First Time Homebuyers Dream Bigger: Home Destination helping Minneapolis real estate investors and home buyers

Older Posts: « 5 ways sellers can compete with foreclosures

In a buyers market with tight financing constraints, the traditional ‘starter home’ is giving way to houses that younger or first time buyers may grow into.

By Rachel Louise Ensign of The Wall Street Journal

Last fall, Gretchen Steinmiller Torres and her husband, Dustin, bought their first place, a $204,000, four-bedroom, 2½-bath house in the suburbs of Columbus, Ohio, even though they didn’t have immediate plans to use much of the space. "We have a baby room in our house with no baby," says Gretchen Steinmiller Torres, 29, adding that the newly constructed home is in a good school district. Now the couple just has to grow into it.

Forget the starter home.

With housing prices stagnant and still falling in many parts of the country, and interest rates still relatively low, younger first-time buyers find that they can afford more house than they would have been able to a few years ago. They also don’t have the complication of having to unload an existing home whose value also has dropped before they can buy a new one. But the current market also presents challenges for younger buyers. Many lenders are requiring higher credit scores and larger down payments. Mortgages insured by the Federal Housing Administration, a popular option for first-time buyers, are getting higher fees. Buyers also should prepare to stay put for a while because home prices aren’t expected to rebound soon.

The median existing-home price was $163,700 in April, down 5% from a year earlier, the National Association of Realtors says.

The most important thing younger buyers should do is get their credit in order, especially because many have a limited credit history. John Prom, a mortgage banker in New York, says paying off some student-loan or credit-card debt can boost your credit score within months.

The Torreses met with a mortgage adviser about eight months before putting a bid on their home. At the adviser’s suggestion, they paid off most credit-card balances, didn’t open or close any accounts and let their apartment’s lease run out. "It took us from a position where we didn’t have any financing options available to one where we had very good credit," says Gretchen Steinmiller Torres, who works in public relations.

Many lenders are now requiring larger down payments. Unless younger buyers are earning a lot and have perfect credit, traditional lenders will want them to pay at least 10% upfront, says Sid Davis, a real-estate broker in the Salt Lake City area. Younger first-time buyers often opt for FHA-insured loans because they require only 3.5% down, are typically easier to qualify for and have lower interest rates. The average interest rate on a 30-year FHA loan was 4.46% on May 24, according to Bankrate.com. The average rate on a 30-year fixed-rate loan was 4.77%. But a down payment of less than 20% means you’ll be required to pay for private mortgage insurance. Fees for that insurance on FHA loans increased on April 18. The Torreses say they chose an FHA loan that had a 4.14% interest rate because they didn’t want to drain their savings for a higher down payment.

While you may get a great deal on a first home, the downside is that its value probably won’t appreciate as much and as quickly as it would have a few years ago. That could be a concern for younger people who tend to move more often as they try to advance their careers.

Younger buyers should expect to stay in a house for a long time because it may take years to recoup buying and closing costs alone, Davis says. "In today’s market, (that could take) five years," he says.

This entry was posted on Wednesday, June 15th, 2011 at 6:35 pm and is filed under Real Estate Articles from Jenna Thuening.

First time homebuyers can lean a lot about the Minneapolis real estate market by reading about Minneapolis real estate 2011 in review.