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What Is a Good Price for a First-Time Home Buyer?


Buying your first home can be pretty nerve-wracking. Regardless of what you pay, whether it seems like a little or a lot, there are going to be some sleepless nights early on.

The first time I bought a place, I threw the bed sheets over my head and didn’t emerge until morning, night after night. It was stressful.

I even turned to a friend to talk about it, and he said if you’re worrying about the what-ifs, you’re already there. So chill out. Okay? Got it.

The Lender Will Let You Know the Most You Can Afford

  • Your first stop might be a bank or mortgage lender
  • For a free no obligation pre-qual or pre-approval letter
  • To determine the maximum you can afford based on your finances
  • This can at least set the price ceiling to limit your home search

We know there isn’t a universal answer here, but we can discuss the underlying stuff to come up with a suitable answer depending on your unique situation.

Per the National Association of Realtors, the national median existing single-family home price in the third quarter of 2020 was $313,500, up a whopping 12% percent from a year earlier.

First-timers might shoot for a price around these levels because starter homes tend to be on the cheaper side of things, but it’s not that easy.

Home prices in individual housing markets nationwide will run the gamut, with many cities well above the median.

Additionally, one’s finances will come into play because they limit how much you can afford, no ifs, ands, or buts.

The bank or mortgage lender will only let you borrow X amount based on your income, assets, and down payment.

This means you could just go get a pre-qualification or pre-approval and find out exactly how much you can afford. We can refer to this as the upper bound, knowing it can’t be exceeded.

Even if you want to buy a $1 million house, you might be limited to a $400,000 property thanks to your finances.

That’s a good start because at the very least you now have a decent idea of affordability and a price ceiling. It means you can set your filters on Redfin and Zillow to not exceed a $400,000 purchase price.

If you don’t want to speak to anyone, you can also run your numbers through a mortgage calculator or two, but chances are it won’t be as accurate.

Either way, we should look beyond money here because there are other considerations, such as why it is you’re buying to begin with, how long you plan on staying, what features you need, and so on.

Do You Want to Live At, Above, or Below Your Means?

  • Are you the frugal type who likes to get by with less?
  • Or the type who goes for broke?
  • You don’t need to spend the maximum you can afford
  • It might even make sense to buy less so you’ve got a safety net for unexpected costs

Using our example from above, let’s say you qualify for a max purchase price of $400,000. That’s helpful, but it doesn’t mean you should spend $400,000.

You know how credit card issuers will give you a credit line of say $25,000. Does that mean you should spend the entire $25,000? Probably not. Or anywhere close to it.

It’s just what they’ve determined you qualify for based on your credit history, employment, and perhaps an estimate of your income.

Mortgage lenders do the same thing, using your debt-to-income ratio and proposed down payment to come up with a maximum purchase price.

Again, should you spend that much? Chances are, especially for your first time, it might be prudent to aim a little bit lower.

After all, homeownership comes with lots of unexpected costs, some of which a seasoned homeowner may not consider unexpected at all. But as a first-time home buyer, they can come as a big surprise.

Heck, even the monthly bills to maintain a home can be a revelation. If you weren’t paying insurance, trash, water, gardening, and other utilities, and all of a sudden are, it can be quite a shock to the old wallet.

Never mind that giant mortgage payment you have to make each month, or the property tax bill. Or the new furniture you have to buy. Or the fact that you’ve got a baby on the way. Whew!

We also have to consider a little thing called payment shock, which is essentially a major increase in monthly liabilities.

For example, if your housing payment goes up 200%, it’s going to be pretty shocking. If you were renting for $1,000 a month, and now owe $3,000 a month, an underwriter might be concerned.

You should be as well, or at least recognize what you’re getting into here.

Personally, I prefer to stay under budget because it takes time to get comfortable with larger monthly housing costs.

Especially as you get to know those other costs of homeownership like monthly utility bills and so forth.

We also have a tendency to exceed our budgets to get the home we think we need/want, so you could already be stretched a little thin from the get-go.

Do You Want to Buy a Starter Home or a Forever Home?

  • Home buyers typically purchase starter properties first
  • Then move up to larger and more expensive homes later
  • But there are lots of transaction costs associated in a home sale
  • So maybe buying the forever home first is actually more sensible

Budget aside, it’s not that simple. A home purchase can be both time-consuming and expensive just as a transaction.

There are lots of closing costs associated with a home purchase, and the process of looking for a house can be very lengthy.

Let’s not forget the costs associated with selling a home, which can be very pricey as well thanks to the agent commissions, additional closing costs, potential repair costs, moving costs, and so on.

Simply put, buying and selling homes is expensive, so you may want to limit your transactions as well.

In other words, it could make sense to try to find a forever home the first time around, instead of buying a starter home, then a move-up property later down the road.

This has been a trend with Millennials, who seem to be smarter than the rest of us.

The thing is – statistics tell us that very few homeowners stay in one place for long. The expected tenure for many folks is a decade or less, for a variety of reasons.

That could also sway your fixed mortgage vs. ARM argument, but that’s a whole other article.

What I’m getting at here is it depends if you’re buying a starter home or a potential forever home.

By definition, a starter home is going to be cheaper than a forever home because the former basically says you’re eventually going to move up to something bigger and better (and more expensive).

While this is how the housing ecosystem generally works, it might not be the most efficient way of doing things.

For many, it might just be the only way, largely because the proceeds from the sale of the first home are often used to fund the down payment on the bigger, more expensive home.

But what if you just went straight to the forever home? You could avoid two sets of closing costs and commissions, and only move once.

And you’d have the space to grow into your home if starting a family. Oh, and there’s generally less competition for more expensive homes, whereas starter homes are the ones that often end in bidding wars.

Sounds like a great deal, doesn’t it?

Sadly, it’s probably easier said than done, and not attainable for most. There’s also a good chance you’ll grow dissatisfied for one reason or another and move again.

Ultimately, it’s just really hard to find a home that ticks all the boxes.

The Price You Pay Depends on What You Want/Need

  • There is no good price to pay for a first home universally
  • It will vary widely based on affordability and needs
  • But do take the time to think it all through and try to look far into the future
  • Always negotiate for a lower price when you do find that right house

Further complicating matters is the fact that price will be driven by what you want/need.

If you desire X number of bedrooms and bathrooms in a certain location, there is a price point for that.

That price point might not agree with your budget, which will either force you to look elsewhere or lower the number of bedrooms/bathrooms you can afford.

Assuming you have wiggle room in the affordability department, you might have the option of buying the forever home today instead of tomorrow.

But even then, you’re still going to be limited by the inventory on hand, which over the past several years has been pretty scant.

Anyway, price will also be driven by square footage, number of bedrooms/bathrooms, desired amenities, location, school district, and so forth.

This will vary considerably from one individual to the next since we all have different needs.

In summary, there isn’t a right number here. It’s just what you can afford, what you want/need, and whether it’s available. And if you want to go through this entire process a second time later when your needs change.

Read more: What’s the Best Mortgage for First Time Buyers?

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