Are You a Twenty-Something Wanting to Buy a Home? Here’s What to Know

Twenty Something- 150x150Low interest rates and home prices have always attracted many young first time home buyers. Especially now, after the recent housing market crash, people who are looking to buy a home also have the option of buying foreclosed and distressed properties, which can still be bought for much cheaper than regular homes. But the housing market crash has also caused people to be more reticent when it comes to buying a home. First time home buyers are being especially careful before making such a large purchase, who may not be as stable financially or as sure as to how long they will be living in one location.

Home ownership when you are in your twenties, if you can afford it, can also be very beneficial in the long run. You will avoid wasting money on renting a place with no potential for equity and will also have much longer to pay off your mortgage before your retirement years. You will also build equity in your home when home prices are low, an advantage that you won’t get if you are renting. However, many young home buyers are afraid that they can’t qualify for a mortgage loan, or at least one that won’t have a very high cost. Being a twenty-something home buyer is the same as buying a home at any age. The most important factors will be your credit score, your income, and the size of your down payment. The actual problem that you might encounter is that you might be a bit young to have a perfect credit score, a large income, or enough money saved up to make a large down payment, but that can happen at any age. In this article, we will take a closer look at each of these three factors and how they can affect young home buyers.

Your Credit Score

A young person will probably be worried that he or she didn’t have enough time to build a good credit score, and the lenders will automatically reject their mortgage loan application. In reality, your credit score will probably be better than you think, and easy to boost. You are in your twenties, so you shouldn’t have any large debt or dark spots on your credit report. Also, if you don’t have credit, you can establish it fairly quickly, in a couple of years. Just having a credit card that you pay on time can help your credit score reach the “perfect” range very easily.

Because you are young and maybe haven’t found a stable job, you may have some unpaid bills that you think will affect your credit score. The most important thing is to pay them as soon as possible, but, unless they are referred to collection, they won’t affect your credit score in any way. You will probably have to pay a late fee if you are late on a credit card payment, but as long as you make the payment within 30 days, your credit score won’t suffer.

Your Income

Lenders have to make sure that your income is large enough to accommodate your monthly mortgage payment, which also includes the obligatory homeowners insurance and property taxes. Lenders usually require that your monthly mortgage payment is less than 30 percent of your monthly income. Also, the total money that you owe each month, including debt such as student loans, should not be higher than 43 percent, or even less for some lenders.

Lenders will also require that you have a stable job, meaning that you have held the same job in the same organization for at least two years. Self-employed home buyers will have to provide tax returns and other records for the past two years in order to qualify for a mortgage.

Your Down Payment

Your credit score will affect how much you will have to put down when buying a home. Typically, if you have a very good credit score, you will only have to make a 10 percent down payment. But you should also keep in mind that, if you put less than 20 percent down, you will have to pay a Private Mortgage Insurance (PMI), which will make your mortgage loan more expensive overall.

An alternative can be a Federal Housing Administration (FHA) mortgage loan, which require a much lower down payment, sometimes as little as 3.5 percent. FHA loans require a larger insurance payment, but also have lower interest rates, making them a good alternative to conventional loans. Active or retired military personnel can apply for a U.S. Department of Veterans Affairs (VA) mortgage loan, which requires no down payment. People who wish to live in a rural area can apply for a mortgage loan backed by the U.S. Department of Agriculture (USDA), which has many benefits over a conventional loan, but a longer waiting period.

Buying a home in your twenties is not harder than buying a home at any age, but it may be harder to qualify for a mortgage. Because you are just starting out in life, usually fresh out of college and with some debt, you might find it more difficult to come up with the large down payment or have a good enough income. But if you can do it, buying a home when you are twenty-something will be more beneficial than waiting until you are in your thirties or forties.

Thinking of Buying a Home? Ask Yourself These Questions First!

Thinking of Buying a Home-Ask Yourself These Questions First- 150x150Low home prices and interest rates might seem very attractive to you, and you might want to buy a home before these prices and rates start going up. However, your financial situation might make it difficult for you to buy a home at the advertised price, while paying a low interest rate. Interest rates that are advertised by lenders are usually reserved for home buyers with stellar credit score, so you might end up paying significantly more on your loan than you were expecting to.

Many first-time home buyers are so blinded by the low interest offers advertised by lenders, that they forget all about the large down payment needed in order to avoid paying for Private Mortgage Insurance, and about the fact that their credit score will have a big impact on the interest rate that they will actually be paying. Here are a few questions that you should ask yourself before thinking of buying a home.

Is This a Good Time for You to Buy a Home?

Buying a home is very expensive initially. If you wish to receive better rates and not be required to pay for Private Mortgage Insurance, your down payment will have to be at least 20 percent of the total loan amount. That can mean several tens of thousands of dollars for an average priced home. Besides the down payment, you will have to pay for inspections, and various closing fees, which can come up to a few thousands of dollars, as well. There are several alternatives to making a large down payment, but you will probably end up having to spend more elsewhere, and maybe end up spending more than you would have on the down payment.

You might think that the large initial cost is the only expensive part of buying a home, but you also need to keep in mind that you will have to pay tax on your property and homeowners insurance. The upkeep of your home can also be very expensive, but this depends on many factors. Your home might need an expensive roof, plumbing or electrical repair, unexpected expenses that might take you by surprise.

Do You Have Good Credit?

You can probably qualify for a mortgage loan with a less than good credit score, but you will have to pay a much higher interest rate. A perfect credit score will most likely guarantee you the best current mortgage rates, but anything less and you will start to see those rates climbing. The difference won’t be that high, unless your credit score is lower than 700, but, over time, you will feel the difference in your wallet.

If your credit score is lower than perfect, you might want to take a little time to try and improve your credit score before getting a mortgage loan. You can start by paying off other debt, and making sure that all your payments are on time.

Is Home Ownership for You?

Some people buy a home and end up feeling that they have made a mistake, that renting was better for them. Being a home owner comes with larger responsibilities, like taking care of the house, making repairs and maintaining it. Sure, you can hire someone to do it for you, but hiring someone for every little task will become very expensive, so you’ll be better off learning how to do most minor repairs and maintenance work yourself.

If you are looking for a home that needs less maintenance and has a smaller chance of needing major repairs, then you should look at apartments. You will still be responsible when something breaks, unlike when renting, but it will be fairly low maintenance compared to a house.

Are You Going to Live There for a Long Time?

Like we’ve mentioned earlier in this article, buying a home comes with some pretty high closing costs. If you plan on moving in the near future, you will recover the money that you put down and the monthly payments, but not the closing costs. However, to build equity in your home, you will need to live there for a longer period of time. The monthly payments that you make in the first years will go more towards the interest, so the equity will build up very slowly. Selling your home after a short period of time can result in you losing money.

Becoming a home owner is a dream come true for most people, but it comes with great responsibility, and a large number of expenses. Ask yourself the questions listed in this article before you start looking for a home, and find out if home ownership is for you, or if you would like to postpone it for a few more years.