Buying a Home in Your 20s

A homebuyer’s plan to affording a home at a young age.

By Emily Southey | 13 minute read

Is buying a home in your 20s right for you? We dive into this question below. For many twentysomethings, purchasing a home is not only feasible but also a wise financial decision. Read on to learn how to buy a home at a young age and its benefits.

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Key Considerations When Buying a Home in Your 20s

If you’re thinking of buying a home in your 20s, you’ll want to think the decision through carefully. At any age there are factors you must consider before jumping into homeownership, but this rings especially true for young homeowners. Keep reading to discover four key considerations to make when buying a home in your 20s.

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Student loan debt

It’s not uncommon for people in their 20s to still be contending with student loan debt. If this sounds familiar, then it’s important to assess your student loan debt, along with any other debts, lines of credit, or outstanding loans, before deciding to buy a home. For example, if you have yet to pay off your student loan debt, making your monthly mortgage payments (more on that below) might be difficult.

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Further, if you have a lot of outstanding student loan debt, then your debt-to-income ratio might be relatively high. In turn, a mortgage lender may be less likely to approve you for a mortgage. If you require a mortgage to purchase a home and are not approved by a traditional lender, you might need to turn to a subprime or private lender with even higher interest rates. Alternatively, if you are approved for a mortgage, whether through a mortgage broker or bank, the terms of the loan may be worse due to your high debt-to-income ratio.

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Before committing to buying a home in your 20s, calculate your debt-to-income ratio by adding up your monthly debt (for example, student loan payments, car loans, credit card bills, rent payments) and divide it by your gross monthly income. The lower your ratio, the less risky you will seem, and the more likely you are to be approved for a mortgage at an advantageous rate. Generally speaking, mortgage lenders prefer borrowers with debt-to-income ratios below 43% and many have a cutoff of 50% (anything above 50% and your mortgage application will likely be denied).

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Monthly mortgage payment

Another consideration when buying a home at a young age is whether you can afford the monthly mortgage payment. Unless a family member is financing your home purchase, chances are you will need to take out a mortgage. Monthly mortgage payments can be expensive, especially if you’re buying a home with low income or bad credit, which is more likely the younger you are. As a person in your 20s, you may also not have enough savings for a large down payment (more on that below), further raising the cost of your monthly mortgage payments. Since monthly mortgage payments are usually the largest expense associated with buying a home, knowing how much you can afford is crucial.

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When it comes to mortgage payments, experts recommend adopting the 28/36% rule. This means spending a maximum of 28% of your gross monthly income on mortgage payments and a maximum of 36% on your other debt (for example, student loan debt payments). As an example, if you adopt the 28/36% rule and you earn $3,500 each month, your monthly mortgage payment should be no more than $980 (28% of $3,500), while your monthly debts should add up to a maximum of $1,260 (36% of $3,500). This rule is crucial to ensuring you have enough money left over to pay for other essentials, like food or transportation, while leaving you with a little extra to put in savings. Overall, when deciding whether to buy a house in your 20s, you must ensure you can afford to make your monthly mortgage payments while having enough money to keep up with your other financial obligations and necessities.

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Down payment

A third key consideration for buying a home at a young age is the down payment. The down payment is the money that a homebuyer must pay upfront when they buy a property. The larger the down payment, the better your mortgage terms will be. While there are multiple ways to fund your down payment (for example, help from a family member) and it’s even possible to buy a house with no money down, the most common way is through personal savings. Having enough money in savings to afford a down payment on a home can be tricky for young people who have had less time to grow their savings and may still be responsible for student loan debt. For this reason, carefully considering whether you can afford a down payment is critical when deciding whether to buy a home in your 20s, especially since down payments are legally required in Canada.

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Down payment requirements vary according to the purchase price of the home and the type of home you’re buying. For example, a minimum down payment of 20% is usually required when buying land or buying a new build home. For resale homes, down payment requirements are as follows:

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• 5% for homes priced at $500,000 or less;
• 5% on the first $500,000 and 10% on the remaining balance for homes priced between $500,000 and $1,000,000;
• 20% for homes priced at $1,000,000 or more.

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Ultimately, young homebuyers must ensure they can afford the upfront cost of a down payment before making an offer on a home.

Closing costs

One final consideration for homebuyers in their 20s is closing costs. Anytime you buy a home in Canada, the transaction involves closing costs, most of which the buyer is responsible for paying. Closing costs typically consist of various legal and administrative fees and can equal between 2% and 5% of the purchase price. In some instances, the buyer can negotiate with the seller to have them help cover these costs, but sellers aren’t required to do so. If you’re thinking of purchasing a home, be sure to calculate the estimated closing costs and factor them into your budget. Closing costs, along with your estimated monthly mortgage payments, down payment, and outstanding debts, all impact your affordability, which will help you determine whether buying a home in your 20s is the right decision. 

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How to Buy a House at a Young Age

Looking for tips on how to buy a house at a young age? Look no further! The experts at Wahi have put together a list of tips and tricks to help homeowners in their 20s purchase homes. 

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1. Build up your credit history

Our first tip for buying a house at a young age is to build up your credit history. This is crucial as both your credit history and your credit score have a direct impact on your ability to get a mortgage, as well as the interest rate you will qualify for. The more credit history you’ve racked up and the higher your credit score, the better rate you will get. If you took out a student loan, this is already part of your credit history. You can further build your credit history by opening a credit card and making payments with it over cash or a debit card (so long as you can pay your bill on time). Other ways to boost your credit score include keeping your credit utilization ratio (your total credit limit divided by your existing debt) below 30%, paying all bills on time and in full, and keeping old credit cards open (as opposed to closing them when you no longer need them). We also advise against applying for lots of credit in a short time as this can hurt your credit score. 

2. Take advantage of first-time homebuyer incentives

The next tip for buying a home in your 20s is to take advantage of homebuyer incentives. Between Canada’s federal, provincial, and municipal governments, there are a number of incentives and assistance programs designed to help first-time homebuyers purchase homes. Research these in advance and take advantage of any and all that you are eligible for. Some of the most popular homebuyer incentives in Canada include the First-Time Home Buyers’ Tax Credit, the Home Buyers’ Plan, Ontario’s First-Time Home Buyer Incentive, and Toronto’s First-Time Home Buyer Incentive. 

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3. Pay off your student loan debt

Before jumping into homeownership, we advise all young homebuyers to pay off their student loan debt (or as much of it as possible). As mentioned, mortgage lenders will assess your current debt levels when deciding whether to approve or deny your mortgage application and what rates you qualify for. Ultimately, paying off your student loan debt will reduce your debt-to-income ratio, and the lower your ratio, the better your odds of being approved for a mortgage and at a better rate. If paying off your student loan debt is not feasible before you wish to purchase a home, you might consider consolidating your debts into one lower-interest loan. 

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4. Consider buying a condo

Homeownership comes in all shapes and sizes. Buying a home in your 20s doesn’t literally mean buying a townhouse or single-family home. Rather, it can mean buying a condo. Buying a condo in Ontario comes with many benefits. Namely, condos tend to be cheaper than multi- or even single-storey homes, which might make them a better option for young homebuyers with less money in savings. For example, while condo down payment requirements range from 5% to 20%, as they do when purchasing a home, the purchase price of the condo is likely to be less, which translates to a smaller down payment amount. 

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A few other benefits of buying a condo include the ability to live in a more desirable neighbourhood or an urban city centre like downtown Toronto, the amenities that many modern condo buildings include, the safety and security they offer, and the shared maintenance costs. 

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Ultimately, buying a condo might be the perfect solution for homebuyers in their 20s who want to enter the housing market but who may not be financially ready to buy a home.

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5. Get a co-signer

Buying a house at a young age may be more attainable with the help of a co-signer. Having a co-signer might be the difference between getting approved for a mortgage and being denied one. This is because a co-signer significantly reduces a borrower’s risk. A co-signer will reassure your mortgage lender because they will be on the hook for your mortgage payments if you fail to pay. You can ask anyone from a family member to a friend or business partner to be your co-signer. However, be sure to choose someone you can trust and who is in good financial standing. Getting a co-signer can be helpful for young homebuyers who want to buy homes but haven’t had enough time to pay off their debts or build up their credit history,