Buying a home before age 30
While there is a persistent perception that Millennials have no interest in being homeowners, younger homeowners are actually a strong force in today's housing market. According to a National Association of Realtors report on generational trends issued in March 2016, 35 percent of buyers were under the age of 35 – the largest of any age group in the analysis.
Nevertheless, most people don't purchase a home until they reach the upper end of the 18-34 age range. The same report found that among those under the age of 35, the median homebuyer was 30 years old.
Young people face a variety of challenges when trying to purchase a home. These might include low salaries at entry-level jobs, modest savings accounts, undeveloped credit records, and persistent student loans. But for those who are determined to get the keys to their own residence, buying a home in their 20s is not out of the question.
When should you buy?
Buying a home can offer a number of advantages over renting one. The legal site Nolo says you won't have the restrictions put in place by a lease, so you can own a pet, customize the home to your tastes, and more. Homeowners can also qualify for more tax benefits than renters, such as deducting the interest on your mortgage.
One of the biggest benefits of owning a home is the ability to build your personal wealth. When you pay rent, you're sending money off to a landlord each month and will never see it again. When you own a home, you'll gradually pay off the mortgage and build up your personal stake in the property. This equity, coupled with increases in home values in healthy markets, can result in a substantial profit when you decide to sell the property.
If you stay in the home for the duration of the mortgage, you'll get the added benefit of paying off the loan. While renting requires you to make a monthly payment to a landlord as long as you are a tenant, resolving a mortgage can substantially lower your living expenses.
However, buying isn't for everyone. Young people are often more mobile, especially if they haven't settled into a career or started a family. Steven Richmond, writing for the financial site Investopedia, says you might not want to buy if you expect to move within a few years. Renting offers more flexibility to relocate, and you'll need to pay closing costs whenever you purchase a home.
You'll also have to decide if you can afford a home at this point in your life. Nolo points out how the monthly mortgage payment is only part of the cost of homeownership; you'll also be responsible for insurance costs, utilities, and property taxes. Unlike a rental property, where the landlord is tasked with repairs and upkeep, owning a home will make you responsible for the cost and time commitment of everything from mowing the lawn to upgrading the windows.
Determine whether you can balance homeownership with your other financial commitments. You might prefer to work on paying down your student loans first, since this can lower your debt-to-income ratio and help you qualify for a larger home purchase. Margaret Heidenry, writing for the National Association of Realtors, says you may also want to start building up your retirement savings account early, since this will allow for greater appreciation than if you start saving later.
Easing the process
Prospective buyers of any age can benefit from getting pre-approved for a mortgage. Richmond says this process will give you an idea of how large a loan you can qualify for and what your monthly payments will look like.
This process will include a look at your credit report, so it is important to work toward healthy credit activities before buying a home. On-time payments for student loans are helpful for boosting your credit score; it will be robust as long as you are able to keep up with these payments, no matter how large the principal is. You can also create a credit history by getting a credit card and making small purchases which you pay off each month.
Decide what kind of home you are willing to purchase. Single-family homes offer privacy and plenty of choice, but are usually more expensive than condominiums. Sharron St. John, writing for the real estate site Inman News, says young buyers can also benefit from purchasing a small multifamily building and renting out other units to offset their mortgage payments.
The down payment is a big challenge for many buyers, and is often the most daunting obstacle for young buyers to face. You'll need to make a 20 percent down payment to avoid private mortgage insurance, and this can be an astonishing sum for those with modest savings accounts. For example, a 20 percent down payment on a $180,000 home would amount to $36,000.
Even if you've squirreled away enough money for a 20 percent down payment, be careful about how much you pay. Sophia Bera, writing for Forbes, recommends leaving enough money for a comfortable emergency account. You can always make a larger payment in the future to get rid of the pesky private mortgage insurance expense.
Several programs exist to help buyers with modest salaries or savings accounts into a home. Richmond says loans backed by the Federal Housing Administration are popular because they allow you to purchase a home with a small down payment. The Department of Veterans Affairs offers loans to assist people who served in the armed forces, while the Department of Agriculture has loans to assist with the purchase of rural homes.
You might be able to find someone to help you with the cost of your first real estate purchase. Nolo says family or friends may be willing to lend you the money for a down payment, or even help with the mortgage obligations by becoming co-borrowers. If there is extra space in the home, you can rent out a room or two to have more income to put toward the monthly payments.
Don't overextend yourself when purchasing a home. Bera suggests a purchase price of no more than four times your annual income. The monthly payments should allow you to comfortably pay for your other expenses and put money aside for future needs, such as home or auto repairs.