5 Ways To Afford a Home in Your 20s
In your 20s, the years of college loans and entry-level jobs, you may believe it isn't possible to afford a house. However, buying a home in your 20s is within your reach. It requires some planning and discipline, but you can do it. Here are five tips.
1. Save for a Down Payment
Many experts recommend saving enough to make a down payment of 20% of the home's purchase price. That can be a lot of money, but it will save you from having to purchase private mortgage insurance, which can raise your monthly premium.
You aren't required to put down 20% of the purchase price as a down payment. If you need help, you can consider applying for down payment assistance. Your income and other factors can qualify you for one of the thousands of assistance programs nationwide to help first-time buyers through tax credits, grants and low-interest loans.
2. Work on Student Debt
If you have college loans, you may need to reduce your debt-to-income ratio. This amount, determined by dividing how much you owe by your income, needs to be less than 36%. You can consider refinancing your student loans to bring down your monthly payment. You may pay more in interest by doing so, but it may allow you to purchase a home now.
Your state may also offer housing assistance to college graduates with student debt. Ask a mortgage lender for more details.
3. Know Your Credit Score
People in their 20s have not had much time to build up a credit history. This fact can lead to a middle-of-the-road credit score, which can hamper your ability to get a loan. It can also affect the interest rate you pay — the lower your credit score, the higher the rate lenders offer you.
If you start out paying a high rate, you can look into lower mortgage refinance rates later on as your credit score improves.
To know your score, get a free credit report. Check for errors first. If you need to raise your score, make sure you pay bills on time and catch up on any missing or late payments. Keep your credit utilization ratio, the ratio of your balances to your credit limits, low. If you have old, inactive cards, use them so that the accounts don't close. Their longer credit history can work to your advantage.
4. Purchase a Starter Home
Buying a home in your 20s doesn't mean you must purchase the house in which you spend the rest of your life. It can be your first home, not your last — hence the name "starter home." Many people invest in a smaller, less expensive home for their first purchase. Your house will probably increase in value over the years, and later when your income increases, you can purchase a larger property.
5. Save Room in Your Budget
Houses come with maintenance expenses. If you currently rent or live with your parents, you might not be paying for upkeep or repairs on your dwelling. However, once you own a home, you need to budget for planned and unplanned costs such as roof repairs, lawn maintenance equipment, appliance breakdowns, and more. Buying a house at the top of your budget can keep you from having enough extra money for the inevitable care your property will need.
You may find a starter home that is an excellent investment but isn't move-in ready. You may need to make improvements first, such as:
- Repairing or painting the drywall
- Replacing old flooring or carpeting
- Upgrading the electrical system
- Purchasing a new furnace, air conditioner or water heater
A fixer-upper means that your budget needs to allow for expenses that get your home ready to move into.
Buying a home in your 20s can be a great investment. It's one of the most financially valuable items you own, and a wise purchase will increase in value. You can learn good spending habits and build your credit history by making timely payments. You can also find satisfaction in owning your living space and making it truly your own.
