Why starter homes are disappearing — and what AI-powered mortgages can do about it

The starter home isn't just disappearing from the housing market — it's being squeezed out of the mortgage system, too. A starter home is typically a modestly sized property, often under 1,400 square feet, that a first-time buyer purchases to build equity before trading up. But today, fewer of those homes are being built, and the ones that do exist are harder to finance.

Traditional mortgage lending relies on loan officers who earn a commission of roughly 1% to 2% of the total loan amount. That structure means a $100,000 loan pays out far less than a $500,000 or $1 million loan — so lenders have historically deprioritized smaller mortgages. Better.com was built specifically to challenge that model. Its fully online, AI-powered platform is designed to make the mortgage process faster and more affordable — including for the buyers that the traditional system has left behind.

If you're looking to buy your first home, understanding how this shift works can help you find the right loan and move forward with confidence.

What is a starter home — and why is it vanishing?

A starter home is generally defined as a smaller, more affordable property — typically under 1,400 square feet — intended as a first step into homeownership rather than a long-term residence. For decades, starter homes served as the primary on-ramp for first-time buyers building wealth through real estate.

That on-ramp has largely closed. According to recent housing data, only about 9% of new homes built today are under 1,400 square feet, compared to roughly 40% of new builds in 1982. At the same time, recent industry data shows that new homes have gotten about 11% smaller over the past decade while costing roughly 74% more to build — a phenomenon some housing analysts describe as residential "shrinkflation."

The result: smaller homes are no longer cheaper homes. And for buyers who do find one, the financing process presents its own set of obstacles.

Recent industry data shows the median age of first-time homebuyers reached a record high of 40 in 2025 — up from around 29 in the early 1980s. First-time buyers now make up just about one-fifth of all purchases, compared to a historical norm closer to 40%. That shift reflects a generation of aspiring homeowners waiting longer and stretching further than any previous cohort.

If you want to understand the math behind affordability, a mortgage calculator is a useful starting point — it lets you model monthly payments based on loan amount, rate, and down payment.

Why the mortgage system isn't built for small loans

Here's a structural problem most housing discussions skip over: the traditional mortgage industry was never designed to serve small loans efficiently.

Loan officers at most lenders are paid on commission — typically between 1% and 2% of the total mortgage amount. On a $1 million loan, that commission comes to $10,000–$20,000. On a $100,000 loan, it pays out $1,000–$2,000. With processing costs running close to $12,000 per loan on industry average, according to recent housing industry data, the math simply does not work for a lender or loan officer to prioritize smaller mortgages.

The downstream effect is that buyers seeking loans under $300,000 — the range most commonly associated with starter homes in lower-cost markets — often get slower service, fewer options, and less personalized guidance than buyers with larger budgets.

This isn't a fringe problem. Recent government housing data suggests that poor credit history accounts for nearly half of all denied loan applications on purchase mortgages under $100,000 — but that statistic may be incomplete without accounting for how few of those applicants received meaningful guidance before applying in the first place.

Understanding what determines your mortgage rate — including your credit score, debt-to-income ratio (DTI), and loan size — is a critical first step for any buyer working with a smaller budget.

How Better is using AI to cut the cost of a mortgage

This is where the math starts to change. Better.com's proprietary AI, Betsy, reduces the cost to process a loan by automating work that previously required multiple human touchpoints — document collection, income verification, scenario analysis, and underwriting preparation.

The traditional mortgage industry averages close to $12,000 to process a single loan, according to recent industry data. Better has brought that cost down to approximately $3,000. That roughly $9,000 gap is exactly what makes it financially viable to service the smaller loan amounts that entry-level homebuyers actually need — loans that the commission-driven model of traditional lending has historically made unprofitable.

Better's AI technology, Betsy, evaluates 21,600 loan scenarios to find your best rate.¹

Betsy's approach to AI mortgage lending means that every borrower — regardless of loan size — gets the same rigorous rate optimization that larger-loan buyers have always received. And because Better's process is entirely online, there's no branch visit, no paper forms, and no waiting for a loan officer to call you back.

For qualified borrowers, Better's One Day Mortgage allows you to go from a locked rate to a Commitment Letter in a single day² — a speed previously reserved for buyers with large balances and established banking relationships.

Better as a financial coach for first-time homebuyers

Beyond processing efficiency, Better's platform changes what kind of guidance a borrower can receive — and who gets it.

Historically, personalized financial coaching in the mortgage context — the kind that might walk you through which specific credit card to pay down, or exactly how reducing a car payment could shift your DTI and unlock a better rate tier — was reserved for high-net-worth clients at private banks. Most first-time buyers working with a traditional loan officer got a generic approval or denial, with little actionable guidance in between.

Better's AI can deliver that same level of specificity at scale. A borrower with a 610 credit score asking how to reach 640 or 660 — thresholds that can meaningfully improve rate eligibility — can receive targeted, data-driven steps rather than a blanket "improve your credit" suggestion. That kind of guidance democratizes the financial coaching that was once available only to the ultra-wealthy.

To understand where you stand, start with the minimum credit score for a mortgage. Conventional loans typically require a 620+ score, while FHA loans allow scores as low as 580 with a 3.5% down payment.

Credit score improvement is not guaranteed. Individual results will vary based on credit profile and financial behavior.

What this means if you're ready to buy your first home

The starter home shortage is real — but the steps you can take right now are concrete.

1. Know your budget before you search

Use a mortgage calculator to understand what a realistic monthly payment looks like at current rates. Factor in property taxes, homeowners insurance, and — if your down payment is below 20% — private mortgage insurance (PMI).

2. Check and optimize your credit score

Your credit score directly affects your interest rate and which loan programs you're eligible for. Review our guide to how to qualify for a home loan as a first-time buyer to understand the key factors. Better's platform can also surface specific steps to improve your profile before you apply.

3. Understand your loan options

Conventional loans require a minimum 620 credit score and as little as 3% down. FHA loans — insured by the Federal Housing Administration — allow a 3.5% down payment with a 580 credit score, making them accessible for buyers with limited savings or credit challenges. See our guide to FHA closing costs so there are no surprises at the closing table.

4. Get pre-approved with Better before you search

A mortgage pre-approval gives you a pre-approved budget to work from — making your offer stronger in a competitive market. Better's fully online process means you can get there without a branch visit or paper forms.

Nearly 8 out of 10 people who apply for a loan with Better get approved.³

Frequently asked questions

Why won't lenders give me a mortgage on a cheaper house — is there a minimum loan amount?

Most lenders don't have a formal minimum loan amount, but the economics of traditional mortgage lending create an informal one. Loan officers typically earn a commission of 1% to 2% of the loan amount, which means smaller loans generate significantly less income while costing nearly as much to process. Better.com's AI-driven model is built to solve exactly this problem — by cutting processing costs, it makes smaller mortgages financially viable to service. If you're shopping for a loan under $200,000, Better is designed to give you the same level of service as any larger-loan borrower.

I make about $60,000 a year and I'm looking at homes under $200,000 — can I still get a mortgage?

Yes — a $60,000 income can support a mortgage in that range depending on your debt-to-income ratio (DTI), credit score, and down payment. DTI is the percentage of your gross monthly income that goes toward debt payments. Most lenders prefer a DTI below 45%. At $60,000 annually, your gross monthly income is $5,000; a 45% DTI ceiling means total monthly debt payments — including your mortgage — should stay under $2,250. Use a mortgage calculator to model the specific payment and see what fits your situation.

Can AI actually help someone with a lower credit score qualify for a home loan?

Better's AI platform can provide targeted guidance on specific steps to improve your credit profile before applying — such as paying down a particular credit card balance to reduce your utilization rate, or addressing a specific negative item on your credit report. This kind of granular coaching was previously available mainly to high-net-worth borrowers through private banking relationships. Credit improvement is not guaranteed, and results vary based on individual credit profiles and financial behavior. But having access to actionable, personalized guidance rather than generic advice can meaningfully help buyers who are close to a qualifying threshold.

Should I wait for mortgage rates to drop below 6% before trying to buy a starter home?

Waiting for rates to fall is a common instinct, but it carries real tradeoffs. Rates are unpredictable — industry economists project only modest declines in 2026 compared to 2025. Meanwhile, home prices in many markets remain elevated, and inventory in the entry-level segment is still tight. Buying now at a higher rate with the option to refinance later may outperform waiting, especially if prices continue to rise. Evaluate your total monthly payment, not just the rate in isolation — and use Better's mortgage calculator to model different scenarios before deciding.

What's the risk of buying a small, older home as a first-time buyer?

Starter homes — particularly older ones — often come with deferred maintenance, outdated systems, or repair needs that can add cost after closing. Budget for a thorough inspection before making an offer, and factor in potential repair costs when assessing affordability. Some loan programs, including certain FHA products, have property condition requirements that older homes may not immediately meet. Going in with realistic expectations — and a financial buffer beyond your down payment — is essential for managing the total cost of homeownership, not just the mortgage.

FHA loan vs conventional loan — which is better for buying a starter home?

FHA loans are often the better fit for first-time buyers with credit scores below 680 or limited savings, since they allow a 3.5% down payment with a 580 credit score and have more flexible DTI limits. The tradeoff is that FHA loans require mortgage insurance premium (MIP) for the life of the loan in most cases, which adds to your monthly cost. Conventional loans require a minimum 620 credit score and as little as 3% down, but private mortgage insurance (PMI) drops off once you reach 20% equity — making them potentially cheaper over time for buyers who qualify. Better offers both loan types, and Betsy will automatically compare your options across programs to surface the most cost-effective path.

I'm 32, renting, and my credit score is around 620 — is it realistic to buy a house for under $250,000 right now?

Yes, it is realistic — particularly in markets where $250,000 can still purchase a livable home. A 620 credit score meets the minimum threshold for conventional loans and exceeds the FHA minimum of 580. Getting pre-approved with Better is the right first step — it gives you a precise budget, identifies any issues to address before applying, and puts you in a stronger position when you make an offer. See our guide on tips for first-time home buyers for a full checklist.

The bottom line

The disappearance of the starter home is a real structural problem — and it runs deeper than just high prices or a lack of inventory. The traditional mortgage system was built to reward large loans, and that incentive structure has historically left buyers with smaller budgets underserved.

Better.com was founded to fix exactly that. By replacing costly, commission-driven loan origination with AI, Better has built a platform that can profitably serve the loan sizes that the traditional model ignores — and deliver the personalized financial guidance that first-time buyers deserve but rarely get.

If you're ready to take the next step, start with a free pre-approval. Better's fully online process takes minutes, won't affect your credit score, and gives you a real budget to work from — so you can move fast when the right home becomes available.

¹ Betsy evaluates loan scenarios using currently available data across participating investors, product types, loan terms, and rate assumptions. The stated number of scenarios reflects a mathematical combination of these inputs (including multiple investors, product categories, loan terms, and rate variations) and does not represent a guarantee that all scenarios are available to every borrower or that any specific rate or loan will be offered. Actual loan options, rates, and terms depend on individual borrower qualifications, credit profile, property characteristics, loan amount, market conditions, and lender requirements at the time of application.

² Better Mortgage’s One Day Mortgage promotion offers qualified customers who provide certain required financial information/documentation to Better Mortgage within 4 hours of locking a rate on a mortgage loan the opportunity to receive an underwriting determination from Better Mortgage within 24 hours of their rate lock. The underwriting determination is subject to customary terms, including fraud and anti-money laundering checks, that take place pre-closing and which may trigger additional required documentation from the customer. Better Mortgage does not guarantee that initial underwriting approval will result in a final underwriting approval. See One Day Mortgage Terms and Conditions.

³ Based on Better Mortgage internal analysis of 2025 HMDA-reported mortgage application data. The approval rate reflects applications received between January 1, 2025 and December 31, 2025 that were considered “completed,” meaning applications not withdrawn by the applicant or closed for incompleteness. Approval includes applications that were approved but not accepted, loans that ultimately originated, and loans that were approved and later purchased. Results are based on aggregate data and do not guarantee approval for any individual applicant. Approval outcomes depend on a variety of factors, including credit profile, income, assets, property details, and underwriting requirements. Individual results may vary.