How to Buy or Mortgage a House in Your Twenties: A Step-by-Step Guide

Age is but a number in the realm of home ownership, even if you're just 20 years old. With the right resources and planning, buying or mortgaging a house in your twenties is achievable. This guide will walk you through the process and provide actionable steps to get you started.

Selecting the Right Approach

While some folks might think that building wealth in your twenties is a distant dream, it's not unrealistic. If you have the funds, you can definitely apply for a mortgage. However, most individuals in their twenties are not that financially stable.

Building Passive Income Streams

I strongly recommend working on a side hustle or building passive income streams so that you can complement your full-time earnings. This approach ensures you have a steady stream of income to support your financial goals, making it easier to manage a mortgage.

Protecting Your Credit Rating

The first step in the process is to protect your credit rating. Many young folks have ruined their credit by the time they turn 25, often due to unpaid car loans, too much credit card debt, or financial missteps.

For example, when I bought my first house at 24, I was already managing a car payment and a boat. However, I lived within my means and managed to save a down payment. Here are some steps to ensure a solid financial foundation.

Understanding Credit Scores and Lenders

To succeed in securing a mortgage, you need a strong credit score. The minimum for a conventional loan is 620. In ordinary times, you could get an FHA loan with a score as low as 580, but during a pandemic, most lenders require a score of 620 or higher for FHA loans.

Knowing your financial situation is crucial. Calculate your income and debt payments. Also, assess how much cash you have available for a down payment and closing costs. Paying off debts like credit cards, student loans, and car loans can significantly increase the amount of loan you can qualify for.

Preapproval and Understanding Lenders

Begin the preapproval process by contacting a local mortgage professional. Even if you think you're years away from buying, this is a good time to set yourself up in the best position possible.

Your mortgage partner is your financial ally, or as I prefer to say, a business partner. They will guide you through the process, including understanding how lenders make decisions. Lenders base their decisions on the borrower's debt to income ratio (DTI).

Calculating the DTI

Lenders calculate the DTI by adding up the total house payment and all monthly debt payments from the credit report, then dividing the total by your gross monthly income. They can approve loans with a DTI of up to 50.

For example, if your salary is $6,500 per month, and your total monthly debt payments (car, credit cards) are $350, with a savings of $20,000 for a down payment and closing costs, you qualify for a purchase around $450,000 with a down payment of $13,500. Additional closing costs can range from $5,000 to $6,500. Your monthly payment will be around $2,880, making your DTI just under 50.

Considering Your Options

Do not follow any "rules of thumb" about how much you should spend on housing. These apply only to individuals in similar financial situations. How much you decide to allocate to housing is your own decision. For instance, if you decide that $2,800 is too steep, $2,500 might be more comfortable, which would result in a $390,000 purchase with a down payment of $11,700.

My Best Advice

The best advice is to work closely with a good local mortgage professional. A mortgage broker or independent mortgage banker can significantly benefit your loan process, offering lower costs and better results by focusing on residential mortgages as their sole occupation.

Conclusion

Buying or mortgaging a house in your twenties is certainly possible with the right planning and resources. It's not just about having money; it's about making informed decisions and leveraging your financial opportunities.