If you’ve recently graduated from college and are just getting established in your career, you may think you’re destined for many years of apartment dwelling. But think again! It’s possible to buy a home in your 20s. Here’s our guide for young home buyers pursuing that worthy financial goal.
Benefits of home ownership
Apartment dwelling may seem to offer more financial freedom than owning a home, since your monthly rent payments might be lower than what you’d pay on a mortgage. But that’s a short-term way of looking at life. That monthly rent buys you nothing more than temporary housing. Because the principal portion of a monthly mortgage payment builds equity in your house, investing in a home brings personal wealth and stability that can be far more satisfying than the temporary enjoyment of apartment living.
And home ownership brings other benefits. Apartment life offers a lively social scene, but occupancy turns over frequently. Owning a home in a neighborhood brings a more stable, long-lasting set of friends. Additionally, the annual amount young home buyers will spend on property taxes and mortgage interest can be deducted on federal income tax returns.
Why wait? Get on the path to homeownership as soon as possible.
Steps toward home ownership
Here’s what you need to do to buy your first home.
- Save money for a down payment and expenses related to home ownership. Create a budget, live within your means, and sacrifice short-term pleasures for long-term financial goals. Set a monthly savings target and turn socking away money into a habit.
- Young home buyers should aim to put down 20 percent on a house. A lower down payment is possible; the Federal Housing Administration (FHA) has programs that allow down payments as low as 5 percent. But lenders view buyers who put down less than 20 percent to be at higher risk of loan default because less of their own money is at stake.
- As a result, you’ll be required to pay a monthly mortgage insurance premium to protect the lender, using dollars that could otherwise be building your equity in the home. To avoid this added expense, it’s best to wait until you have saved enough for 20 percent down.
Additionally, you’ll need to save for the additional costs that come with homeownership. There are fees you’ll pay at closing, and property taxes and insurance, homeowner association (HOA) dues and maintenance are regular expenses of home ownership.
Work on building a good credit score. Limit debt and pay what loans you have on time. Buy affordable cars. Pay faithfully on student loans. A clean credit history is vital for getting the best mortgage terms.
Begin to establish a stable employment history. Employment stability pays off when applying for a mortgage.
Shopping for a home
When you’re ready to begin looking at houses, take these three steps:
- Determine how much house you can afford. If you don’t already have a household budget, establish one, then figure how much you can swing for a monthly house payment, insurance, taxes and HOA dues. Online mortgage calculators can help you determine how much house you can buy. Be conservative, and when you begin home shopping, resist the urge to buy above your price range.
- Find a mortgage broker to shop for the best lender terms for you and apply for pre approval. Prequalification is a cursory first look at your finances and doesn’t carry as much clout as pre approval, a more in-depth examination of your finances that tells a real estate agent and potential sellers that you are a serious buyer who can pay up to a specified amount.
- Find a good real estate agent, preferably one who works with young home buyers like yourself. She will know the challenges first-time buyers face and can answer your many questions.