There’s no perfect age to buy your first home. Some will tell you to wait until you’re married, while others say the sooner you can stop renting the better. The truth is, the best time to become a homeowner is whenever you’re ready, even if you are just starting out.
If you’re in your 20s and contemplating buying your first home, it can be done. Even with the expense of student loans and minimal savings, there are ways for you to become a first-time homeowner. In this article, we list six tips that’ll help you through the process:
1) Check Your Credit Score
Before you consider buying a home, take a close look at your credit score. This way, you can determine what kind of loan and interest rate you can get. Knowing this information before you start the home search can help you plan accordingly.
If you have a low credit score, you’ll probably need a larger down payment to obtain a loan. But if paying more money upfront isn’t an option, consider improving your credit score instead of rushing to buy a home.
Since you’re in your twenties, you probably don’t have a high credit score or you might not have credit at all. If that’s the case, it’s time to start building your credit.
One way to do this is by getting a credit card, making payments, and building your credit activity. By paying your bills on time and keeping your credit utilization ratio low, you’ll grow your credit score. Keep in mind, if you don’t pay your bills on time, you’ll acquire debt and hurt your score.
If this is your first introduction to a credit card, you might want to consider a credit builder card. Before getting one, you’ll have to put down a cash deposit that’s equivalent to the card’s credit limit. With these cards, you must still make regular monthly payments to help build your credit. But, having the secured deposit helps provide a safety net against going overboard.
2) Know What You Want
Buying a house is a commitment and not something you should go into without serious contemplation. Most mortgage loans last 15-30 years, and while you can always sell a home, that’s a process in itself. Before signing any documents, make sure you’re ready. Ask yourself a few questions: Where do I want to be in five years? What neighborhood do I want to live in? What type of house do I want? Do I have a stable income?
As a 20-something year old, you probably don’t have all the answers when it comes to your future. And that’s OK. You don’t need to know everything, but you should be somewhat stable in your professional and personal life. The last thing you want is to go through the home buying process only to land a job and have to move.
3) Save For a Down Payment
Contrary to popular belief, your down payment doesn’t have to be 20%. In fact, how much you put down is based on the type of loan you qualify for. Conventional loans, for example, let you purchase a home for as little as 3% down.
FHA loans require as little as a 3.5% down payment and you can get a USDA loan putting 0% down. Keep in mind, each loan requires a certain type of credit score. For example, if your credit score is lower than 580, you probably won’t be approved for an FHA loan.
It’s important to note that just because you don’t have to put money down, doesn’t mean you shouldn’t. Remember, your down payment is what determines your mortgage. The more you put down, the lower your monthly payment will be.
4) Don’t Forget About Closing Costs
According to research, closing costs can range anywhere from 3-6% of the home’s price. This means if you buy a home for $300,000, you could end up paying $18,000 in closing costs.
Believe it or not, most first-time homebuyers don’t take closing costs into consideration when budgeting for their dream home. Don’t make that mistake. Closing fees can vary. Once you know what they include, you can figure out how much you’ll owe before signing on that dotted line.
Closing costs are made up of appraisal fees, title insurance, homeowner’s insurance, property tax, private mortgage insurance, and other fees. If you’re not sure how much you’ll end up owing, ask your real estate agent.
5) Get Pre-Approved
Getting pre-approval for a mortgage can give you a leg up on your competition. This is something you’ll desperately need when shopping for a home in today’s seller’s market. A mortgage pre-approval involves having a lender assess your financial situation in advance of purchasing a home. If they feel you are a low-risk candidate, the pre-approval will let you know how much you can spend. Not only can this information help you find the right home, but it helps sellers. It shows them you’re financially stable and that the deal will most likely not fall through.
6) Stay on Budget
Regardless of your age, buying a home should help your future, not hinder it. But this is especially true if you’re in your 20s. You don’t want to buy a house you can’t afford and drown yourself in debt before you’re 30. To make sure that doesn’t happen, stay within your budget.
Figure out what kind of loan you qualify for, what kind of down payment you need, and the mortgage you can afford. Then you can determine your price range so you can stay true to that budget.
Buying your first home is one of the most important decisions you’ll make in your lifetime. It’s also one of the most expensive. Regardless of your age, it’s important to take your time and make sure you’re financially stable. This way, you can afford the mortgage, insurance, taxes, and other fees that’ll inevitably come with owning your first home.
