If you’re currently living in a college dorm or a family member’s house, purchasing a home may seem a long way off.
But consider this: Most home buyers in the U.S. are in their 20s or 30s, according to the National Association of Realtors, and twice as many home buyers this year were single females (18%) as opposed to single men (9%). So for young women who hope to purchase property as part of their seven- or even 10-year plan, experts say proactive planning should start today.
Buying a home may be the first step in accumulating wealth for many young women. Aside from purchasing an asset that typically grows in value, buying a home brings a number of tax advantages, too, says tax expert and frequent TSE contributor Barbara Weltman. In the buying, selling and maintaining stage, there is ample opportunity to deduct mortgage and property taxes in addition to other expenses. “Why make a landlord rich?” she says. “Make yourself rich.”
But buying a home involves a lot of strategic planning, saving and educating. If you don’t know where to start, we’ve compiled a primer on the basics of home buying and what young women can do to increase their chances of making the big purchase. Here’s what to keep in mind.
Credit Scores Are Integral
“Your credit score, that’s number one,” says Alexandra Shepis, an advisor at women-led firm Francis Financial. Your score will be the determining factor for whether or not you’re approved for a mortgage — the loan you receive when you’re purchasing a home — and how much interest you will pay on it.
Shepis recommends requesting a copy of your credit report from annualcreditreport.com, an agency that provides a free annual copy of your credit, run by the three major credit bureaus (Experian, TransUnion, Equifax) and analyzing where you might lack. “You want to take a look at your credit report to see if there are any outstanding debts that you aren’t aware of, or if there are any mistakes on your report, that might adversely affect you,”she says. “If you see any mistake on them, reach out to the credit bureau, and get it resolved as soon as possible.”
What makes a good score when it comes to home buying largely depends on what type of housing you’re looking for. Private lenders will typically ask for higher credit scores, usually in the high 600s, as opposed to lenders with the Federal Housing Administration that may fall in the high 500s.
The higher your score, the greater the chances of approval and lower interest rates. Aiming for a score of 700 or higher — with little outstanding debt — should be part of your goals. For those who may be “credit invisible” or need help rebuilding their credit, we previously spoke with credit bureau Experian on where to start.
Saving for the Down Payment
Along with boosting your credit scores, saving for the down payment on your home should be your top priority as it can be the most troubling of tasks. A down payment is the initial sum you pay once you’ve been approved by a lender, and it represents a portion of the total purchase price. You finance the remainder through your mortgage, which is generally paid in monthly payments.
How much you need to save will again depend on the type of housing you’re looking for.
According to the NAR, the median price for buyers aged 22 to 30 was $229,000 in 2021. Younger people might also consider a small home or a one-bedroom condo just to get their feet wet.
Typically, Shepis says, a down payment will be 20% of the purchase price, which most lenders want to see as it makes you a less risky candidate for a loan. Many young people will get assistance from family and friends for making the down payment.
In many cases, however, a first-time home buyer just can’t afford a 20% down payment. (In 2019, the average down payment was 6% amongst first timers according to the NAR.) In that case, the buyer often will need to pay for private mortgage insurance as a condition of obtaining a mortgage, which protects the lender.
Regardless, you should aim to save as much as possible, ideally by starting a separate savings account and diverting monthly or weekly funds to it, Shepis suggests. And the sooner, the better.
Any extra money can help with a lot of the unforeseen costs of housing, such as the costs of furnishing and maintaining that one should prepare for early on. “A lot of people consider the down payment that they need to buy the home, but you also want to think of the ongoing cost associated with home ownership,” Shepis says. “Everything from property taxes, to homeowners insurance, to maintenance, any repairs. Even off-season expenses, like snow removal, you might have to build that into your budget when you consider homeownership.”
And When It Comes to Mortgages …
Shop around. You want to get the best possible deal with a lender, and for that you need to shop around and consider different options.
“It’s kind of like buying a car, you go to a car dealership, and you know what type of car you want,” Shepis says. “But maybe you’re not going to buy the car as soon as you see it at that first dealership. You might go to a second dealership and shop around and see if the price is better.”
There are different types of mortgages that you may qualify for depending on your personal financial situation. Either you will be offered a traditional fixed mortgage, where your interest rate (which could be 2.5% to 3%, based on current rates) will remain the same through the course of your mortgage payments. Or, on the trickier end, you might be offered an adjustable rate mortgage — also known as ARM — where your interest rate will remain the same for, say, the first five years, and then could either increase or decrease.
As for the advantages to each, Shepis says some “might get an adjustable rate mortgage, knowing that before that interest rate could potentially jump up, they [will] refinance.” Or, they might sell the property if it’s a starter home. Some buyers prefer starting with a traditional 30-year mortgage, then refinancing or switching to a shorter term down the road, especially if personal income rises.
In any case, the most important step of finding the right mortgage is to research options, looking at credit unions or even online lenders in addition to traditional banks.
Shepis, a financial advisor herself, recommends consulting a professional if you’re confused or anxious about the home buying process. There are also plenty of ways to educate yourself — be it Investopedia’s “Are You Ready to Buy a House?” educational articles, NerdWallet’s “How Much Home Can You Afford?” online calculator, or just scoring a “Home Buying for Dummies” guide.
Either Way … Make a Move
As with all things money, time can be the most valuable asset. If you can start planning your financial wellbeing at a younger age, odds are you’ll spare your future self a lot of stress and anxiety.
“Even if [you] aren’t thinking about being a homeowner for another seven to 10 years, it’s still important to get into the habit of consistently saving every little bit that you can set aside into a savings account,” Shepis says. “Time is on our side.”