How to Buy a House in Your 20s—and Why You Really Should
September 27, 2018
Curious about how to buy a house in your 20s? If you're dubious it can be done, we get it. Between entry-level salaries, college loans, and the desire to just be young and have fun, 20-somethings often think homeownership is beyond their reach.
No so! It is entirely possible to buy a home in your 20s, and it will benefit you big-time down the road. Here's how you can make your home-buying dreams come true much sooner than you think.
How to buy a house in your 20s: Save for a down payment
To buy a house at your age, you'd better have some cash saved up for a down payment on your mortgage—a lot of cash, actually.
Most financial planners recommend that home buyers make a down payment amounting to 20% of the price of the home. So on your typical $250,000 house, that would amount to $50,000. Ouch!
Granted, you don’t have to put down 20%, but doing so enables you to avoid paying private mortgage insurance, a premium that can increase your monthly payment by up to 1.15%.
If you don’t have a ton of money in savings, one way to afford the down payment is to ask Mom and Dad for financial help. Another option to foot the down payment bill is to apply for down payment assistance. Depending on your income and other factors, you could qualify for one of over 2,200 down payment assistance programs nationwide, which help out home buyers with low-interest loans, grants, and tax credits.
So, how much money are we talking about? Well, one study found that buyers who use down payment assistance programs save an average of $17,766. Sadly, most consumers aren't aware of these programs, or assume they're too difficult to qualify for. Don't be one of them!
Shore up student loan debt
Student debt has surged to an average of $28,950 per borrower, reports the Institute for College Access & Success. But college debt doesn’t automatically prevent you from being able buy a house.
Most mortgage lenders require a borrower’s debt-to-income ratio—how much money you owe divided by your income—to be no more than 36%. So, someone making $6,000 a month and paying $500 a month in student debt would be able to afford a maximum monthly mortgage payment of $1,680—in many markets, that's plenty to buy a house. But, if you’re shouldering too much student loan debt to qualify for a mortgage, you may still have a few options.
One way to make room for a mortgage is to refinance and extend the life of your college loan. This results in smaller monthly payments over a longer period of time, so you’ll have more you can put toward a mortgage. The caveat is you'll end up paying more in interest over the life of your college loan, but it means you can buy a home now and, in turn, take advantage of today’s low mortgage interest rates, says Heather McRae, a senior loan officer at Chicago Financial Services.
Moreover, nearly half of states today offer housing assistance to college grads carrying student loan debt. For instance, New York's new Graduate to Homeownership program provides assistance to first-time buyers/college grads in the form of low-interest-rate mortgages or up to $15,000 in down payment assistance. You can meet with a mortgage lender to find out if you qualify for one of these programs.
Check your credit score
Unlike older generations, home buyers in their 20s tend to have shorter credit histories. That can be a problem, since if you have limited credit history, the odds are greater that you have a mediocre credit score—the numerical representation of how well you've paid off past loans (like credit cards).
Mortgage lenders usually require borrowers to have a minimum credit score of 660; they also look at your credit utilization ratio—your current debts, divided by the credit limit on the sum of your accounts. For example, if you’re carrying a $400 debt on your credit card and have a $1,000 credit limit, your credit utilization ratio is 40%. Unfortunately, relatively new credit users tend to have higher credit utilization ratio.
You’ll want to get a free copy of your credit report at AnnualCreditReport.com. Check for errors—1 in 4 Americans spots mistakes on their credit report, according to a Federal Trade Commission survey. And, if your credit isn’t up to par, you may have to take a few months to raise your score. Or you can get someone with good credit (like your parents) to co-sign the loan for you.
Purchase a starter home
As a young home buyer, you don’t have to find your “forever home” right now.
“I tell young buyers all the time, ‘This is your first home—it’s not your last,'” says Linda Sanderfoot, a real estate agent at Coldwell Banker in Neenah, WI.
In fact, there are a couple of big financial benefits to buying a starter homewhile you’re in your 20s. First, your mortgage payments will probably be more affordable, since you’ll likely be buying a cheaper house. Second, you may be able to get a 5- or 7-year adjustable-rate mortgage and qualify for a lower interest rate than you would with a 30-year fixed loan—a good decision as long as you plan on moving before the loan's interest rate lock expires.
Plan for unexpected home expenses
All home buyers should have a rainy day fund to pay for emergency home repairs such as roof damage or a gas leak. And this is especially important for young buyers. Why? Research shows many millennials are less financially responsible than older generations. A study by TD Ameritrade found that more than 9 in 10 millennials overspend, fall short on savings, or take on additional debt at least once a month per year. Furthermore, a recent GoBankingRates.com survey found 52% of millennials said they feel pressure to keep up with their friends due to always going out.
Consequently, “Don’t buy at the top of your budget," says Sanderfoot. "Unless you’re buying new construction, you need an emergency fund for big repairs.”
She adds that home buyers may also want to get a home warranty, which is a policy that would cover the cost of repairing certain home appliances if they break down. (Plans start at about $300.)
Source: "How to Buy a House in Your 20s—and Why You Really Should" REALTOR.com (September 28, 2018) Daniel Bortz