Buying a first home is often a memorable experience filled with joy and some potential stress. When it comes to buying a house, individuals typically find themselves immersed in decisions. How many rooms or bathrooms? Large or small yard? In a neighborhood or closer to the city? However, none of these questions can be answered until a first-time homebuyer decides between buying a forever home and buying a starter home.

Deciding which type of home to purchase is more vital than ever as inventory continues to shrink. According to Realtor.com, available inventory dropped by over 40% in January 2021 compared to January 2020. This type of shortage increases all available homes' prices as buyers compete more than usual to buy a house.

Starter home or forever home?

What is the difference between these two types of homes? A starter home is usually considered the first home an individual or family purchases. It tends to be a smaller home that costs less than your dream home and will eventually be outgrown as your family grows and needs change. A forever home is the property that you plan to spend the rest of your life living in. 

Five things to consider 

With the median cost of a house in the United States reaching $334,000 in 2020 and available inventory reaching a significant low, first-time homebuyers have plenty to overcome before buying a house. Here are five things to consider when deciding between a starter home and a forever home. 

Market stability

Research shows that 41% of Americans believe the real estate market will crash in 2021, with another 26% believing the crash will occur in 2022. First-time homebuyers should consider how long they plan to live in their new home. If the market crashes and you try to resell the property too fast, you risk losing money. 

Life goals

What are your plans or goals for the next five or 10 years? If you plan to switch jobs, start a family or relocate, buying a big home isn’t the best financial investment. Experts suggest that homeowners should plan to live in a house for at least five years, or else they risk losing money on transaction costs. However, if you don’t plan to make big changes, buying a forever home now could be the most cost-effective option, as home prices might continue to rise, which would require a more substantial down payment. 

Budget

What you want to buy and what you can afford to buy are often different depending on your savings and stage in life. It is vital that first-time homebuyers talk to a lender early on and request a preapproval so they know how much house they can afford. Lenders review your income and credit score to determine your mortgage interest rate and monthly payment amounts. This letter can be used as proof to sellers that you will qualify for the loan. 

Financial risk tolerance

Everybody has a different level of risk tolerance. Buying a home is risky because you don’t know what the market will look like when it is time to resell or what your income will look like a year from now. If you were to lose your job, how would you continue to afford the mortgage payments? It is recommended that buyers spend no more than 36% of their monthly gross income on debts and loans. 

Must-haves

Finally, what are the things that your first home must have versus the things you dream of having one day? Do you need an extra bedroom for a home office because you are now a remote employee? Can you wait to have a large backyard until you start a family? Understanding wants versus needs is always helpful when buying a home. 

Which one wins? 

With home prices soaring, first-time buyers should consider their options before setting their sights on a big home they can’t afford. Do your research, understand the resale potential and make sure you can afford a new house in any financial scenario.