If you’re in your mid-20s, chances are the idea of homeownership is beginning to look more and more appealing. In the back of your mind, you know that the rent you pay each month, while necessary, isn’t really going anywhere. You daydream about owning your own home, or at least a nice 2 bedroom apartment- really owning it. And, you know that it’s possible. You’ve seen a few of your friends or previous classmates buying homes, grinning ear to ear as they hold up the keys on their new front porch. They really own that?? Purchasing your first home in your 20s won’t be for everyone. However, it is a smart financial decision, and making the switch from paying rent to paying a mortgage means that your monthly payments aren’t just disappearing… they’re being invested in your future!
You may not be entirely sure that homeownership is the right choice for you yet. And that’s ok! However, the following advice can help you start to get a sense of what buying your first home will look like, and what kinds of steps you can start to take. It’s never too early to start saving!
Decide if you’re ready to commit
Buying a home in your 20s can be a great decision. However, that doesn’t mean that you should get that process started without serious consideration! Most people stay in their homes for 3 to 5 years at the very least, just to recoup the cost of the purchase. That means if you’re going to buy, you should be confident that you’re buying in an area you would be happy living in for the next 5 years or so. Think about the cliché interview question you’ve probably heard dozens of times by now… where do you see yourself in 5 years? That will help you decide if the commitment of owning a home is right for you at this point.
Another thing you will have to commit to as a homeowner is maintenance and repairs! As a renter, you are able to call on your landlord when things break down… the washing machine, the air conditioning, and so on. As a homeowner, you are your landlord! Understanding that these maintenance problems will fall on you is part of committing to homeownership.
Understand your finances
Do you have a credit history? If so, how good is it? Will it help lenders have confidence in you? Take a look at your credit report and see how you can improve it. (Keeping balances at or below 30% of your credit limit is one good way). If not, consider getting a credit card and building up a credit history by making small purchases and consistently paying them off.
What does your savings account look like? Are you generally more of a saver or a spender? If you already have some savings, try to make a detailed plan for how you will increase those savings, and what you will use them for. Saving up money towards a down payment is always a good option. Ideally, you’d want to put down a 20% down payment- but if this will require years and years of saving, it won’t necessarily be the best choice. Just keep in mind that with a down payment under 20%, you will have to pay some sort of mortgage insurance.
A common piece of advice is to aggressively save for 6 to 12 months. Try putting away 20% of each paycheck, cut back on frivolous spending, and ask yourself what a reasonable monthly mortgage payment might look like for you. Can you afford it? How much could you save in half a year or a year’s time? Keep in mind, all of these spending habits are also going to be thoroughly inspected by your lender. Don’t worry if you’re making under $50,000 a year: this is pretty standard for your first job! Aggressive saving, help from your family and parents, and having a side project that provides some extra income are just a few options that can help you put together a down payment.
Finally, when you’re considering finances and costs, keep in mind that your monthly mortgage payment does not represent your total monthly costs. Property taxes, condo fees, utilities, property insurance, and more will add up to quite a bit per month. You will also need to have enough money to pay for unexpected repairs and expenses.
A few final tips: ask yourself: would I be able to afford my mortgage payments if I lost my job and was out of work for 3 months? Am I comfortable with the idea of cutting back on dinners out with friends and other frivolous activities in favour of paying off my mortgage? Does my plan for homeownership include relying on a raise or a family loan that I may not receive in the next 5 years? Do I understand how much the closing costs will be, and have I saved enough to cover them as well?
mortgage pre-approval is a good step to take if you’re serious about buying a home. This will help you understand how much your lender is likely to give you, what your monthly payments might look like, and so on. Getting pre-approved also helps you to stand out as a serious buyer. At this stage, you may want to shop around a little bit for a mortgage that is right for you. Keep in mind that every lender is different, and most will offer you different rates and loans. If you messed up somewhere along the way with your credit history, there will be lenders who are more lenient about a bad credit report. Just remember that you may want to look around and do some research before deciding on a lender.
Research and use down payment assistance
Depending on where you want to buy your home, there may be different types of down payment assistance available. For example, in Ontario there is the RRSP Home Buyer’s Plan, which allows you to withdraw up to $25,000 from your RRSP towards the purchase of your first home. You can read about a few other forms of financial assistance in Ontario here, and do your own research! Consider Kitchener’s Affordable Home Ownership Program and look into other options in your area. Some forms of down payment assistance will be “forgiven” if you are a primary resident in a home for a particular period of time, and many will be a “soft” loan or have multiple different repayment options. Doing some research into what kind of down payment assistance you are eligible for can help you put together that 20% down payment!
Work with a real estate agent!
A good real estate agent can help you work with a certified mortgage lender, understand what kinds of legal fees and other costs you may be looking at, and help you out each step of the way towards owning your first home. Professional real estate agents have the training and know-how to help you find the house that’s right for you, and keep you informed on what you need to know about the home buying process! They will negotiate and walk you through the entire offer and closing process, and work to protect your best interests. If you are serious about buying a home, the smartest decision you can make is to choose a great realtor! Contact Tracey and Megan today to learn more about how you can get started buying your first home.