Homeownership on a Budget: A Guide for First-Time Buyers
It's not easy being a first-time homebuyer right 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, often cash-heavy bids.2
In fact, 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. This underscores just how steep a hill new buyers are facing.3 As a result, many first-time homebuyers are finding that they need to get creative or risk renting for longer than they planned.
If you, too, are struggling to afford homeownership, here are some workarounds to consider as you plot your first home purchase.
1. Try House Hacking
“House hacking” is a real estate investment strategy in which participants use their homes to generate income in order to offset their expenditures.
For example, renting out a basement apartment or accessory dwelling unit (ADU)—such as a detached garage that's been outfitted with a bathroom and small kitchen—counts as house hacking. So does splitting housing costs with a roommate or converting a part of your home into an Airbnb.
Related: From Starter Homes to Forever Homes: Finding the Perfect Fit
House hacking isn’t new. But, it’s grown in popularity as a new crop of digital platforms has entered the market and made it easier than ever for homeowners to generate income from their property.
In some cases, house hacking may make it possible for you to qualify for and afford your first home. A lender, for example, may approve you for a larger mortgage if you purchase a home with immediate income potential, such as a legal duplex or a property with a secondary suite that has a kitchen and full bathroom.4
In addition, house hacking could help you pay your mortgage once you move in. Here are just a few of the ways you could use your home to earn some extra cash:
- Offer paid parking in your driveway on a site like Spacer or SpotHero.
- Rent out your swimming pool for a few hours on Swimply.
- Make your home available for photoshoots or events on Giggster or Peerspace.
- Turn your backyard into a pay-by-the-hour dog park on Sniffspot.
- List your garage space on an app like Neighbor Storage.
But before you make plans to house hack, make sure you fully understand an area's laws and HOA rules. We can help you find a home with income potential in a neighborhood with less restrictive zoning and regulations.
2. Team Up With Friends or Family
If you aren't wild about the idea of welcoming strangers to your home, you may want to consider co-purchasing with a friend or family member instead. This unconventional housing arrangement is also growing more popular as friends and family members 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
Arrangements can be customized to fit your circumstances. For example, you could purchase a home and then rent a portion of it to a loved one. Or you might consider co-buying a home with friends or family members so that you can step onto the property ladder and start building equity together.
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 the coziness of 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.
In addition, you may need to rethink the type of home you pursue. For example, a smaller home might be cheaper, but do you really want that much togetherness all the time? We can help you set priorities and search for a suitable property.
3. Tap Your Network for Help With Funding
Another established method for affording a first home is to lean on family or friends for financial help. Getting assistance with the down payment or other borrowing costs can go a long way toward making your homeownership dreams come true.
As long as you don't mind asking for help, a free-and-clear gift that's intended for your down payment is an ideal arrangement, since it will allow you to borrow less overall. Or, if that’s too big an ask, your loved ones could pitch in toward closing or moving costs.
Alternatively, 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.
Just be sure your parents or other generous loved ones are aware 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.
For example, consider using a grant to help you fund your down payment. There are 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
We can connect you with a lender or mortgage broker who can educate you about your options and help shepherd you through the process. Some financial assistance programs require you to work with specific lenders, while others require you to apply directly and fill out a separate application.
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. In many cases, we 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 located in up-and-coming areas with lower starting prices. We would be happy to introduce you to some great but lesser-known neighborhoods that we consider hidden gems.
You could also save money on your home purchase simply by dropping or revising some of your must-haves and settling for OK-to-haves instead.
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? These types of compromises can sometimes shave tens of thousands off your purchase price.
Similarly, if you don't mind rolling up your sleeves or working with a contractor on minor jobs, you can look for homes that need a little TLC. Just because a house looks dated doesn't mean it's destined to stay that way or that it will take a ton of money to spruce up. In fact, a home with good bones but cosmetic flaws could be a perfect match: With less competition, you'll have a better chance of purchasing the home at an affordable price. You can then take your time to save more and fix it up to your taste.
Keep in mind, starter homes are rarely forever homes, but merely a first step onto the property ladder. By gaining a foothold in the real estate market now, you can set yourself up to afford a more expensive property in the future.
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
Buying a first home is challenging, but it's not impossible—especially when you have a savvy real estate professional in your corner. We will work with you to devise a plan to overcome your financial constraints. Then, we’ll help you find a home that not only excites you but also fits your budget and lifestyle. Give us a call to get started with a free exploratory consultation.
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.
- Housing Wire -
- Realtor.com - https://www.realtor.com/news/trends/death-of-the-starter-home-where-have-all-the-small-houses-gone/
- National Association of Realtors - https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-sellers
- ValuePenguin -
- Pew - https://www.pewresearch.org/fact-tank/2022/07/20/young-adults-in-u-s-are-much-more-likely-than-50-years-ago-to-be-living-in-a-multigenerational-household/
- YouGov - https://today.yougov.com/topics/economy/articles-reports/2022/05/25/american-homebuyers-finanancial-help-parents
- Bankrate -
- Investopedia -
- National Association of Realtors - https://www.nar.realtor/sites/default/files/documents/2022-snapshot-of-race-and-home-buying-in-the-us-04-26-2022.pdf
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