A cheat sheet for first-time home buyers in today's tight market

Potential first-time buyers have been forced to compromise when making their homeownership dreams a reality. Read more about first-time home buying here.

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In today's housing market where affordable single-family homes are difficult to come by, potential first-time buyers have been forced to make compromises in how they shop for a home and what's on their wish list to make their homeownership dreams a reality.

The 2019 NerdWallet Home Buyer Report finds that 36% of Americans plan to buy a home in the next 5 years. Of them, 24% say they'll be making the purchase within the next 12 months.

The report examines the compromises and ways first-time buyers could save money. Here are some key findings from the report based on a new online survey conducted by The Harris Poll in January.

Upping the ante. Nearly half (45%) of Americans who have purchased a home in the last 5 years offered more than the asking price before having their offers accepted. NerdWallet home expert Holden Lewis attributes this to stiff competition in a sellers market.

"When we looked at the people who bought homes in the last 5 years, people who were first timers and the people who were repeat buyers, we found that first-time home buyers made more offers before finally having one accepted," said Lewis. "For all buyers, the average was 3 offers before an offer was finally accepted, and that might be for 1 house or they made offers for more than one. But for first timers, they made nearly 4 offers before having one accepted."

First-time home buyers are likely to be younger and on a leaner budget. Those with less to spend stand to feel squeezed more.

"They might be low-balling in their first offer in a market in which that is not really the way to do it," said Lewis. "I think a bigger part does not have that much to do with inexperience. When you're buying an entry-level home, it's tougher. There are more buyers, there's more competition, and, therefore, you're going to have to make more offers on average."

Down payment misconceptions. 62% of Americans believe they must put at least 20% down in order to purchase a home.

"This is something we try to continually educate people about," Lewis said. "You do not need a 20% down payment. With a conventional loan you can often get a home with a 3% down payment. With FHA, you can get a home with a 3.5% down payment and your credit doesn't even have to be that good. If you're a veteran, you can buy a house with a VA loan with zero down. Or if it's a rural area, you can get a loan with zero down."

With a smaller down payment, you don't have to fork over as much money initially, but your monthly house payments are going to be larger. Lewis said that with home prices continually rising, a buyer might be better off buying in the current market.

"Essentially, if you buy a house today, you might be buying it for 10% less than a year from now," he said. "The earlier you buy that house, the more likely you are to get that house at an affordable price."

Missing out on savings. Home buyers could save more than $400 in the first year of a 30-year mortgage by comparing mortgage rates among lenders before applying, the report finds.

"Mortgage rate shopping is extremely important and is not done nearly often enough," said Lewis. "In our survey, we found that half of people who got a mortgage in the last 5 years applied to only one lender. If each of them had applied to at least 5 lenders, they would have saved an average of $400 in interest in their first year of having their mortgage. Of course, if you have a mortgage in its first year, that $400 would compound year by year."

Lewis said digital mortgage platforms offer convenience and savings. "The income information is available to the lender online, bank account information, information about debt payments. When it's that easy to apply for a mortgage, why not apply for 5 mortgages?" he said.

With that in mind, Lewis added, "It's really a good idea to not max out the absolute most you can afford to borrow and pay every month. I always recommend giving yourself a little bit of wiggle room. With money that is saved over every month after you paid all your debts, including your mortgage, you can pay for car repairs and vacations and save money for the inevitable maintenance and repairs on the home."

Feeling the pinch after the purchase. One-fourth (25%) of American homeowners say they no longer felt financially secure after buying their current home, and more than one-third (34%) of first-time home buyers echoed that sentiment.

Lewis attributes this insecurity to lack of experience. "They might not fully comprehend how much it costs to own a home with insurance and taxes," he said. "And since they are more likely to get caught up in bidding competitions, they are more likely to pay a little bit more than they expected to pay. Therefore, after they close they are feeling a little bit financially precarious."

Lewis recommends working with a licensed real estate agent and using a home affordability calculator to estimate how much you realistically can afford to pay for a home.

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Article copyright 2019 by Brenda Richardson from Forbes. Reprinted from February 26, 2019 issue with permission from Forbes.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
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