It’s no secret that home prices have gone up significantly since baby boomers held sway. This continuing trend, not to mention the effect of the pandemic on soaring house prices, has influenced the decisions of younger millennials (aged 25 to 32) and Gen Z to hold off on buying a house for the time being.
How is it even possible to buy a home in your 20s? Is it likely or unlikely?
It’s more likely than you think. However, a few prerequisites have to be present before you can confidently decide to buy a home sooner rather than later.
Before anything else, consider the following.
Work towards achieving a stable financial base
Anyone who’s serious about buying a home in their 20s should first create a stable financial base. Securing a decent-paying job is the first step.
Aside from making sure your income remains stable, you’ll also need to develop good spending habits. Making hard (yet correct) decisions about when you should and shouldn’t part with your hard-earned money bring you closer to your dream home.
Financial literacy also comes into play. You’ll need to know where to put your money when you’re not spending it. This will involve thinking long-term about where you can save, invest, and grow your money.
Be strategic when paying off student debt
If you’re in your 20s, you may just be starting to pay off your student debt. The good news is that your debt doesn’t preclude you from buying a home.
Instead, banks will scrutinize your debt-to-income (DTI) ratio. Mathematically speaking, it’s the debt you owe divided by your income, or the percentage of your income that goes into paying off your debt. If your DTI is below 35%, you’re in good shape, according to lenders.
If you want to lower your DTI, you can opt for refinancing. This means extending the life your student loan so you can decrease your monthly payments. Remember that you may end up paying a higher interest over time, but if your goal is to buy a house as soon as you can, refinancing your student loan may be worth your while.
Additionally, use credit wisely to keep your DTI below 35%.
Think of the 20% down payment
When you want to buy a house, you’ll need to save at least 20% of the home’s asking price to serve as your down payment. Otherwise, lenders will deem you high risk and require you to take out a private mortgage insurance, which is designed to protect the lender in case you default on your mortgage payments.
If you’re buying a home with a price tag of $300,000, you should have at least $60,000 in the bank – a substantial amount if you’re in your 20s. If you can’t make the full deposit, the next best thing is for you, a first-time homebuyer, to talk to as many lenders as possible to find the best deals. Get a clearer idea of the mortgage amount and interest rate you can qualify for.
Start with a starter home
Before you gun for every bell and whistle, begin with a starter home. It checks off the basics until such time that you can move to a more feature-laden, amenity-rich home.
Some first-time homebuyers like to think of their first home as their forever home. But you don’t have to think that far into the future. With a first home, it makes more sense to aim for something you can realistically afford without unduly compromising your quality of life.
David DePaola & Company can help you buy your first home
Want to learn more about how to buy a house in your 20s? Contact seasoned agents from David DePaola & Company Real Estate for a first home you can afford in Central New Jersey. Call us at 609.731.0581 or send an email to david(at)depaola(dotted)com.