Hello! Today, I have a great guest post from Mama Bear Finance. She bought a house at 25, and just 8 years later, it is now fully paid off. She will share with you a story of why she bought a house at age 25 and what steps she took to get there. Her story recounts the sentiments during the previous financial crisis also known as the Great Recession. As the stock market changes in recent news, hopefully this experience could provide insights during times of financial unrest and inspiration to stay the course with your financial goals despite uncertainty.
Buying a house is by far the largest purchase for most people regardless of age. But when you buy one at the tender age of 25, it really raises some eyebrows.
“You must be rich or came from a rich family,” one might assume.
“Either that or you robbed a bank,” one might even joke.
Nope and nope.
While this became one of my major personal milestones, the beginning of homeownership gave me unspeakable anxiety.
You see, it was back in 2011 when the mortgage crisis was at full speed.
Foreclosures and Short Sales Were Rampant
When you had just signed a mortgage during the Great Recession, you can’t help but have a small nervous breakdown.
“Did I make a mistake?” I anxiously pondered to myself.
This was during a time when my best friend’s home had just been foreclosed. I’ve frequented her home since elementary school all the way up till the 12th grade, so seeing that For Sale sign hanging on her lawn made me shivered with sadness.
Also, I had just started my full-time job two years ago. Sure, I racked up enough savings for a 20% down payment, but I was still very nervous about shouldering the rest of the 80% debt burden.
But despite all the emotional unrest, I was still determined to own a home.
The temptation is especially strong when you’re a renter but being so not by choice.
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- 20 Ways I Saved a 20% Deposit To Purchase My First Investment Property At 20
- How I Paid Off My $400,000 Mortgage In 7.5 Years, Before I Was 32
- How To Save For a House Deposit
I grew up living in a household that lived paycheck to paycheck. Well, don’t feel sorry for me just yet.
Even though my parents worked minimum wage jobs while raising me and my two little sisters, I seriously felt that we have the best parents in the world despite having very little.
Both of my parents have strong values and believe in hard work. They instilled that virtue in us to work hard for whatever we believe in.
Furthermore, they spoiled us with love and anything they could afford no matter how much it cost. In fact, I never felt poor living in my family. Even though I knew I was poorer than most of my friends at school, I truly felt rich because of the parents I have.
You see, my dad believes highly in education. He taught me that having knowledge is a much more abundant resource than having money itself.
On the other hand, he doesn’t believe in materialism. He was quite frugal, but he’ll spend on anything for me and my sisters. Luckily for him, my sisters and I didn’t need much.
My mom is the most generous person on earth. No really! She has the most unselfish soul. I’ve seen her give away money to those in need when we probably needed it equally.
Some might call this “foolish,” and at times I might agree. But it’s because of her simple kindness that I felt lucky to have her as a mom.
So you see, even though we lived paycheck to paycheck and we were quite frugal, I’ve never felt deprived.
Impossible to Become Homeowners?
My parents were really great at hiding finances from us. I never knew how they managed their finances until I started to take over some of the expenses once I got a part-time job.
I volunteered to pay for utilities. That was okay, it didn’t cost too much (this was a decade ago). I was working part-time as a teller at a bank and with that meager salary, I was still able to help out my family while paying for my college expenses.
Luckily and thankfully, I had scholarships that paid the rest.
I did this job for about two years and then I transitioned to a “highly coveted” internship – one that paid $16 an hour back in 2007. (Most internships at the time were unpaid.)
With my hourly wage now increased by 60%, I offered my parents to pay for half of their rent.
It’s around this time that I learned about managing personal finances as I now have my own money to handle.
It was then I learned that our rent for a humble 3-bed, 1-bath apartment cost my parents one-third of their income! There weren’t many savings left after all of the living expenses.
From then on, I started to wonder about the prospect of buying a house. I begin to ask my parents if they had thought about it.
“Of course we did!” they exclaimed. “But every time we wanted to do it, some emergency would always come up. Plus, we want to save what we have for you and your sisters’ future education.”
And there, those sentiments alone left a great impact on me. For the first time, my parents expressed their vulnerabilities in managing their finances. They weren’t in fact really managing, but was just getting by the best way they could.
Buying a House for the First Time
There are many ups and downs to owning a house, especially when you’re an inexperienced first-time homebuyer.
Because I felt incredibly grateful to my parents for providing a better future for me and my sisters, I was determined to buy a house so that we’d stop paying rent.
Little did I know that during a time of great despair came a window of opportunity.
Since the housing market crashed, all of the houses on the market suddenly went “on sale.” But the only question remained: Do I dare to jump into a firepit?
Even though the housing prices were seemingly cheap, no one knew how long the free-fall would continue, and thus hardly anyone was buying.
Not to mention, banks were beginning to tighten their lending standards. At the time, they required first-time homebuyers to have at least 20% down payment and a decent credit score or borrowers would have to pay PMI (private mortgage insurance) which is an extra expense.
Therefore, my missions were simple: 1) find a job, 2) build credit, 3) save, 4) get a mortgage loan pre-approved, and 5) find an agent and start the housing search.
How to Buy a House
1. Establish an Income History
Ten years ago doesn’t seem like a long time but during the period of financial crisis, banks were only issuing credit to those with a substantiated income.
So while I graduated during the worst economic crisis, I knew I had to research 10x as hard to land a job.
Finding a job was already difficult, but finding a job for my field of study (finance) was a grueling process.
Thankfully, I had done an internship during a time when internships weren’t technically a pre-requisite for landing a job upon graduation. Times have changed though and having an internship seems like a requirement now.
And so I landed a job at a Los Angeles-based private bank as an analyst a few months after graduation.
My starting salary was only $45,000 after bonus and this was mainly driven by the high supply of applicants and low demand of employers.
But I did get a raise year after year which helped for the next steps ahead.
With an income secured, I begin to work on building up my credit score.
2. Build Up Good Credit
I didn’t know what a FICO was until I applied for my first credit card, and even then, I had very little understanding of it.
Thankfully, one of the duties at my job was to analyze the credit trend of portfolios, so that’s where I really understood the importance of having a good credit score.
At the time of the mortgage crisis, the banks scrutinized very closely at three fundamental factors:
- your FICO score;
- your credit history;
- and your current income history
With this information, the underwriters will evaluate the risk for the bank to grant you a loan.
The FICO score and an established credit history are very important factors to evaluate a borrower’s creditworthiness.
Meanwhile, a borrower’s current income will be used to determine the mortgage amount based on the “DTI” or debt-to-income ratio. The higher the income, the higher the pre-approval amount.
How Does a FICO Score Work?
A FICO is a credit score that is used most commonly by creditors.
The scoring system ranges from 300 – 850. To be considered a loan during the mortgage crisis, one needed to aim for a credit score of at least 670.
The higher the credit score, the better an indication of your creditworthiness to a lender.
Since the only credit I had established was my student credit card, I decided to open up four more credit cards and use them frequently to build up credit.
At the time, having an average of five credit cards was the best practice for establishing a credit history so long as you pay on time.
How I Established My Credit History
With all five of my credit cards, I made sure to pay in full every month and never late. I was also very careful with not overextending myself and accumulating a balance that I could not afford.
Basically, I used these credit cards as if they were cash on hand instead of credit.
This method seemed to work out very well and after two years of establishing my credit, I earned a FICO score of 750.
As a measurement, anything over 740 is considered very good while anything above 800 is considered exceptional.
But to get 800+ score, one must have more than just revolving loans (i.e. credit cards). It was recommended to throw installment loans into the mix such as having a car payment, which was one of the popular choices.
I didn’t feel like financing a car while trying to buy a house, so I settled with having just revolving loans while aiming for saving up cash instead.
3. Spend Less and Save More
There’s no secret for those who saved enough for a 20% down payment, you just have to focus more on saving and less on spending.
During those two years of working full-time, I put savings as my priority.
First of all, I lived at home so I shared my living expenses with my parents.
During the weekdays, I would bring lunch to work at least three times a week, reserving one or two days of eating out with co-workers.
Since I worked in downtown Los Angeles in the financial district, the monthly parking fee was hefty. Therefore, I opted for taking the bus since public transportation was subsidized by my company.
During the weekends, I would still go out with friends but I would try not to buy frivolous things that I didn’t need such as expensive clothes and shoes besides work attires.
I also didn’t own an iPhone between 2009 – 2011 and I had the cheapest cell phone subscription – a family plan where we all shared data.
But none of these tactics were easy, and especially so in your twenties.
Social Pressure Can Destroy Wealth
Looking back, I was really glad that I hung out with a group of awesome co-workers and friends who didn’t judge me on my lifestyle choices.
Sure, there were numerous incidents where they tried to “influence” me into buying an iPhone so that we can iMessage each other.
Or the times when they wanted to go out clubbing every weekend and sometimes including weekdays. I had to decline partly because I’m a homebody, but most notably because I didn’t want to overspend a month of my hard work.
But I know that social pressure can easily destroy wealth if you don’t have enough self-restraining ability or just the confidence to say ‘no.’
During some of my chats with my friends and co-workers, we discussed buying new cars, going to concerts or expensive music festivals, and just upgrading our lifestyle in general.
We were all making more or less the same salary yet we spent on entirely different things.
But since I had such strong determination to buy a house, I didn’t care for keeping up with them. And luckily, they didn’t banish me for not conforming either.
Therefore, I think having self-determination and a supportive circle of people can really be a game-changer in terms of saving and building wealth.
4. Get Pre-approved for a Mortgage
After two years of diligently working and saving, I finally racked up 20% for a down payment.
I recalled getting pre-approved for a loan of $320,000 and I ended up buying a house just shy of that amount.
The process of getting the pre-approval was quite stressful though because there were so many new financing terms to learn.
For example, an interest rate is different than an APR or annual percentage rate. While the interest rate only encompasses the cost of borrowing the principal amount, the APR includes the interest rate plus all of the associated lending fees, points, and costs.
Then, a mortgage is amortized throughout the life of the loan known as a loan amortization. This means that the monthly fixed payment is applied towards both the interest and principal.
Furthermore, every lender charged varying interest rates and APRs and have slightly different mortgage approval processes.
My mind was in overdrive trying to absorb it all.
But in the end, all it took was to have a good credit history, a reasonable paying job, and 20% cash for a down payment to get that pre-approval letter.
As a result, I obtained three pre-approved loans from the largest banks in the country and naturally, I chose the one with the most favorable terms (i.e. APR).
Thanks to my FICO score of 750, I was pre-approved for a 30-year fixed loan with an interest rate of 4.875%.
And so with the pre-approval letter in hand, I begin my house searching.
5. And So the House Hunting Begins…
This is the part where I think I was too inexperienced to be a homebuyer.
I made numerous mistakes here, some of which included:
- Not vetting the real estate agent properly (I only conducted one interview and hired the first person)
- Not setting ground rules. In actuality, I didn’t even know what rules to set!
- Not acting on red flags. For example, I withdrew one of the offers I made and my real estate agent was not too happy about it. This should be a red flag because I’m pretty sure it’s not unusual to back out of a deal.
- Letting my real estate agent choose a home inspector. Big mistake here obviously, as I found some issues after moving in. I kicked myself for that.
The only thing I did right was to ignore my real estate agent’s advice of buying a condo over a single-family residence (SFR). Her reasoning was that I was only in my twenties, so perhaps it’d be wiser to buy a condo instead. She knew of a couple that she wanted to show me.
LUCKILY, I was adamant about buying an SFR so I didn’t take her advice.
Buying a condo in the neighborhood she suggested would have meant a lower home value appreciation rate and harder to resell comparing to the home I eventually bought.
In the end, we only looked at 8-10 houses until I found the one. Actually, this was just a starter house, but at least the monthly payment was very comparable to the rent we were paying. It was nothing fancy but definitely an upgrade.
Eight Years Later…
Sometimes I think that a bit of stress-induced life circumstances can push us forward.
For one, I was among the few who bought a house at such a young age. It was definitely not a walk in the park as it was full of anxiety due to the scar left by the financial crisis.
But in the end, the housing market recovered and even marches forward to a new height.
The value of my house is now close to double without my artificially inflating the value through home improvement.
During this time, I continued to spend sensibly but instead of pumping money into my savings, I devoted them to paying down my house and other investments.
After eight years and tripling my salary, I have fully paid off my house. Had the financial crisis not happened, I don’t think I would have had the chance to buy a house at such a steep discount.
And had I not experienced living as a renter for most of my life, I wouldn’t have that strong determination to become a homeowner at age 25.
But despite the value appreciation and the early mortgage payoff, what I’m most grateful for is to have bought a house for my parents.
…A house where we can all call home.
Are you thinking about buying a house soon? Why or why not?