How to Buy a House in Your 20s
- Save for a down payment
- Shore up student loan debt
- Check your credit score
- Purchase a starter home
- Plan for unexpected home expenses
1. Save for a down payment
Janice: Most home buyers make a down payment accounting for 20% of the price of the home. You know, on a typical $25,000 house that could be $50,000. So, they talk about how to do that with increasing your savings and of course, they did mention here about asking Mom and Dad, which I don’t know about you, that wouldn’t go very well. But they talk about just trying to save up for that. But in my thinking, which might be different from yours, in your twenties saving $50,000 seems like a really big task. Maybe you have different opinions about the percentages but that seems … that seems like that would scare me right off the bat of, “Oh boy, $50,000. Okay, no house until I’m 30.”
Anthony: Well, I think the point of pointing out the 20% sort of rule of thumb is to maybe … it doesn’t have to be $50,000, right? Those are just … those are the absolute numbers. It would be to lower your horizons a little bit. Instead of going for the full on house, maybe get a smaller apartment or a starter home, something along those lines, which I think we’ll get into later. But you don’t want to over leverage yourself, which I think might be the point here. You won’t want to try to get in with zero money down or 3% down and have this onerous mortgage.
Janice: Right, realistically, why look at houses if you don’t have … if you can’t do it. If you can’t save just even a little bit up for even smaller percentage. So they’re saying to save, which is a good thing to start doing anyway, house or not.
2. Shore up student loan debt
Janice: So, personally, and I’m sure you were probably in the same boat, student loan debt, I mean, if you want to college, you have it. They said here that the average is $28,000 per borrower. That seems really low so I’d be interested to see if that’s correct. That seems pretty low. But mortgage lenders, she was saying, require a borrower’s debt to income ratio. So, it might not automatically prevent you from being able to buy a house by having student loan debt, but it’s something that you wanna keep in mind. I said she, I’m sorry. I meant he because this is by Daniel Bortz.
Janice: He mentioned that one way to make room is to refinance and extend the life of your college loan. I believe we talked about this before though, is you wanna make sure if you’re gonna do any refinancing or anything with your money at all, you need to make and be sure of the timing. You don’t wanna do that right before you’re gonna go in and work on a loan application for a home. What do you think about that?
Anthony: So, this seems to tie in with a more general advice of just making sure your debt to income ratio is okay, and I guess they’re pointing out student loans because that would be more relevant or applicable to somebody in their twenties, probably one of their bigger debt items. But yeah, you wanna have a good ratio. And there are rules of thumb in terms of what amount of debt payments you can have on a recurring monthly basis, relative to your recurring monthly income. There are these sort of rules of thumb and if you’re over the rule, or over the threshold, it’s gonna be much tougher to get a mortgage. And if you can do anything, like as you mentioned, refinancing your debt or doing some big pay downs, that’ll really help you in terms of getting a mortgage.
3. Check your credit score
Janice: And that leads right into the next one of checking your credit score. So, home buyers in their twenties, they tend to have shorter credit histories. But you know, in that short amount of time anything could happen. So it’s important, they say, to check your credit report annually because you do get that free annual credit report, that information’s inside of the article. But you wanna check for errors, make sure there aren’t any. If you really did make all your payments on time, you wanna make sure that one isn’t showing that you have six months of missed payments. That’s pretty bad. But you definitely wanna check and make sure that your credit score is actually the score it’s supposed to be.
Anthony: Right, I don’t know about you but during my college years, and law school years actually, I don’t know, my credit card debt was a little … I guess you would say, out of control. I mean, it’s fine now but-
Janice: I completely agree with you.
Anthony: I mean, those credit card companies know that you’re in your early twenties and you don’t know what you’re doing, and they offer you like all these, access to money that you never would have had before. It’s kind of scary.
Janice: It is, and I can personally say that that’s the same thing, you got to college and you get … I remember they had a college fair, and one of the major companies for the credit card was there, fill out an application, get a free t-shirt or something similar.
Anthony: Yeah, they give you a lot of free cool stuff.
Janice: So you did.
Janice: Right, right, so you did. And then you’d get it in the mail and it’s like, wow, you’ve got a $10,000 limit. Okay. You know? But they don’t really necessarily prepare you for the fact that if you’re late one time or if you rack up too much, so it is pretty scary right around that, I would say that college time, if you don’t know how to handle a credit card or credit, it could lead to problems almost instantly. Like you said, buying a home in your twenties.
Anthony: So, like you said, as long as you didn’t miss any payments and the repayment obligation doesn’t completely throw your debt to income ratio out of whack, you should be okay. So just make sure that your credit score is good and accurately reflects that you’re an honest repayment … you know, a responsible repayer.
Janice: Yep, just make sure they’re on time. And I think if we had more education around that time to make sure you pay it on time, make sure you ended up paying it on time, I think that the credit scores would ultimately be a little bit better.
4. Purchase a starter home
Janice: Your first home in your twenties might not necessarily be your forever home. You wanna look at it as this is your first home, it’s not your last. So you don’t wanna go into it trying to get your $500,000 home … I’m talking about the suburbs, not the city. And really bury yourself in this house when, you know, just go for the starter home. Get in there, build your credit, learn how home buying can go, and then down the road when you’re ready, then go for that big forever home.
Anthony: Yeah, I talk about this a little bit in my book. You wanna be … so there’s a minimum amount of time you wanna be in a property. I mean, at a bare minimum, you should wanna keep it for five years, ideally closer to 10. And the reason for that is because there’s a lot of transactional costs each time you buy and sell. So, anything shorter than that and your transactional costs will most likely eat up any profit you would have made on the sale of your home over that period. But aside from that, I mean, you probably just can’t afford your dream home yet.
Janice: Yeah, not yet. Soon, it’ll happen but you should just be pretty excited that you own a home in your twenties, even if it’s a smaller one and it’s not the white picket fence that you’ll have eventually. But it’s a really great way to start.
Anthony: Yeah, and in Manhattan it’ll be more like in your twenties, you’re probably gonna want the studio or one bedroom-
Anthony: In a hipper neighborhood, like Chelsea or the Meatpacking District or whatever, but you know, it’s tougher to raise kids there, so in five to 10 years, you’ll probably upgrade from that unit to something in a more residential area or leave for the suburbs. I mean that’s kind of the typical path.
Janice: Exactly. Just go with it … you’re in your twenties, go with what you can do and don’t set yourself out. Which brings to the final point that he makes is plan for unexpected home expenses. So you do not wanna buy at the top of the budget because you’re gonna have to pay for emergency home repairs. It says here roof damage, gas leak, there’s a lot of things that could happen and you don’t wanna go in at the top of your budget. You have nothing now in savings, you lose, and you damage part of your roof, what are you gonna do? That is a pretty big problem that you have to account for before you go into it.
5. Plan for unexpected home expenses
Janice: Home buyers want to get a home warranty. Now, when we buy houses around here in the suburbs, we usually … they kinda build that into it. The home warranty comes with the first year. So, personally, I know we did that on our home but we’ve kept it ever since and it’s been a lifesaver, even though you do have to prepare for everything, it’s really nice to have something that can help you.
Anthony: That’s interesting. I don’t think there’s … I’m not sure but I don’t think there’s anything similar to that in the city. You don’t have roof issues or, when you buy an apartment or coop, you don’t have those types of issues. But you do have other things come up. Don’t get lackadaisical there. The HVAC units is often a big problem, meaning the air conditioning/heating units that go to the wall. Windows, that’s your responsibility even though it’s part of the exterior of the building so if the frame, I don’t know what happens, it kinda comes out of whack and you have to reseal it, and that’s actually kind of expensive, that’s on you. And because you are living in a building, you might have things like a leak from an upstairs neighbor that kinda causes problems for you downstairs. Depending on how things shake out, that might be inexpensive but at the very least, you have to pay for out of pocket upfront before you can get reimbursed later from either insurance or from the neighbor or from the condo itself. So, expenses do exist for apartments. Just because you don’t have a backyard or a roof doesn’t mean that you are good to go. This definitely applies to Manhattan as well.
Janice: How interesting. Yeah, the home warranty is something that originally when we got, you think, “Ah, we won’t need that.” Well, upon moving in, we had to fix quite a few, even appliances that broke or malfunctioned and would lead to bigger problems. So, I’m glad that we had [inaudible 00:10:54], so it’s just something to look into and also plan for the unexpected financially.