Saving for a House in Your Twenties: 4 Tips to Consider
Note: The story below is a fictional scenario that many twenty-somethings can relate to. This fictional story does not depict a real Ross Mortgage customer.
Melissa is a 26-year-old young professional.
When she graduated college, Melissa moved to a big city and rented a small apartment with a roommate. Living there was tolerable, but she quickly found that the atmosphere didn’t quite fit the lifestyle she pictured for herself.
After a year in the city, Melissa applied for and secured a new job in her hometown. She moved in with her parents, and once she realized this was where she wanted to stay for the foreseeable future, she entertained the possibility of buying a home of her own.
But living in the city was expensive, and, coupled with student debt, Melissa’s finances were in in need of some help by the time she moved home. If she was going to reach her goal of buying a house, she knew she needed to create a game plan and get her financial house in order first.
Here are four tips that Melissa, and others in their twenties, should follow if they’re planning on saving for a house.
Create A Budget
Buying a home in your twenties is absolutely feasible, so long as you know you can afford it, and have some money set aside for things like a down payment, closing costs and emergency funds. The best way to do this is by creating and sticking to a strict budget.
Your budget should factor in the total amount of disposable income you have each month, and allocate a certain percentage of that money – depending on how soon you want to buy a house – toward your home fund. This may mean cutting back on dining out or making extravagant weekend plans with friends, but you’ll soon realize it will all be worth it when your savings start to rise. You’ll see your home fund grow exponentially if a portion of your paycheck is automatically deposited into a bank account not accessible by your debit card.
For more budget tips, check out our previous blog post on places your down payment might be hiding.
Make Sure Your Credit Is Solid
If you want to obtain financing for your new home, a good credit score is imperative. At Ross Mortgage, we can pull your credit score for you. If you find your credit score isn’t as high as you (or lenders) would like, then you’ll want to consider taking these steps to boost your credit. We will create a reliable plan for you to raise your credit score where you need it to be, even if you’re six to 12 months out from buying a house.
One common credit challenge faced by those in their twenties is that they have not established a lengthily enough credit history. To learn more about building credit from scratch, you can refer to this blog post. We also have a helpful overview that explains what factors are used to determine your credit score.
Reduce Your Debt
At the end of the day, lenders want to make sure you can afford to repay your loan. They use the debt-to-income (DTI) ratio to determine how much extra debt you can reasonably afford to take on, in addition to the student loans and/or other obligations you have.
One common question we get from homebuyers in their twenties is: “Do student loans affect a mortgage application?” If you are a recent (or not so recent) grad looking to buy a house, don’t worry. It’s important to note that debt, including student loan debt, won’t necessarily keep you from qualifying for a mortgage. Here are several ways you can buy a house even if your credit report shows student loan debt.
However, it will be important to create a plan for paying down your debt. This will help you decrease your DTI ratio and improve your chances of qualifying for a mortgage.
Paying off debt while simultaneously saving for a home can be tough, but there are some strategies you can follow to minimize headaches. Start by making a list of all your debts in an Excel or Google Sheet. Then, strategically budget out the cash to pay for them – prioritizing from the smallest debt to the largest.
Consider Living with the Rents
It doesn’t make a ton of sense to pay rent at another house or apartment if you’re trying to save money for your first home. Just like Melissa in the example above, living with your parents after college is a common way to save a lot of money.
If your parents are open to letting you move back in, don’t count it out as an option! The fact that you’re doing it to save money for your own house makes for a more-than-acceptable excuse when you tell your friends.
If you’re interested in learning more about how to get your finances in order to buy a house in your twenties, send us a message and we’ll connect you with one of our top lending experts.