costs associated with homeownership. Many first-timers focus on the down payment and monthly mortgage payments, forgetting the many auxiliary expenses. Review this checklist for first-time homebuyers and make sure your cash flow is covered.
If you're on the edge of qualifying for a home, consider your qualifications for alternative programs such as FHA or VA loans that require lower down payments and are more tolerant of low credit scores – but remember that these programs come at a cost. You are borrowing more money and will pay more in interest over the life of the loan.
Join the ranks of first-time homebuyers if you're ready – just make sure that you really are ready. Consider downsizing your home goals or delaying your purchase if you are stretched too thin and adjust your budget to plan for a future home purchase instead.
MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.