When I tell people I bought my first home at 22 years old, they often ask me how I did it. Most people think my family or parents helped out, but the truth is, my husband and I were able to get qualified and put the down payment on the mortgage ourselves.
Since then, I have moved into three other homes, each time, moving into a better area. The size of the home has gone up and down as I realized I didn’t need or want a large home. The third home I purchased was bigger, but it was also more to care for. So the current home we are in is in a nicer area and it is a smaller home.
What to think about when buying a house at a young age
Decide if buying a home is in your financial plan- seriously, most people don’t even have a financial plan. If you do, awesome! If you don’t, let’s talk very briefly about another option. You could also rent and live more simply and invest in the stock market. I’m not trying to sway you one way or another, but I want you to realize there are MANY options. Just because everyone talks about owning a home doesn’t mean it is the right thing for YOU. You need to know what your goals, dreams and desires are first, and then see if home ownership fits in with those aspirations.
Buying a house at a young age means you will have more responsibility sooner.
When buying a house at a young age, realize that you will not only have a house payment. You will also have property taxes, water bills, gas bills, trash bills, possible HOA (Home owners’s association) fees, home insurance, etc. Also, the house is now yours which means you will need to care for it. With time, you will need to paint the house, replace a roof, fix broken appliances, replace the water heater and air conditioner. All of these “improvements” to your home can put a damper on spending money on fun nights out.
Tips for buying a house at a young age
- Think about having a renter or two to help you pay the mortgage- a friend of ours wanted to buy his own home, and he did it by renting a room to a co-worker. He was able to easily pay the mortgage with this financial help.
- Write a list of needs and wants in a house. Get the needs met first. Then try for the wants and if you can’t get them, settle for what you can get now.
- Pick the best deal you can afford in the best area you can afford. Essentially you want to choose a home in a safe neighborhood you like. This may mean you end up in a smaller home in a nicer area. But for the most part, safety wins out over size. We’ll talk more about what you can afford below.
- Go see homes in person- with the internet, it’s easy to think you will find your dream home online. I can tell you that for the last home we found, I must have passed it over at least 20 times online. It wasn’t until I went and visited a few of the homes I thought I liked, that I realized pictures can lie! The way real estate photographers take photographs can make rooms appear larger than they are. And they will usually leave out cracks, flaws, or anything negative about the home. Go look in person, and look at a few listings that are getting passed over by others. Sometimes a listing looks so plain that other people are passing it up online. This was the case with our current home, and it turned out to fit everything on our list, and we got it for a deal!
- Spend LOTS of time perusing the neighborhood, getting a feel for not only the home, but the environment it exists in. Walk the sidewalks slowly and make note of what you see, good and bad.
Related Article: A Plan to Reach Financial Independence at an Early Age
Buying a house at a young age that fits your budget
How do you know if you can afford a house? If you have a good agent or loan officer, they will work out your income to debt ratio. Here is a quick example of how to calculate if you will be able to afford the payment.
- Add up all of your monthly debt. So for example, let’s say you have:
$400 car loan
$150 student loan
$400 credit card minimums (notice that only the credit card minimums are added in here)
Total expenses are $950 - Then write down your gross monthly income (this is your income before taxes or other deductions). Let’s say your income is $3000 a month.
- Now divide your expenses by your income.
$950 / $3000 = .32
When we purchased our home, our loan agent said we needed an income to debt ratio below .36 to safely pay our mortgage.
According to ConsumerFinance.gov, studies of mortgage loans show that borrowers with a higher income to debt ratio are more likely to run into problems with making monthly payments. Some lenders will qualify you with up to a 43% income to debt ratio.
Lenders also want to see your monthly housing debt to be no more than 28% to 33% percent of your income. In the example above, 28% of $3000 income is a monthly house payment of $840. Remember, these are just guidelines. Some lenders are more strict than others, but I highly suggest you run these numbers for yourself and seriously consider whether the payment seems comfortable for you or not.
Here is a calculator for figuring out your income to debt ratio.
What I learned from buying a house at a young age
When I bought my first house at 22, I qualified with what was called a piggyback loan. Lenders had more options back then, and they were qualifying people with almost no paperwork. This made it so people who should not qualify for a home were able to qualify.
Fortunately, I was making enough money with my income and side business that everything turned out okay.
Now, there are still ways to qualify for a loan by being creative. One of those ways is to combine the incomes of all the people who will be living in the home. If you have a family and a few people work, and all of the members will be living in the home, then some lenders will qualify you based on adding up all of the incomes.
Related Article: Tracking Income Suddenly Made My Income Increase
Creative ideas for buying a house at a young age
If you are planning on buying a house at a young age, then you have options. Of course you can go the conventional loan route and put down 20% of the purchase price of the home, but in some areas, 20% might mean you need to come up with $100,000!
Here is a short list of options when it comes to buying a house at a young age:
1. Conventional Loan-
You need 20% down of the purchase price of the home, and when you do this, you avoid paying private mortgage insurance. Closing costs may still run between 2% and 5% of the purchase price. You also need a good credit score of at least 650.
2. Seller Financing-
You go directly to the seller to buy the home. You usually pay a higher interest rate and need to put a lot down. This sometimes works if you know someone like a friend or family member willing to sell you their home directly… but you could also risk losing a friendship if things go badly.
3. Rent to Own-
You pay rent and a small percentage of the rent goes towards purchasing the home. There might be “option” fees involved. And if you decide not to purchase the home when the rent period is up, you could lose this fee. We had family members try to rent to own and the owners never decided to sell the home. So make sure to have a clear agreement in place!
4. Crowdfunding-
You could use a crowdfunding site like GoFundMe or KickStarter and ask for family and friends to contribute there at gift giving time. It’s a great way to save up money over a period of time.
5. FHA Loan-
This is a loan backed by the government. You still obtain the loan through a lender. A lower credit score is okay. You’ll have to pay an insurance premium which is usually added in to the mortgage. Also you’ll have to pay private mortgage insurance (PMI) until you have 80% equity in the home.
My experience with buying a house at a young age
I was still in college when my husband and I decided to buy a home. We had just started our business, and we were working a few jobs.
We looked for a home and realized the housing market was favoring sellers. Home prices were climbing fast. In the process of trying to find a home, the prices of homes in our price range climbed from $130,000 to $150,000 in just a month!
Of course this made us frustrated because each day we waited, we saw house prices jump.
But we had the strong desire to buy a home. Our rent at the time was about $750 a month. We realized after some simple calculations, that for just a few hundred dollars more a month, we could buy a home.
We knew we would be in the area for quite some time, and we also had a dog, so buying a home seemed like the next reasonable step.
What we didn’t know was that because we owned a business and reported deductions (fairly), we showed a lower income range. This was making it hard for us to qualify.
A Piggyback loan helped us with buying a home at a young age
We found a lender who was doing piggyback loans. This meant we got a mortgage for the first 80%, we put down a down payment for 10% and another 10% was financed in a second loan for a much higher interest rate. This loan got us into our first home for a purchase price of $150,000.
In the two years we lived there, some interesting things happened. The market kept climbing. So the house was now worth $300,000, and yet the neighborhood was becoming scary. The subdivision we lived in was growing in popularity and many families with teenagers were moving in. The teenagers were taking to the streets at night and vandalizing cars and homes.
Long story short, we started to feel the itch to move. Our agent helped us find an older home that would need some work in a nicer area. She told us probably four or five times to keep the first home as a rental, but we decided to cash out while the market was high. We did and made enough money to put a down payment on the next home and pay for a few repairs on the house.
What I would have changed with our home purchases:
1. The timing of buying a house at a young age
Everything worked out great for us in the end, but I probably would have kept the first home and rented it out for additional income.
We could have kept the first home and probably paid off the mortgage within 10 years because our business took off, but it would have been a gamble. You never know what the markets are going to do. Historically, the housing market and stock market trend up, so looking back now, I probably would have taken the risk and kept the first home.
2. Buy in an area that makes you happy
With the first house, we just wanted to buy a home so badly that we didn’t consider the area. Although, buying this first home allowed us to get into the housing market during an upswing and make some money. This was shear luck.
Now when I buy homes, I have a plan in mind. And based on what I’ve been through with buying various homes, I know what I’m getting into when I buy. For example, the current home I live in is already in my plan as a potential rental. I want to live in this home, upgrade the yard, repair the wiring, and get it into easy maintenance mode. This way when we go to rent it, it will be easy to care for.
3. Invested or traveled instead?
This isn’t a huge regret of mine, but I am a numbers person, and looking back I might have rented a nice place and invested a ton of money in the stock market. Historically, the stock market out-performs the housing market. So if you want to do better with your money, it would be a really good idea to run numbers as a comparison for yourself. See if you can rent on the cheap and save diligently. Also, know what you’re really wanting to do with your life. If traveling is a huge dream, then purchasing a home could tie up your money.
What are your plans for purchasing a house? Do you know your dreams and desires and do they fit in with home ownership?
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