How Much Money should you Spend on a Starter House?

Many people dream of the day they can buy a home that they can call their own. Houses are expensive and many people start out by purchasing a starter home. There are many perks of buying a house such as tax advantages, possible appreciation, equity build up, and control of your living situation. However, a lot of people do not take the time needed to research the house buying process. Buying a house will be the biggest purchase most people make, but often they leave the entire process up to other people like the lender and real estate agent. I hope this article can shed some light on buying a first house and how much you should spend.

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What is a starter home?

A starter home is typically thought of as a smaller, low-cost home. Most people who buy their first house cannot afford to buy a mansion right away. The lower cost homes are typically called starter homes. Whether you should buy a starter home, a larger home, or even rent will depend on many factors.

Why don’t most first time home owners take the home buying process more serious?

Buying a house is a big deal! With low down payment loan options and 30 year mortgages, it may not seem like houses cost that much. It is possible to put as little as 3 percent down on a home and with interest rates at extremely low levels, house payments are very affordable. Even though you many only have to put $6,000 down and your payment is $1,000 a month, you are buying a $200,000 house. Buying a house is the expected thing to do for many people. Get a good job, get married, have kids, and buy a house (not always in that order). Because it is expected that most good citizens should buy a home, most people do buy homes, and it is not that much money to buy a house, I think many people take the process lightly.

Buyers will often let real estate agents and lenders tell them what kind of house to buy and how much to spend. Buying a house is the biggest purchase most people will make and it should be treated as such. Buying the wrong house for too much money can be a disaster. Getting an awesome deal on a house you love, can be extremely beneficial. It does take some work and time to figure out how much home you can afford and how to get a great deal on a house.

How much house can you afford to buy?

I believe the main factor that should guide a first time home buyer is how much home can they afford, which is difference from how much they can qualify for. Most lenders and agents will tell buyers they can buy a house up to an amount of $200,000 for example. The buyers assume this is how much they should spend because that is what the lender tells them they can qualify for. But the number the lender gives is the most they can buy based on many financial factors. That max number comes from how safe the bank feels the buyers are and how confident the bank is that the buyers can pay back the loan. If the bank were to lend more money, there is a pretty good chance the buyers would default on the loan. Do you want to spend so much money on a home that you are right on the edge of not being able to pay back the loan?

The number the lender gives buyers, also has nothing to do with the buyer’s comfort level, spending habits or saving habits. We like to use the term “house poor” in the industry for those who spend all their money on a house and have nothing left to save or invest. The lender does not care if you have an emergency fund, how much you are saving towards retirement, or your kids’ college. The lender cares if you can make the house payments. Do not rely on a lender to tell you what you should spend on a house.

I love the advice a lender gave on of my podcasts: “Figure all of your expenses, save 20 percent of your income, and see how much you have left over for a house payment.” When you get an idea of how much you can spend on a house and still save money, you will get an idea of how much home you can afford. I like to spend less than 10 percent of my income on my personal house. Remember that lenders are not financial advisers, and are not qualified to tell you how much money to spend on a house.

Here is a great article I wrote that goes into more detail on how much house a buyer an afford.

What if you cannot afford to buy any houses in your area?

Once you figure how much you should spend on a house, you need to check out house prices in your area. If you live in San Francisco, New York City or other popular towns, you may not be able to afford anything. If you live in the Midwest, you may be able to afford an awesome house with a lake. Usually to be able to afford to live in a very expensive city, you have to make a lot of money. You have to make a choice on being house poor and having all your money go towards living expenses, commuting, or moving to a different area.

There is also the option of renting if prices are too high to buy in your area. There is nothing wrong with renting if it makes more financial sense, but buying is not always the best option. Here is an article that goes into more detail on renting versus buying. If you really want to buy a house or live in an expensive area, you may be wise to try to cut down on as many of your other expenses as possible.

If you do decide to spend most of your money on a house, because you live in an expensive area, try your best to get an awesome deal.

Why is it important to get a great deal on a house?

When most people look for houses, they want to make sure they aren’t paying more than a house is worth. When I buy houses, I want to make sure I am paying much less than they are worth. One of the advantages of real estate is you can buy houses below market value. Some times houses need work, the seller needs money right away, a bank wants to get rid of a home, or other circumstances cause a house to sell for less than market value. It is not easy to buy houses below market value and most people are not willing to put the work and time into the process. If you can buy a house that is a great deal, it will do wonders to your financial health. Buying below market allows:

  • Instant equity. If you buy a home worth $100,000 for $75,000, you have gained $25,000 in equity as soon as you buy.
  • Ability to remove mortgage insurance. Many low down payment loans have mortgage insurance, which can add hundreds of dollars to the monthly payment. On some conventional loans you can get the mortgage insurance removed after a couple of years. The house has to have enough equity for the mortgage insurance to be removed and getting a great deal helps tremendously.
  • Easier to refinance. When you have more equity in your home, it is much easier to refinance it. You may be able to take cash out with the refinance.
  • Easier to sell a house. If you buy a home at fair market value, but have to sell quickly you may lose money. When you sell a house you have to pay real estate agent commissions, recording fees, title insurance, and in some cases attorneys fees and transfer taxes. These costs can easily be 10 percent or more of the value of the home. If you pay market value you will have to bring money to closing to sell the home quickly, but if you get a great deal on the home, you may still make some money.
  • When you sell your personal residence you might not pay taxes. When you sell a house you have occupied for at least two years, you may not have to pay any income taxes on the profit. If you get a great deal on a home that you end up selling, it is a huge bonus when you don’t any taxes on that profit.

How do you get a great deal on a home?

It is not easy to get a great deal on a house, otherwise everyone would do it. It would take a book to explain all the options and I have written several that you can find on Amazon. Most real estate agents are not looking hard to find awesome deals for their clients, because it takes more time and work. If the buyer never specifies exactly what they want, the agent has no idea that they should be looking for a great deal. Below are some links to other articles I have written that explain the best ways to get a great deal on a home.


If you are in the market to buy your first home, do not blindly trust your real estate agent and lender to buy the house for you. You need to figure out how much you can afford, where you want to live, what type of house you want, and how good of a deal you need to get. You may end up with a starter house, something much better, or renting. None of those are bad options depending on your financial situation.




  1. PART Realty October 4, 2016
  2. Kennedy August 16, 2016
    • Mark Ferguson August 16, 2016

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