Between entry-level salaries, student loans and the desire to just be young and have fun, twentysomethings often think buying a house is beyond their reach. Not so quick! 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.
Save for a down payment
Be sure to have some cash saved up for a down payment on your mortgage. Most financial planners recommend that homebuyers make a down payment amounting to 20 percent of the price of the home. So, on your typical $250,000 house, that would amount to $50,000. Granted, you don’t have to put down 20 percent, but doing so enables you to avoid paying private mortgage insurance, a premium that can increase your monthly payment by up to 1.15 percent. If you don’t have a ton of money in savings, one way to afford the down payment is to ask your parents 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 more than 2,200 down-payment assistance programs nationwide that help homebuyers with low-interest loans, grants, and tax credits.
Shore up student loan debt
Student debt has leaped to an average of $28,950 per borrower, according to the Institute for College Access & Success. But college debt doesn’t automatically prevent you from being able to 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 percent. 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 still might 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 during a longer period of time, so you’ll have more you can put toward a mortgage. Note: You’ll end up paying more in interest over the life of your college loan, but it means you can buy a home now.
Check your credit score
Unlike older generations, homebuyers in their 20s tend to have shorter credit histories. That can be a problem. 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. 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—one-in-four 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
There are a couple of big financial benefits to buying a starter home while you’re in your 20s. First, your mortgage payments probably will be more affordable, since you’ll likely be buying a less-expensive house. Second, you may be able to get a five- or seven-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 expires.
Plan for unexpected home expenses
All homebuyers should have a rainy day fund to pay for emergency home repairs, such as roof damage or a gas leak. Unless you’re buying new construction, you need an emergency fund for big repairs. Buyers also may 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)