How to buy a house by age 23
Updated: May 26, 2020
We bought our first house at age 23, after getting our first "real" jobs. But made the plans ahead of time. This is a longer post due to how much information we needed to get.
What you need to know about First time home buying
Living in the Bay Area, California prices are/were ridiculous. We were living in a one bedroom apartment in a decent area, and the cost...$1850 a month (back in 2012, to adjust for basic interest is around $2100). At that time we were going to college and working part time also. So most of the rent was coming from that. But that was the first year we were at that apartment. What you need to find out when renting apartments in your cities is one major thing: RENT CONTROL.
So moving on to the next year 2013, the price to keep the apartment changed. $2300 a month!
Now this wasn't a private home or from a private person this was from a large apartment facility brand. But a $450 increase a month for rent is absolutely impracticable.
So after some very skilled negotiating* we were able to able to get the rent down to $2100 a month. But we knew that this was only going to be for one year.
*Some of you might be interested in how we were able to negotiate rent with a corporation. So for those that are interested i'll explain, for those that aren't interested then...you know...skip.
Ok, we were pretty upset about this unreasonable price gouge. We first started thinking about moving out, although only being in this location for a year and still having boxes left out on the patio we were less than pleased with this option. Yeah it took us a little while to fully move into the place, but once we did we really liked it and didn't want to move. Oh, and I forgot to mention we were on the third floor of the apartment complex(and there was no elevator). So we would need to gather all of our reluctant friends back to the place to help us move out. Don't worry they would be well provided with pizza afterwards. Not before, because it would just slow them down with the heavy furniture...Anyway, we started to look at prices of other apartments around the area and they were going for an average of $1900-$2100 a month. But we knew again this would change after a year. So we, (Le-wife/Le-girlfriend at the time) the royal we, looked at the going rate for the apartments in the complex. She noticed that the going rate for an apartment was $2100 a month. YES, that IS a lot lower than the quoted $2300 that they were trying to gouge their loyal customers. So we(again the royal we, so she) spoke with the manager of the complex. She showed the manager the going rate for the apartments on the website and the letter that was given to us with the price increase. Another note for this story is she wasn't officially on the lease. She was on the lease for a prior apartment when we rented this new place so I was the only one officially on the lease. So being a master negotiator, she told the manager, what if she goes on the lease as the new renter, shouldn't she be able to get the rate that was put on the website? The manager agreed to the new terms. (We had been friendly with the manager in the past,gave them Christmas cookies or something like that, so maybe don't burn bridges with them if possible). So now we were able to keep the place for another year at the "reasonable" low low price of $2100 a month.
Ok now we were in the planning stage. We knew that rent prices were just going to keep going up, but there's really that's yours in a rental. So we made a decision to start saving for a house. This is where the wife went into research mode to find out what the best way to save and how to become first time home buyers. After our first year living in the apartment both of us graduated from college. Le-wife got hired for a big 4 accounting firm while I started working full time with my job. We understood how much we were making a month, and how much we had in our savings account(not much, wasn't that hard to check). So from research we found that Mint.com was a great website to help manage your finance and help you reach financial goals. We entered all of our information into the website(how much you have, how much you make, living expenses, entertainment expenses, food, fun, literally everything). The interesting thing about Mint.com is that once you link it with your accounts it will continue to review your spending and after your put limits on how much you are willing to spend for each expense you will see really where your money is going. We still use Mint.com even after buying our house to see where we our spending is going.
So after finding something that can help with looking into the finances, we needed to find out: "how the hell do you buy a house?"
We found out that you needed to get the following:
Real Estate agent
kind of in that order.
The broker is an agent that again reviews your finances, finds what loans you qualify for, and then finds a loan for you with a bank/mortgage company. So the broker, in layman terms for people who haven't had one yet, looks at the market, reviews interest rates, builds relationships with mortgage companies/banks, and secures a loan for you.
So again we(mostly Lewife) looked for brokers. Google, friends, real estate agents, they can all help you find a broker.
Our current broker has helped refinance our house three times since we got it(just due to dropping interest rates). When you refinance it can save you some major money. We really love our broker, he stays on top of the market and sees when interest rates drop in order for us to get great interest rates for our mortgage.
When shopping for a broker, make sure to see reviews(and interview them), to see what they are about. You want someone who will continue to work for you even after you close your loan.
After a little bit of searching we found the broker. Had an interview with him and discussed what our options were. During this time the broker asked if either of us had been in the military, if this was both our first house, how much we were able to put on a down payment etc.
if you have served in the military you may have an option for a VA loan. From Google:
During a time of war, a service member must serve a consecutive 91 days of active duty to qualify for a VA Loan. For peacetime,181 days on active duty meet the standard. Those individuals serving in the National Guard or Reserve component must have completed at least six years to use their VA Loan benefit.
For a VA loan you don't have to put any money on a down payment which is a main reason why you would want to use the VA loan. No down payment means no lump sum of money you need to spend at the beginning of buying your house. But, this didn't apply to us so I can't speak about the pros/cons of VA loans.
First Time Home Buyer
This did apply to us. Both of us were first time home buyers. For FHA (Federal Housing Administration) loans these give people the option to put lower down payments down for their "first" home. There were a lot of requirements in order to qualify for an FHA loan. I couldn't remember all the points so here's the info from Zillow
Borrowers must have a steady employment history or worked for the same employer for the past two years.
Borrowers must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state.
Borrowers must pay a minimum down payment of 3.5 percent. The money can be gifted by a family member.
New FHA loans are only available for primary residence occupancy.
Borrowers must have a property appraisal from a FHA-approved appraiser.
Borrowers’ front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, homeowners insurance) needs to be less than 31 percent of their gross income, typically. You may be able to get approved with as high a percentage as 40 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
Borrowers’ back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of their gross income, typically. You may be able to get approved with as high a percentage as 50 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
Borrowers must have a minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent.
Borrowers must have a minimum credit score of 500-579 for maximum LTV of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.
Typically borrowers must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you’ve managed your money in a responsible manner.
Typically borrowers must be three years out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you’ve improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
The property must meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
Not to mention you have to have a minimum of a 580+ FICO score for a 3.5% down payment.
See... there's a lot of requirements. But for us we weren't receiving a down payment from our family and we knew we had to move by the end of the year so this was our option. One other very important thing about FHA loans-PMI (Private Mortgage Insurance). Due to the risk of putting less money down, you need to pay monthly insurance on your loan in case you get foreclosed on the bank gets some money out of you.
During these talks with the broker we also discussed loan options (30 year fixed loan, 15 year fixed, ARM loan-adjustable rate mortgage).
30 year fixed loan- your interest is set for 30 years.
15 year fixed loan- your interest is set for 15 years. (More money a month than 30 year fixed, but your house gets paid off earlier. You pay less money in interest over a long run)
ARM loan- the rates adjust based off the life of the loan periodically. Here's a trick for you:
We started with an ARM loan set at 1.7% interest for the first 4 years. We knew we wanted to get rid of the PMI (in order to get rid of this fee you need to refinance or get 20% of the loan) . PMI literally goes to the bank and has nothing to do with your house, get rid of it as quick as you can. So we started with the lowest amount of interest in the beginning because we knew we were going to get rid of this PMI as quick as possible, thus saving money.
Real Estate Agents
Once the broker was secured we looked into which real estate agent we wanted to work with. We sat with one agent and she showed us a few houses. She was new to the real estate scene, but she was very eager to help us find a house. She showed us a few homes in our price range, but they didn't really make the scratch. She was nice and enthusiastic, but due to use being newbies in the house buying business, and she being new in the house finding business we looked for other agents with a little more experience with FHA loans. We met an agent from a big real estate firm. He knew how to process FHA loans, how to talk to sellers about how we would apply the loans etc. etc. And he ultimately had us sign a contract making him our sole realtor. Once the contract was signed, he more or less took a backseat. He would send us a few houses over email for us to check out, see if we were interested in looking at them in person, but besides a few emails he was pretty absent. New buyers with less money will take a backseat to someone wanting to buy million dollar houses- more commission.
We eventually found a townhouse in our price range (closer to the top of our range) that we really liked. Big bedrooms, small courtyard, two car garage what's not to like! Maybe the kitchen was a little old(and needed renovation) and the garage looked like the wood was being nibbled on by a few termites over time. But hey, this was the best we had seen over the months we had been looking. After talking with the realtor, he told us the house had been sitting for a few months and there hasn't been much traffic over the last few weeks.
-"Perfect! Let's put an offer for $20k under the listing price to maybe pay for the kitchen renovation"
"Ok, i'll put the offer in."
"So the seller has one other person who put an offer in, do you want to stay at under $20k or go to asking price?"
-"We really like this place, just go to asking price".
"Ok, the seller came back, the other person is offering cash and $20K more than asking"
So goes to show that we didn't get that house. A few weeks goes by, the realtor is sending fewer and fewer houses to our email. Le-wife decides to go check out new construction homes. She falls in love with a townhouse, it's large, plenty of rooms, and is a nice community with freeways nearby. She calls at 4pm and tells me to leave work to see this house as she's fighting people off with a stick. I get down to the house, check it out, looks really nice (albeit a little higher than what we originally wanted to spend). We decide that night we wanted it (there were only two houses left on the lot and they were going quick). We put a deposit with the agent and the house was secured.
With new construction homes there are a ton of benefits. Everything is new(and under warranty), there's no bidding(the price is the price), and the value of the house should go up. We got a new fridge, new washer and dryer, and water heater. After dealing with a frustrating bidding, this was our dream. And our house rose quickly in value and we were able to get rid of the PMI in two years. The funny thing about new construction is once you put your deposit down, they typically will want to use their own lender(hence why you get more benefits like the free fridge, washer/dryer etc) and there is no need for the real estate agent anymore. So after all of the lethargy from our agent he didn't have to do any of the paperwork, and he still got $30k for "bringing us" to the property. Pfft he should've split that with us.
That's the basic story of how we were able to buy our first house by the age of 23. Hopefully this helps you in your decisions in your future house purchases.