How to Start Planning to Buy a Home When You’re in Your 20s

The housing climate may look rough, but there are smart money moves you can make to get on the path to homeownership.

For many, home ownership is part of the quintessential American dream, but affordability is a major roadblock for younger generations. Not to mention, the U.S. housing market is tight, interest rates are creeping higher, and inflation continues to be part of the financial equation. But that doesn't mean that dream of homeownership has to be pushed aside. Even in your 20s, you can still make sound financial decisions and money moves to set you in motion to buy your first home.

For guidance, we asked four industry experts who know mortgages, the housing sector, and smart money planning to walk through the important steps you can take now to become a homeowner.

:A Step-by-Step Guide to Buying a Home

How the economic climate impacts homeownership

The current housing market is daunting and for potential homebuyers in their twenties, many of whom are saddled by student debt, things can be even more discouraging. According to a recent study by Rocket Mortgage, of the 86.2 percent of Gen Z-ers who dream of homeownership, almost 45 percent aspire to buy their first home in the next five years. The reality, says the study, is that a mere 8.3 percent of Gen Z-ers who are stashing money away are earmarking these savings for a down payment.

“The housing market got so far out of line in 2020 and 2021 that unfortunately Gen Z-ers hoping to become homeowners are likely going to face a difficult market for years to come,” says Kate Wood, home and mortgage expert at NerdWallet. “Affordability is a major challenge, and extensive student debt is not making that easier for Gen Z.”

Likewise, millennials are still trying to get into this market too, says Wood, creating even more competition for younger cohorts. “Instead of moving up the home-buying ladder and making space for the next group to start climbing, there's an ever-growing number of people stuck trying to reach the first rung,” she says. “With demand so intense for a really limited housing supply, home prices are stubbornly high in most markets.”

What steps can twentysomethings do now to buy a house?

Taking an inventory of current debts and your balance sheet is the foundation. “There are the obvious but easier-said-than-done steps, like paying down your existing debt and setting aside any money that you can, ideally in a high-yield savings account,” explains Wood.

But there's also thinking long-term about how buying a home would fit into your lifestyle.  For example, says Wood, if you live in a high-cost area, ask yourself if your goal is to try to buy there. Think about if you would be open to moving to a lower-cost area if that's what it takes to become a homeowner.

And, while you're not actively working to buy a home, she insists this is a good time to do this kind of soul-searching. “Maybe take a trip to that other city you could move to so you can see whether you might be happy living there,” Wood continues. “If you definitely want to stay put despite the prices, consider talking to a financial advisor to learn more about what you could do to make homeownership within closer reach.”

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What are the barriers, compromises, and a realistic timeline as you plan for a home purchase?

Expectedly, for most homebuyers, affordability is the greatest barrier to homeownership. It's not just saving up for a down payment—it's figuring out how to budget on an ongoing basis when high home prices and escalating interest rates mean monthly mortgage payments eat up more and more of your income, says Wood.

Compromise is vital, she says, and it's important to sort out where you're willing to compromise before you're actively searching for a home. “This is where you're going to live; you don't want a heat-of-the-moment decision to turn into years of regret,” cautions Wood. Ask yourself these tough questions: Is living near family important to you? Do you want to have your own outdoor space? Are you hoping to start a family of your own?

Although everyone has a different timeline for getting finances in order, it always pays to be well prepared. “In terms of a timeline for buying a home, allow a year, if you can—don't wait until your apartment lease is a month from ending to start figuring out your home search,” Wood states. “Researching mortgage lenders and getting pre-approved could take one week or several. Finding a real estate agent that you click with could take a little time as well.”

Keep in mind a home search varies based on location and price range. Right now, Wood says, it's not uncommon for buyers to look for three months, six months, or even longer.

How much should you budget to buy a home?

One of the first important topics of starting to look for a home is figuring out how much you can afford. Colleen McCreary, consumer financial advocate at Credit Karma, says you can take advantage of free tools online like Credit Karma’s free home buying power tool, which uses the same calculations a loan officer would, to help give you an idea of how much home you can afford and what your monthly payments will be. “This will also help give you an idea of how much of a down payment you’ll need,” says McCreary.

Not only does carrying a debt load make it more difficult to save for a house, but it can also make it more difficult to qualify for a mortgage. “Your debt-to-income ratio shows a lender that you won’t be using up all of your remaining cash on making your house payment,” explains McCreary. With this in mind, remember to reduce your day-to-day expenses so you can make a bigger dent in your debts, such as your student loan or auto loan balances, and other debts, she says. In addition, McCreary advises that you avoid large purchases on credit that aren’t absolutely necessary.

As stated earlier, home prices have continued to rise, so prioritizing saving and spending is a must. “The key factor is to visualize your target and set up a simple plan to get there,” says Katherine Salisbury, co-founder and co-CEO of the personal finance app Qapital. “If owning a home is a priority, that means adjusting your budget around that accordingly.”

According to Salisbury, an industry standard 20 percent down payment works out to about $82,000 with today’s median home price of $408,000. “That’s not the kind of money you can save overnight, and putting that pressure on yourself can make it harder to stick with your plan,” she says. “Decide what you can realistically put aside from every paycheck, and determine your timeline from there.”

:Do You Really Need That 20% Down Payment on a House?

How does your credit score come into play, and what can you do to boost it?

Mortgage lenders use credit scores as a way to gauge risk, says Wood. If you have a higher score, lenders feel more confident that you'll pay your mortgage on time. “If you've had some credit challenges, it's worth taking the time to get your credit in shape before you venture into buying a home," Wood adds. "Try to pay all your bills on time, pay down your existing debts, and avoid taking out new lines of credit or acquiring more debt."

:What Your Average Credit Score Should Be by Decade—and Tips to Maintain It

What are the most important financial goals when planning to buy a home?

Even though buying a home is the reach here, there are specific financial goals you should strive to maintain. Practice sound credit habits, create savings goals, and seek a steady path to financial stability. “Invest in your career to enhance future earnings prospects, develop a habit of consistently saving money, refrain from high-cost debt such as credit cards, and always pay your bills on time," Greg McBride, chief financial analyst with Bankrate.com says. "This is the stable financial and creditworthiness foundation on which future homeownership is built."

He stresses that one should not pursue the goal of homeownership to the exclusion of other financial pursuits, such as saving for emergencies and saving for retirement. “You can, and should, work on all of those at the same time," McBride says. "And early in your career may not be the best time for you to buy a home if what you need is the mobility to pick up and go somewhere in the pursuit of opportunity." So, take the time to assess where you're at now, where you want to be in the future, and what it'll take to get there.

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