You’re twenty-something and you’re considering buying a place. Maybe you moved back in with your parents to save for a down payment—or you're living in a rental that gobbles up a huge chunk of your first grown-up paycheck and you don't feel you have anything to show for it. Unless Mom and Dad are rich, your great aunt left you a trust fund, or you're a brand-new internet mogul, you probably won’t be able to buy a home without taking on some debt.
That’s when it’s time to consider a mortgage—likely to be the biggest debt you ever take on in your life. Acquiring a mortgage, especially this early in your life ties up a lot of your money in a single investment. It also ties you down and makes it less easy to relocate. On the other hand, it means you're starting to build up equity in a home, provides tax deductions, and can boost your credit history.
- Getting a mortgage in your 20s allows you to start building equity in a home, provides tax deductions, and can boost your credit score.
- The mortgage process, however, is long and thorough, requiring pay stubs, bank statements, and proof of assets. Preapproval helps make twentysomethings more appealing homebuyers to sellers.
- Twentysomethings need to have enough credit history to qualify for a mortgage, which means handling debt responsibly early on and making timely student loan payments.
- Borrowers in their 20s may find it easier to get a mortgage through the Federal Housing Administration (FHA) or Veterans Affairs (VA).
What Is a Mortgage?
In simple terms, a mortgage is a loan used to buy a home where the property serves as collateral. Mortgages are the primary way most people buy homes; the total outstanding mortgage debt of the U.S. was approximately $15.5 trillion in the first quarter of 2019.
Unlike opening a credit card or taking on an auto loan, the mortgage application process is long and thorough. Very thorough. Going in, be ready with your Social Security number, your most recent pay stub, documentation of all your debts, three months worth of bank account statements and any other proofs of assets, such as a brokerage account.
How Do You Get a Mortgage?
If you've already found a house—much of the above also applies when you're just trying to be preapproved for a mortgage—bring as much information as possible about the place you want to buy. Pre-approval can make it easier to have your offer accepted when you try to buy a home, which could be especially crucial if you're the youngest bidder.
Lenders will scrutinize your credit score and history, which may be problematic for twentysomethings who have a limited borrowing history, or none at all. This is where having student loan debt actually helps you—if you’re making your payments on time, you’ll likely have a good enough credit score for banks to feel comfortable lending to you. Generally, the better your credit score, the lower your interest rates will be. This is why it’s absolutely vital you handle debt responsibly and build credit at an early age.
One of the biggest hurdles for first-time homebuyers is the down payment. Generally, lenders want you to pay 20% of the total loan upfront. You can get a mortgage for a smaller down payment, but your lender might require you take out a private mortgage insurance (PMI) to cover the greater perceived risk. This will add to your home's monthly carrying costs.
Tax breaks help reduce the effective cost of a mortgage, where mortgage interest paid is tax deductible.
When Is the Right Time to Buy?
Figuring out when to take out a mortgage is one of the biggest questions. Unless you somehow already own home through divine providence, you’ve probably been paying rent and changing residences every couple of years or so. Here are some factors to consider when deciding when to take out a mortgage.
Where Will You Be in Five Years?
A mortgage is a long-term commitment, typically spread out over 30 years. If you think you'll move frequently for work or plan to relocate in the next few years, you probably don’t want to take out a mortgage just yet. One reason is the closing costs you have to pay each time you buy a home; you don't want to keep accumulating those if you can avoid it.
How Much Real Estate Can You Afford?
What would you do if you lost your job or had to take many weeks off due to a medical emergency? Would you be able to find another job or get support from your spouse’s income? Can you handle monthly mortgage payments on top of other bills and student loans? Refer to a mortgage calculator to get some idea of your future monthly payments and measure them against what you pay now and what your resources are.
What Are Your Long-Term Goals?
If you hope to raise kids in your future home, check out the area for its schools, crime rates, and extracurricular activities. If you’re buying a home as an investment to sell in a few years, is the area growing so that the value of the home is likely to increase?
Answering the tough questions will help you determine which type of mortgage is best for you, which can include a fixed or adjustable-rate mortgage. A fixed-rate mortgage is one in which the interest rate of the mortgage stays the same for the life of the loan.
An adjustable-rate mortgage (ARM) is one where the interest rate changes at a set period according to a specified formula, generally tied to some kind of economic indicator. Some years you might pay less interest, in others, you might pay more. These generally offer lower interest rates than fixed loans and might be beneficial if you plan to sell the home relatively soon.
Making a Mortgage More Affordable
There are a handful of ways to reduce the price tag associated with a mortgage. The first is tax breaks, where the interest you pay on your mortgage is tax-deductible. There are also Federal Housing Administration (FHA) loans. Loans through the FHA generally require smaller down payments and make it much easier for borrowers to refinance and transfer ownership.
There’s also the Veterans Affairs Home Loan Guaranty Service, which is perfect for twentysomethings returning from military service, VA home loans make it much easier for veterans to buy and afford a home; many of its loans require no down payment.
The Bottom Line
Homeownership can seem like a daunting prospect, especially as you’re starting your career and still paying off your student loans. Think long and hard before you take out a mortgage; it’s a serious financial commitment that will follow you until you either sell the property or pay it off decades from now. But if you’re ready to stay in one place for a while, buying the right home can be financially and emotionally rewarding.