The ultimate guide to buying a home in your 20s
In your 20s, buying a home may seem like a pipe dream. You’re a recent graduate, you’re dealing with student loan debt, and you’re doing it all on an entry-level salary with no raise in sight.
Though home buying might seem an insurmountable journey, millions of Millennials have done it. Millennials are now the single-biggest group of homebuyers in our country, and many are even buying houses solo, long before marriage or kids are even on their radar.
But is this move right for you, too? More importantly, can you afford it? Let’s break it down.
Benefits of buying a home in your 20s
The benefits of homeownership are huge—especially when you’re younger. In your 20s, a home is a long-term investment, and if you stay long enough, it can mean building serious wealth over time. Sell the home at a profit later on, turn it into an income-earning rental property when you’re ready to move up, or enjoy fully paid-off housing during your retirement years (though those may be far down the line!)
Homeownership also means:
• Consistent, reliable payments – No more annual rent hikes from your shady landlord.
• More control to customize the property – Forget “accent” walls. Paint, upgrade, renovate and do whatever you want to your home once you own it.
• Great credit – Getting a mortgage loan at a young age can help you establish a solid credit history, which means a good credit score and ample financial opportunities later on.
• Tax benefits – Homeownership comes with several tax benefits that can lower your tax burden and increase your annual refund.
You’ll also likely save on monthly costs. Rents have been skyrocketing in most major cities in recent years, with the average mortgage payment coming in well under the average rent. You also have the option of renting your property on Airbnb or other similar sites to make extra cash as needed.
How young is too young to buy a house?
There’s no wrong or right time to purchase a house. Legally, you can buy and own real estate at the age of 18, but that doesn’t necessarily mean it’s the right move for every 18-year-old.
A home is a huge and expensive purchase, and it’s one you’ll need to live with for years or even decades of your life. At a bare minimum, you will want to wait until you have consistent income, a stable job and a decent credit score, as this will allow you to both get an affordable mortgage loan, as well as cover that mortgage payment month after month while you’re in the home.
What to consider before buying a house in your 20s
Before seriously considering a home purchase, make sure to take into account the full scope of financial factors and other lifestyle considerations.
You should think about:
How established are you in your job? Do you expect to be there long? Could your career take you out of the area, therefore requiring a move? You want to stay in the home at least long enough to recoup your transaction costs and break even on the property.
How much do you make? How much of that after-tax income could you afford to put toward housing? Use a mortgage calculator to see how much your mortgage will likely cost, and make sure you’ll have the income to cover that, plus the costs of maintenance/repairs and your regular monthly expenses like utilities, food, phone, car payment and more.
Is marriage in your future? Kids or pets? Can you afford a home that will accommodate those changes? You’ll want to make sure a home purchase fits with your future life plans and goals.
What are mortgage interest rates at right now? Would it be better to wait until rates drop and your monthly payment becomes more affordable? Talk to a reputable loan officer if you’re not sure on this one and be sure to shop around and compare rates. They can vary greatly from lender to lender.
Your local market
What are the housing market conditions in your area? Are home values rising? Are prices still affordable? You want to purchase a home that’s going to improve in value over time, thereby netting you profits. If you’re not sure if a home is a good investment in your city, talk to a local real estate agent for advice.
There is also the responsibility factor. Owning a home requires a little more hands-on attention than renting does, and you no longer have a landlord to make repairs (or foot the bill for them). Make sure you’re ready to take on all that comes with homeownership before moving forward.
Ready to buy? This guide can help
If your goals, the local market and your finances all align, then it might be time to buy a home. Here’s how you go about that process:
Prepping your credit & finances
Even if you’re in a solid place with your income and expenses, it’s important to take some time to prep your finances before applying for a mortgage or starting your home search. Doing so can 1) help you better afford your monthly payment and 2) improve the mortgage rates you’ll be offered.
Here’s where to start:
Work on your credit score
Start paying down your debts, beginning with your highest-interest ones first. If you have any collections to your name, settle those and make sure your accounts are in good standing. You should also pull your credit report and check for any errors. Report these to the crediting agency to improve your score.
Avoid expensive cars
A $500 auto payment might not seem huge, but according to our mortgage calculator, it can cut your buying power by a whopping $80,000. (Considering a $100,000 salary, 5% mortgage rate and 5% down payment). It can also mean significantly less cash flow each month—particularly once a mortgage payment is added to the mix.
Cut out unnecessary expenses
You’ll want to have a good cushion of savings before purchasing a home, as this helps cover unexpected expenses and gives you the “cash reserves” mortgage lenders look for. Be prepared to cut out those morning coffee runs and reduce your spending wherever possible.
Be prepared for other associated costs
Your mortgage and down payment aren’t the only costs you’ll have when you buy a home. Make sure you’re prepared to cover things like moving expenses, new furniture, HOA dues, property taxes and more. Have some wiggle room in your budget to account for these.
Dealing with student loans on top of your future mortgage? Make sure you’re staying on top of your payments, and consider refinancing your loans to get a lower interest rate. (Shopping around can help you do this!)
Minimizing your down payment and closing costs
Though the old 20% down “rule” isn’t true, that doesn’t mean there aren’t some serious up-front costs that come with buying a home. On top of your down payment, you’ll also have closing costs to take into account—and those can range anywhere from 2% to 5% of the total purchase price of your home, depending on the lender.
Fortunately, there are ways you lower these up-front costs or, at the least, make them easier to afford. You can:
• Choose a low-down payment loan – Down payment requirements vary by loan product. USDA and VA loans require nothing down (though they have strict eligibility requirements), while FHA loans start at 3.5%. Conventional loans require 5% or more. Keep in mind that a lower down payment means more in monthly mortgage costs.
• Apply for down payment assistance programs and grants – There are loads of programs, grants and loans that can help you cover your home’s down payment. These programs vary by state and municipality, so be sure to check with your local housing authority to see what options you might have for your home purchase.
• Look into closing cost assistance – There are also programs that can go toward closing costs, or you can see if the seller of your property will pay a portion of your fees. This is common if the home needs repairs or has been particularly slow to sell. Talk to your agent to see if this might be an option for your purchase.
You can also get creative in pay for these up-front costs. Many young homebuyers are using crowdfunding to raise money for their down payments and closing costs, while others are seeking donations in lieu of wedding presents. You can also get a side hustle to help you funnel away savings for these extra expenses before buying your home.
Finding the right home
The first step in home shopping is to determine what sort of payment you can afford. Use a mortgage calculator to home in on a good price range, and make sure it still allows for enough cash flow to cover your other monthly expenses (unexpected ones, too).
Once you have a solid price range in mind, start the search. You should:
• Set up alerts on the major listing sites, including Zillow, Trulia and Realtor.com. Add filters for the size, age and features of the house, so you get the most appropriate listing alerts possible.
• Consider working with a real estate agent. Make sure they’re familiar with the area you want to buy in.
• Have a list of “must-haves” and “nice-to-haves” when touring homes. Bring this list with you on every showing, so you can compare apples to apples.
• Drive around the neighborhood of any home you’re seriously considering. Get to know the area, talk to neighbors and see what local amenities there are.
If your local housing market is particularly expensive or competitive, you’ll need to move fast when a home you like is listed. Make it a point to see the property within a day or two, and be prepared to offer a decent earnest money deposit in order to get the seller’s attention. Including an offer letter can also help you persuade a seller to choose your offer over another bidder’s.
Getting your mortgage
To start the mortgage process, you’ll first need to find the right lender. There are hundreds of potential options to choose from, including everything from big banks and financial institutions to fintech firms, credit unions and more. Make sure to get a rate quote and breakdown of fees from each one you consider, and always look at reviews, too. The customer experience can differ greatly from one lender to the next.
After you’ve found the right lender, you should:
• Get pre-approved – This usually requires a short application and a little bit of info about your income and credit. Once approved, the lender will give you a “pre-approval letter,” which will state the exact loan amount for which you’ve been pre-approved. You can include this letter in any offers you make to increase the seller’s confidence.
• Complete your full mortgage application and lock in your rate – Once you’ve made an offer on a home and the seller has accepted, you’ll need to fill out the full mortgage application and provide all the financial documentation your lender requires. Talk to your loan officer about locking in your rate. Most lenders offer rate-locks of 30 days or more, meaning your interest rate can’t go up in that time period while your loan is being processed and underwritten.
• Communicate with your loan officer often – Keep in touch with your loan officer, as they’re the ones spearheading your mortgage loan’s approval process. Make sure you respond quickly when they have questions or request additional documents. Any delays on your end will delay your closing date.
• Get the home inspected – Before you close on the home, you’ll want to have a professional home inspector evaluate the property for any deficiencies, safety issues or potential repairs. If issues do crop up on the inspection, you can ask the seller to address these before closing or have them pay part of your closing costs to make up for the necessary repairs.
• Find a home insurance policy – You’ll also need to have homeowner’s insurance before you can close on the home. Just like with your lender, be sure to shop around for the best price here. You might also need flood insurance, depending on where the home is located.
Finally, attend your closing. This will likely be at your title company, though it could also be online via a mobile notary or other digital process. Either way, you will need sign the closing papers and pay your down payment and closing costs via wire transfer or cashier’s check. Your loan officer should give you a closing disclosure sheet well before this date, so you know exactly how much you will owe. Once all is said and done, you’ll get your keys and the home will be yours.
Homebuying in your 20s: The FAQ
How can I start saving for a house in my 20s?
Saving at a young age can be difficult, especially if you have an entry-level job or have student loan debt. Your best bet is to set a monthly budget, determine what you can comfortably afford to set aside, and automate those savings however possible. You might want to designate a certain amount of each paycheck for savings or just schedule a monthly transfer from your checking account once a month. You can also consider a savings app like Digit or Acorns to help you save (and even make money) with your extra cash.
Can a 22-year-old get a mortgage?
A mortgage loan is not an age-specific product. Your ability to get a mortgage depends on your credit score, your debts, your income and the home you’re looking to purchase. As long as you have stable employment, solid income and the funds to cover the mortgage payment for which you’re applying, you should be able to secure a loan at any age.
Do I need a co-signer?
You don’t necessarily need a co-signer to get a mortgage, though it could come with some benefits. A co-signer’s income and credit score (if both numbers are good), could improve your interest rates and give you a bigger price range to work with. It also may help you more easily qualify for your loan. Still, there are some downsides to having a co-signer. For one, they’re on the hook if you, for some reason, are unable to pay your mortgage payment. This can put them in a tricky financial situation if they’re not prepared. They can also hurt your application and lower your interest rate if their credit score is lower than yours.
What is the right age to buy a house?
There’s no wrong or right age to buy a house—just a wrong or right time. Make sure to carefully consider your financial situation, your employment, the local housing market and your future goals and plans. Consult a real estate agent or loan officer for professional advice if you’re unsure.
How long should you rent before buying a house?
There’s no set number here, but remember, when you rent, those monthly payments go toward your landlord’s mortgage—not yours. You’re not building wealth, and you’re never going to get that money back, no matter how long you stay on the property. When you own the home, your monthly payments equate to equity in the home, and that means more revenues when you sell the property later on. So, essentially, the longer you rent, the more money you throw away and the less wealth you can tap when you’re older.
Can I buy a house with no credit?
Buying a house with no credit to your name is difficult, but it’s not impossible. In fact, thanks to a new credit scoring system called the UltraFICO, it might not be bad at all. The UltraFICO allows lenders to take into account data other than your credit score—things like banking and savings activity and on-time bill payments. Ask your lender if they accept the UltraFICO score when applying for your loan.
Should I buy a house or condo?
This depends on your personal goals and your financial scenario. Condos are typically smaller than single-family houses, though they come at a lower price point in most markets. They also usually mean less in maintenance (the condo association covers much of that)—a big plus if you’re not the handy or DIY type. Talk to an agent in your area about whether a condo or house is right for your situation.