How to buy a home before you're 30
How to buy a home before you're 30
First-time homebuyers are probably a little wary of the housing market. There are a lot of unknowns when it comes to real estate. Couple that with the struggles that many millennials face, and you have someone who is unsure when, or if, they'll be able to afford a home. For many millennials, buying a home before they're 30 seems like a pipe dream, but it doesn't have to be. Read on to find out how you can to turn your dream of owning a home into a reality.
Check your credit score
Before you start looking for a home, check your credit score. How much of a mortgage you’re approved for largely depends on how good your credit is, so this step is extremely important. Keep in mind that if you're planning to buy a house with a spouse or someone else, both of your credit scores will be taken into consideration. If you find that one or both of you need to raise your score, start working on it immediately.
It usually takes at least six months to make noticeable improvements to a credit score. Get a head start by paying off any bills that have gone into collections, paying down your credit card balances and holding off on applying for any new credit until after you've closed on a home.
Research different locations
It's no secret that home prices vary depending on location, so be sure to check out different neighborhoods for the best deal. You may be someone who has always wanted to live in one particular part of a city and will do anything to make it happen. It's great that you have your eye on a location, but don't rule out something that you may love just as much simply because you never gave it a chance. By doing your research and shopping around, you'll be arming yourself with the information necessary to make an informed decision.
Buying a house isn't something that you should rush into. Take your time putting together a list of neighborhoods you like, then figure out how much a home similar to what you want would cost in those areas. Once you have an estimate, you'll be able to better calculate how much you'll need to save for the down payment.
Calculate your down payment and closing costs
It's a common misconception that you'll only need to have enough money to cover your down payment when buying a house. In reality, closing costs consist of much more. We've broken down the list of expenses below.
Most buyers are aware that they'll need to put a down payment on their new home, but the amount can vary. The down payment is a percentage of the overall purchase price of the house. If you want to avoid paying private mortgage insurance, which insures the lender in the event that you can’t make your payments, you'll need to make a down payment of at least 20%. For example, if you're purchasing a house for $300,000, you'll put $60,000 down.
Because 20% is pretty steep for many first-time buyers, lenders have low down payment options available, with some as little as 3.5%.
Closing costs, which consist of fees and taxes, vary from state to state and even from lender to lender, so they're a little harder to pin down. It is usually safe to set aside 2 - 3% of your loan amount. On a $300,000 mortgage, that will run you $6,000 - $9,000.
There are ways to reduce or eliminate your closing costs. In some areas, it's common for the seller to pay some, if not all, of the closing costs. It may also be possible to negotiate premium pricing with your lender, which means the lender will cover the closing costs in exchange for a higher interest rate on your mortgage.
This is where things get a little confusing. Pre-paid expenses are collected by the lender and put into an escrow account to pay real estate taxes and homeowners insurance when they're due. These expenses will be a part of your mortgage payment in the future, but you'll need to provide the first payments. The escrow will then be replenished each time you make a mortgage payment.
The amount put aside for pre-paid expenses will vary depending on your location and the frequency of your property tax collection.
Save whenever possible
Now that you know how much cash you'll need upfront, start saving. For a young person with an entry-level job, this may seem difficult. If so, start small and work your way up. Make a budget and see where you can cut costs. For example, if you tend to eat out most weekdays, try cooking at home three days out of the week. Remember, saving for a house shouldn't make you miserable, so don't cut out all the things that bring you joy.
Automatic savings programs are one of the easiest ways to ensure your bank account grows. Schedule a set sum of money to be transferred to a high-interest savings account after each paycheck. Pretend that account doesn't exist, and don't touch it unless absolutely necessary. When creating your monthly budget, just subtract the amount you are transferring right from the start, and act like you never had it. Any leftover money at the end of the month can also be transferred to this account. You'll be surprised to see how quickly the money adds up.
Avoid the temptation to invest money in volatile stocks in an attempt to get rich quick. That's not to say that you shouldn't invest in the stock market at all, but you should be doing so responsibly, which means not gambling with the money you'll need for your house. A good rule of thumb for the stock market is to not invest anything that you'll need to use within the next five years. You're better off putting it in a savings account that won't tie it up or diminish it when the time comes to use it.
Find the right real estate agent
While it's possible to purchase a house without a real estate agent, they can save you time and money in the long run. You may be tempted to do everything yourself by following online guides, and it's fine to take that route if you're confident in your abilities, but if you're short on time or unsure about the homebuying process, it’s a good idea to hire an agent.
An important thing to consider when hiring one is that they truly listen to what you want. Find an agent who will listen to your preferences and treat you with respect. A good agent will help you find the right house to meet your unique needs.
Millennials tend to disagree about whether buying a home is necessary for their generation, and it may not be the right choice for everyone, but buying a house in your twenties is an achievable dream. With a little bit of planning and the dedication to stick to your plan, you'll be in your new home before long. Remember that it's not a race to get to the homeowner milestone, but it is a great investment in your future.