You’re in your early 20s, and you might be thinking about leaving behind the rental life and owning a place of your own. There’s just one problem: you can’t afford it. Unless your ancestors left you with a trust fund or your family is knee-deep in cash, owning a home seems far out of reach for you. If you’re willing to take a risk, why not try getting a mortgage.
It might be one of the biggest investments you’ll be making in your life, but the benefits of a mortgage greatly outweigh its drawbacks. They give you something to work toward, build up your credit history, and provide tax benefits. Learn more about what a mortgage can do for you.
What is a Mortgage?
For those who haven’t given this even a single googling, here’s a primer. A mortgage is a debt instrument provided by a bank or financial institution that allows an individual to purchase a home. The money borrowed is secured against the value of your home until it is fully paid back through a predetermined payment plan, which is usually monthly. If you fail to pay your monthly dues, the lender can sell your home to get the money back.
Before you go and apply for one, it’s best to understand the basics and be aware of the options you have.
Fixed-Rate vs. Adjustable Rate Mortgages (ARM)
With fixed-rate mortgages, the interest is set when you close the deal, and it stays the same for the entire duration of the loan. The most common mortgage type is the 30-year fixed and 15-year fixed mortgage. For adjustable mortgage rates, the interest varies. Getting an ARM is a good idea if rates are particularly low, as it takes a long time before rates start to adjust.
Government-Insured vs. Conventional
If you have a low income or poor credit history, getting a government-insured mortgage might be the way to go. A government-insured mortgage is generally backed by either the Federal Housing Authority (FHA) or the U.S. Department of Veteran Affairs (VA). FHA loans are more popular among first-time buyers because they require a lower minimum credit score and generally lower down payment. VA loans cater to veterans, individuals serving in the military, and their spouses and require little to no initial cashout.
Conventional mortgages are not insured or backed by the government. Instead, these types of loans are backed by private lenders like banks, credit unions, and mortgage companies.
Preparing to Apply for a Mortgage
Before getting that application, you have to choose where you want to live and find a house. When making these decisions, consider if you’ll be able to afford your house in the long run. Don’t buy a house you know you can’t afford. While you’re in the prospect of looking for your house, try to build up your credit score and credit history. If you have little to no credit history, you’re going to have a hard time convincing lenders to approve your mortgage application.
The best way to do this is to start early. If you don’t have any established credit, open a credit card account with a manageable limit, and pay off your balances each month on time. Paying off your balance on time and staying under the credit limit is a good way to improve your credit score.
Finding the Best Mortgage
Not all mortgages may be right for you, so it’s important to do your research. Considering factors like your income, credit history and score, and employment will help you find the best mortgage loan. It’s important to remember that lenders will criticize every aspect of your financial history and are looking to see whether you will be able to afford your monthly payments, how you’ll be able to handle down payments, and other up-front costs like closing costs, underwriting fees, legal fees, etc.
It may also be helpful to use a mortgage calculator to get an idea of how much your monthly payments might be. This will give you a clearer picture of the total amount you’ll be paying for your property. Now that you’ve estimated how much you’ll be paying, try to save as much money as you can for at least a year. While you’re upping your credit score and building up your credit history, you’ll be getting your down payment funds ready.
Once you have these things ready, you can try getting pre-approved for a mortgage. A mortgage pre-approval involves a preliminary evaluation by a loan officer to assess your income, assets, debt, and credit history. This will then determine how much money you can borrow and what your interest rate can be.
What to Do After Getting Pre-approved
You’ve been pre-approved; now what? The next step is to choose your house. It’s important to note that the lender might consider some properties unfit as security for your loan. Remember to keep your options open and do your research; look up property prices, go to auctions, and compare the price of the property to the price of your loan. Doing this will make it easier to choose a home that suits your needs and budget.
Once you’ve decided on your home, you need to find a lawyer to help you with the legal documents necessary to complete the purchase. A good lawyer will give you advice, keep you protected, and assist you through any important transaction that will help you make a good offer on the property. Make sure you read the conditions of any offer thoroughly and talk to your attorney about any conditions that should and shouldn’t be there.
Afterward, it’s important to make the necessary inspections to ensure that the home you’re getting is still in good shape. Conduct pest inspections and building inspections. If you want to be thorough, here’s a list of other inspections you can do before making an offer on a property. This might cost you a bit of money, but ensuring your safety is just as important as a good deal.
Once everything is in order, it’s time to let your lender know that you’ll be purchasing the property. Prepare the paperwork and down payment, and you’ll be one step closer to becoming a homeowner.
The Bottom Line
Mortgage applications are extensive, and there are many steps to getting the perfect home. You’ll go through a lot of hurdles in the process, but with a lot of research, the right tools and methods, and help from experts, becoming a homeowner in your 20s will be the best big investment you’ll ever make.