April 5th, 2011 3:39 PM by Lehel S.
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 Ms. Torres, 29 years old, adding that the newly constructed home is in a good school district. Now they just have 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 are finding that they can afford more house than they would have a few years ago. And they don't have the complication of having to unload an existing home that also has dropped in value before they can buy a new one.
But the current market also presents some 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. And buyers should prepare to stay put for a while since home prices aren't expected to rebound any time soon.
The median existing-home price was $158,800 in January, down 3.7% from a year earlier and down 24.7% from January 2007, according to the National Association of Realtors.
The most important thing younger buyers should do is get their credit in order -- especially since 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 Ms. 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 since these only require 3.5% down, have lower interest rates and are typically easier to qualify for. The average interest rate on a 30-year FHA loan was 4.58% last week, according to Bankrate.com. The average rate on a 30-year fixed-rate loan was 4.76%.
But a down payment of less than 20% means you'll be required to pay for private mortgage insurance. And the fees on that insurance with FHA loans are going up April 18.
The Torreses say they chose an FHA loan, which had a 4.14% interest rate, since 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 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 anticipate staying in a house for a long time since it may take years to recoup buying and closing costs alone, says Mr. Davis. "In today's market, [that could take] five years," he says.