How to Buy a Home In Your 20s

Buying a Home in Your 20s Takes Planning

Young adult couple buying home

Buying a home is a significant financial step, and the next generation of home buyers is already stepping up to the plate. Gen Z, which spans young adults born after 1997, are poised to flood the housing market within the next five to 10 years.

According to Realtor.com, four out of five members of Generation Z are certain they want to become homeowners. And they're twice as likely than other generations to be saving or plan to save to buy a home by age 25.

Buying a home before age 30 is an achievable goal, but it requires some additional planning. If you're wondering how to buy a home in your 20s, here are the most important things to keep in mind.

Decide Where–and What–You Want to Buy

In real estate, location is everything and that's especially true for buying a home in your 20s. One thing you have to consider is how long you plan to stay in the area where the home is located.

Millennials set the trend for "job hopping"; 75% think it can be a good thing, career-wise.

If there's a possibility that you might change jobs in your 20s, consider how easily you'd be able to resell the home relatively quickly if necessary.

If you don't see a job change in your immediate future, think about what you want from a 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?

Buying a home in your 20s also means deciding what kind of property to buy. Buying a condo or townhome, for instance, has its advantages. It may be less expensive than buying a single-family home, and things like outdoor maintenance and lawn care are usually handled by the condo association.

Or you might want to find a fixer-upper for a bargain and spend some time and resources renovating it. On the other hand, you might prefer a home that's move-in ready and doesn't need any work at all.

Looking at all the options can help you decide which path is right.

Assess Your Financials

The next step for buying a home in your 20s is prepping to qualify for a mortgage. Lenders look at several different things when you apply for a home loan, including your:

Credit is a big one and it can help to influence whether you're approved for a mortgage and the interest rate you'll pay. This is where the 5 C's come into play:

  1. Character
  2. Capacity
  3. Capital
  4. Collateral
  5. Conditions

The first four relate directly to your finances and your ability to repay the loan. Conditions are things beyond the scope of your personal financial situation that could affect buying a home, such as the current interest rate environment.

Things that can work against you in your 20s include:

  • Not being established in your career yet or earning an entry-level income
  • Having a low credit score or no credit score at all
  • High student loan balances
  • Lack of savings

Fortunately, there are some things you can do to make home ownership a reality as a 20-something.

Getting Ready to Buy a Home In Your 20s

The first and most important thing to do is to check your credit reports and scores. This can give you an idea of what a lender is likely to see when they pull your credit. It's also helpful in determining what type of mortgage loans you might qualify for and at what interest rates.

If you haven't really established a credit score yet, there are a few ways you can do it. The easiest is to apply for a credit card, but if you can't qualify for one on your own, you could ask a parent to add you to one of their cards as an authorized user.

If you're able to get a card in your name, the most important rules to follow are paying the bill on time each month and keeping a low balance.

Your payment history and the amount of your available credit have the biggest impact on your credit scores.

Next, look at your student loans if you have this type of debt. Specifically, zero in on your debt-to-income ratio or the amount of your income you're spending on debt repayment each month. Ideally, this should be below 43% to qualify for a mortgage.

If your student loans (or other debt payments) are eating up a lot of your income each month, consider what you can do to lower the payments. With federal loans, for instance, you might be able to get on an income-driven repayment plan. Private student loans could be refinanced at a lower interest rate, which could lower your payments.

Don't Forget the Down Payment

Finally, focus on saving. There are two big costs to save for: your down payment and closing costs.

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 only need 3.5% of the purchase price for a down payment. These loans are designed for first-time buyers, so they're worth looking into as a mortgage option.

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 using an FHA loan, you might need approximately $4,000 to $10,000 for closing, plus $7,000 for the down payment.

Two things you might want to consider for how to buy a home in your 20s are down payment assistance programs and down payment gifts. Both can help you get the money you need to cover the down payment and closing costs so buying a home is a smoother process.