How to Buy a Home in Your 20s
Buying a House Young Takes Planning
Move over millennials, a new crop of homebuyers is on the horizon. Gen Z—young adults born after 1997—are poised to flood the housing market in the coming years.
According to data collected by financial services company Morningstar in April 2020, 83% of 18- to 25-year-olds hope to purchase a home within the next 10 years. Another survey by mortgage loan company Freddie Mac found that members of Gen Z also believe they’ll own their first home by age 30—three years sooner than the current average homebuying age of 33.
While buying a house young is not impossible, it does require some planning. If you're interested in becoming a 20-something homeowner, these tips can help.
Decide Where (and What) You Want to Buy
Real estate is all about location, location, location, but it's also important to think about how long you plan to live in any given area.
If there's a possibility that you might move due to a job change or marriage in your 20s, consider how easily and quickly you'd be able to resell the house, if necessary.
Even if you don't see a move in your immediate future, think about what you want from the location. For example, do you want to be close to shopping and restaurants? Would you like to live in an area that's walkable or allows you to bike to places? Do you prefer the suburbs to the city? If the home isn’t in your dream location, you might want to move in the future if another house hits the market.
Buying a home in your 20s also means deciding what kind of property to buy:
- Single-family home
- Duplex or condo
- Tiny home
Depending on the type, you may have to pay additional fees, such as a homeowners association fee. You’ll also need to think about how much work (and money) a home might require if it’s not move-in ready. A fixer-upper could be yours for a bargain price but you'll likely need to spend time and money renovating it. A move-in ready home, on the other hand, may need zero updates, but could come with a higher price tag.
A house can often be seen as a long-term investment. But if there are short-term things that could impact owning that home, like going back to school or eventually getting married, it might not make sense. Make a plan before buying so you can move when needed.
Assess Your Financials
Before you can move ahead with buying a house in your 20s, you'll need to give your finances a thorough review. There are a number of things that can influence whether you can afford to buy a home and how much home is reasonable for your budget. These items will also impact the mortgage approval process.
Credit history and credit scores are two of the most important things lenders consider when approving mortgage loans. Your credit history tells lenders how responsible you are when it comes to managing debt.
FICO credit scores are used by 90% of top lenders. Members of Gen Z had an average FICO score of 674 in the third quarter of 2020, according to Experian, which analyzed consumer credit report data over the course of one year.
While a 674 credit score could allow you to qualify for a mortgage in your 20s, it doesn't necessarily guarantee that you'll get the lowest interest rate. Low interest rates are the goal because the lower your interest rate, the less you’ll pay in interest over the life of the loan and the more home you can generally afford. But you’ll also need credit experience. If you don’t have enough credit history, you may need a co-signer.
Check your credit reports for free through AnnualCreditReport.com to ensure there are no errors that could impact mortgage approval. If you have a credit card, your issuer may offer a free FICO score, too.
Good credit alone isn't enough to determine whether you can afford buying a house at a young age. You also need to consider how much money you're earning, how likely your income is to stay the same or increase, and what your career plans may be for changing jobs.
According to data from the Bureau of Labor Statistics (BLS) in the first quarter of 2021, workers aged 20 to 24 earn a median weekly income of $628, while workers aged 25 to 34 earn a median weekly income of $901. Which way your income leans can make a big difference in how much home you're able to afford and what you’re approved for by a mortgage lender.
For example, say you take home $628 per week. That adds up to $32,656 per year. Even if you have no other monthly debt payments, the amount of home you can afford may not be as much as you think. For instance, if you’ve been following the 50/30/20 budget and saving 20% of your earnings, you’d only be saving $6,531.20 per year. It might take a while to have enough saved for both an emergency fund and a down payment.
Now, let’s assume you make $901 per week, which adds up to $46,852 per year. If you’re saving 20% of your income, that’s $9,370.40 per year, which would help you save up for down payment faster. (Read more about down payments below.)
Lenders typically require one to two years' worth of income records, including W-2s, pay stubs, or 1099s, if you're self-employed, before you can be approved for a mortgage.
Don’t Forget the Down Payment
When planning to buy a house in your 20s, you’ll have to know what you can afford to put down and how much you'll need for closing costs. As a general rule, the larger your down payment on a home, the lower your monthly mortgage payment. It may also allow you to buy a larger or more expensive house. You can use a mortgage calculator to test out different scenarios.
The amount you'll need for a down payment depends largely on the kind of mortgage you get. With an FHA loan, for example, you may qualify to put down just 3.5% or 10% of the purchase price. These loans are designed for first-time homebuyers. However, when your down payment is less than 20%, you’ll likely need to pay private mortgage insurance (PMI).
Closing costs typically run between 2% and 5% of the home's purchase price. So if you're planning to buy a $200,000 home, you might need approximately $4,000 to $10,000 for closing costs.
Down payment assistance programs can help provide funds to cover down payments and/or closing costs for eligible buyers.
You could save money for a down payment yourself, or ask parents or other family members to give or lend you the money you need to put down on a home. If you're considering a down payment gift, be sure to check the mortgage lender's requirements for documenting it properly.
Steps to Take Before Buying a House Young
There’s a lot that goes into the homebuying process. While deciding where to live, what type of house to buy, how long you’ll live there, how big of a down payment you’ll make, what you can afford, and what interest rate you may qualify for are all important, there’s still more to consider.
For starters, you’ll have to factor in your other debts. If you have student loans, credit cards, or a car payment, for example, those balances affect your debt-to-income (DTI) ratio. This is the percentage of your income that goes to debt repayment each month.
In most cases, mortgage lenders cap the acceptable DTI ratio for homebuyers at 43%, though 36% may be more favorable. If you're putting a sizable chunk of your income to debt each month, you may have difficulty qualifying for a mortgage in your 20s. You may need to pay down some of that debt to improve your chances of getting a mortgage with favorable terms.
It may also be wise to stay away from opening a new credit card or taking out a loan before applying for your mortgage. These applications require a hard credit check, which could temporarily lower your score, and taking on too much debt in a short period of time could also cause your DTI to increase.
Next, think about how much it may cost you to own a home on an ongoing basis. Some of the typical costs of homeownership 20-somethings should budget for include:
- Maintenance and upkeep
- Home improvements
Property taxes and homeowners insurance may also come into play. These costs can be escrowed or rolled into your mortgage payments, or paid directly, depending on what the mortgage lender requires. Either way, they can affect the cost of buying and owning a home.
Pros and Cons of Buying a Home in Your 20s
Customize the property
Needs may change
Low rates aren't guaranteed
Maintenance and upkeep
- Consistent payments: Unless you're taking out an adjustable rate mortgage (ARM), your payments will remain the same for the life of the fixed loan. This can offer predictability when budgeting, unlike renting, where a landlord may increase your rent once your lease expires.
- Customize the property: Owning a home means you can tailor it to your needs and tastes, whether that means changing the paint colors, installing new flooring, or completely renovating the kitchen or bathroom.
- Tax benefits: Mortgage interest paid on a home loan is tax-deductible, as are property tax payments, up to certain limits. Tax deductions can reduce your taxable income for the year, which may help you owe less in taxes or get a larger tax refund.
- Investment: Buying a home in your 20s may be a good investment. If you’re able to one day rent it out, it could help generate income. Or if you decide to move in a few years, and housing prices have gone up in your area, you could end up selling it for a profit.
- Needs may change: The home you buy in your 20s may not be the home that suits your lifestyle in your 30s. Getting married, having kids, or even getting a pet may prompt a move so you may want to wait to buy until you've tackled those milestones.
- Low rates aren't guaranteed: Interest rates fluctuate and the rates you qualify for aren't guaranteed to be the lowest if you have fair or poor credit. You may benefit from waiting to apply for a mortgage until you improve your credit score.
- Maintenance and upkeep: One of the upsides of renting is that a landlord or property manager is responsible for making repairs or maintaining the property. As a homeowner, the burden and the cost of those things shift entirely to you.
- Buying a house in your 20s could make sense if you don't see yourself moving in the near future.
- It's important to consider what your needs are and how those balance against what you can afford.
- A good credit score and consistent income are two of the biggest factors in mortgage approval decisions. Unfortunately, if you’re just starting out, you may not have enough credit history or a high enough salary to be approved for the best loan terms.
- Down payment gifts or down payment assistance programs may be an option to help you buy a home in your 20s.