I’m sure some of you saw the title (or picture) and immediately thought to yourself “no way… not happening for me.” Not so fast my friend… It probably won’t be a house like the one above, but buying instead of renting can be monumental in setting you up to eventually own a house like that. Buying your first home can indeed be a scary thought, let alone as someone in their 20’s. You may be thinking to yourself, my 20’s are supposed to be for going out with friends and finding my forever person and having kids and advancing my career! Well, you’re not wrong, but hear me out.
First of all, your 20’s consists of ten years, all of which can be attributed to the above tasks, so let’s not underestimate ourselves too much. Also, any of those things can be done in your teenage years OR your 30’s. In addition, if you are lucky enough to find your forever person first, that likely makes affording a house much easier. For the sake of this article we are going to pretend investing in a home is atop your list of goals for your 20’s, and we are to assume using mom and dad’s money is off the table. All you really need to do in order to invest in a home (along with the desire to own a house) is have your money right. By that, I mean meeting the following criteria:
- Have a decent long-term job
- Started paying off debt
- Have some savings built up
These three combined will make it much more likely for you to get pre-approved for a home loan – the first step in the home buying process.
Have a decent long-term job. What I mean by this is a job that isn’t part-time or temporary, and pays enough to cover your expenses and then some. This is factored into the home buying process through qualifying for a certain mortgage based on your debt-to-income ratio. Your debt-to-income ratio is essentially monthly debt divided by monthly income (from your decent long-term job). There is more that goes into it other than debt divided by income but you will see throughout this article that this is a main factor. Hypothetically, lets say your monthly income is $4,000.
Started paying off debt. This is included because you won’t know how much you can pay monthly for a mortgage until you factor in your debt(s). This goes back to the debt-to-income ratio, of which mortgage companies tend to look for 36% or less. Since your monthly income is $4,000, this allows for $1,440 in monthly debt (1440/4000=0.36). Common debts for 20 something-year-old’s are car payments and student loans. Say your car is $240 per month and student loans are $100 per month; this allows for $1,100 in a mortgage (1440-340=1100). And, you still have $2,560 (4000-1440) to pay for additional expenses like homeowners insurance, utilities, when the furnace goes out, etc. Very doable if I do say so myself.
Have some savings built up. By ‘some’ I mean enough for a down payment and closing costs. There are many different types of home loans available, some only requiring 3% down ($9,000 on a $300,000 house). Obviously the more you can put down the better because that means you will have more immediate equity in your home. Conventional home loans can include anywhere from 3%-20% down, and FHA (Federal Housing Administration) loans are usually 3.5% down. Then, closing costs can account for as low as another 2% ($6,000 on that same $300,000 house). All in all, that is only $15,000 for you to close on a decently priced house. It only gets easier if your spouse is involved, or if you shoot for a lower price point.
Other factors to consider are fees for an inspection and appraisal, insurance premiums, as well as earnest money or similar terms/conditions that are determined when writing the offer (this is where your realtor can work their magic). If you have any questions at all feel free to send me an email or direct message and I can show you a few tricks. I could also send an Estimated Closing Costs worksheet to break it down even more.
Hopefully after reading this you feel a little better about the home buying process and what it takes to get it done in your 20’s. Having a decent job, paying off debt, and saving money are measures of success for many different things in life but statistically owning a home in your 20’s isn’t common and can definitely set you up and set you apart. There is no need to be committed to your first home forever (on average people buy/sell every 5-7 years) but it is a much stronger option in comparison to renting until you’re 30 something. Tie that with the lowest of interest rates in our lifetime and you have a recipe for financial success! Not to mention, having a house to pregame at before a night out with friends, or a house to go back to after a date can be a huge game-changer in accomplishing those other goals.
Cheers to all my readers, and please come back for more next week.
Brady
Brady Arthur Homes and Drones 