As in, as early as you start making money.
It might even mean starting to plan while you’re still in high school. Decisions you make during your college years can impact your financial future for a long time (i.e., student loans or choosing your major).
Here are the critical steps you need to take if you want to purchase a home after you graduate.
1. Determine where (and what) you want to buy
Many people may not agree that this is the first step, but I strongly feel that it is. Knowing exactly what you want will allow you to set a goal.
According to Dr. Neil Farber of Psychology Today, having goals “help us to focus our energy, form plans, live a purpose-centered life, and give us a feeling of accomplishment.” He also outlines the benefits of value-based goals—creating meaningful goals based on what you value.
If you don’t know what you want, it’s hard to set a clear direction to get there.
Find the right neighborhood
Moving past the psychological stuff, I recommend doing some research on areas that you want to live. Niche.com is a fantastic website to help you find neighborhoods to live in.
Niche will show you ratings for things like nightlife, diversity, crime and safety, and housing prices. You can also see homes for sale as well as a quick breakdown of what housing is like in that area (median home values, area feel, etc.)
Know what type of home you want to buy
Once you’ve settled on where you want to live, you should think about what you want to buy. For example, most neighborhoods will have single-family homes and condos, but there are also townhomes, duplexes, and other types of homes you can consider.
If you’re looking for a traditional single-family home, this fun guide from RealtorMag shows you over 30 different types of home architectures so you can see what suits your style. You may not be able to afford what you want right out of college, but this will at least allow you set your sights on something for the future.
Which leads me to my next point:
You may or may not remember the housing crisis of 2008 (more on this below), but banks were lending absurd amounts of money to people who couldn’t afford to repay it. It caused people to think they could live in a much more extravagant or more expensive home than they actually could.
So my advice is to start small and buy an inexpensive starter home. My first home was in a city with terrible schools and only had two bedrooms.
But it worked for my wife and me.
We didn’t have kids yet, and we only needed one bedroom (the other served as an office). The house was within fifteen minutes of both of our jobs. And it served us well for years.
Too many people, including close friends of mine, think they need to buy their ‘forever home’ first. If you’re just getting out of college, I can’t think of any logical reason you’d need a big home with four bedrooms and two bathrooms.
So start small—both with your home and your budget. Doing this will allow you to make better financial decisions down the line.
2. Align your college major and job prospects with where you want to buy
Now that you have an idea of where you want to live, you’ll need to determine a major that will lead to job prospects suited for that type of area. If you’ve already chosen a major, think about getting internships in jobs that align with where you live.
Here’s what I mean:
If you want to be a Marine Biologist, don’t live in an area with no access to water. I’m sure it’s possible to have a career in marine biology, but it makes sense that you’d need to be close to a body of water… right?
Cost of living and median wages
The other thing to consider is cost of living and pay. If you want to live in New York City, I wouldn’t suggest choosing a major that might get you a low-paying job. If you’re going to own a home in an area you desire, you’ll need to balance finding a job that you enjoy with a job that pays well.
For some guidance, Zippia.com does rankings for nearly every state and many different types of jobs. You can find things like the highest paying jobs in the state you want to live in, or the best places to live for certain types of professions. You can even plug in your major to get a career path.
Here’s what I got after searching for a major in Finance:
3. Know where you stand with credit
Next, you’ll need to get your credit in order. Whether it means building credit for the first time or fixing some past credit-related mistakes, your credit score will directly impact if you can buy a home and how much you can afford.
Your credit score has a huge impact.
To give you an example of how significant an impact your credit score can make, let’s look at some current mortgage rates from myFICO. As of this writing, here are the national averages for rates based on credit score:
Look at the difference between someone with say, a 630 credit score versus someone with a 760 credit score. On a 30-year fixed rate mortgage, the person with the 630 credit score will have an average 5.630 percent interest rate. The 760 credit score person will only have an average 4.041 percent interest rate.
Because I’m a math nerd, let’s plug these figures into an amortization calculator to see how much money you’re wasting by not getting your credit score in check while in college. Because I told you to start small, we’ll use a $100,000 loan (yes, it’s possible—my first home was under $50,000).
Here’s the total cost of repayment for $100,000 at 5.630 percent (our 630 credit score person):
They’ll pay $207,350 for that $100,000 loan over 30 years. Now let’s see the person who gets the 4.041 percent interest rate (760 credit score):
$172,722. So the person with the lower credit score on a mortgage loan for the same amount will pay almost $35,000 more than the person with the higher credit score.
Those numbers show you the power of getting your credit score in check.
Get in touch with your credit report
Between medical bills, missed payments, and a lack of credit history (among other factors), it’s easy to see your credit score tank while you’re in college. It’s also easy to forget about it because you have so many other things to do.
Here’s my advice:
If you have credit, make sure you’re on top of it. Go to Credit Karma and get a free copy of your credit report so you can see if there are any derogatory marks or mistakes. If there are, you can use this guide to help repair your credit quickly.
If you’re already at a reasonable level and your credit score is 760 or above, you can follow these tips to maintaining your credit score.
The goal is to get in touch with your credit. Know where you stand and take immediate steps to improve your score.
4. Get rid of your debt
This one might be the hardest for most college students. Getting rid of your debt is critical if you want to set yourself up for financial success in the future. You don’t want to get out of college with a boatload of debt and a nice new mortgage payment, do you?
Now I’m a realist, and I know most of you probably have or will have student loan debt. In fact, Research done by Pew Research Center shows that people with a Bachelor’s degree owed a median of $25,000 in student loans, while postgraduate degree holders owed a median of $45,000 in student loans.
Credit card debt
I’m not asking you to pay off $25,000 by the time you graduate college (although that would be great). I’m suggesting you get rid of any unnecessary debt, like credit card debt. Credit card debt will not only impact your credit score, but it will also affect your ability to get a mortgage loan. Someone with loads of debt is going to have a high debt-to-income ratio when they go to apply for a loan—which may disqualify you, limit your loan amount significantly, or just give you a higher rate.
I know this is easier said than done. I was in college once, and I remember barely being able to afford that $7 pineapple pizza (don’t judge) after a long night out. My credit card balances were building and building while I was in college. So when I got my first job, I spent the first six months throwing everything I possibly could at my debt to pay it off. There was no way I was ready for a mortgage payment (not even a rent payment—I lived at home).
Live well below your means
It’s hard. But my advice to my college-self would be to live below your means. Buy only what you need and what you have the cash for. It won’t be the favorite choice amongst your college friends who want to go out for happy hour, but it’s the smart financial choice.
If you want to have any chance at owning a home after college, you need to buckle down, pay off your debt, and start living below your means right now.
I’ll get off my soapbox now and help you move toward some actionable advice. Here is some additional reading on helping you knock out your debt right away:
- 11 Ways I Paid Off $80,000 Of Debt—In JUST 3 Years—An inspirational story from David Weliver, our founder, on how he paid off a massive amount of debt in just three years.
- How To Get Out Of Debt On A Low Income—Some steps you can take to paying off your debt when you don’t have a lot of money to work with.
- Snowball Vs. Avalanche: Which Debt Payoff Method Is Best?—A comparison of two popular debt payoff methods, so you can decide which works best for you.
5. Save, save, save
If you want to buy a home after college, you need to start saving as much as you possibly can right now.
While there are pros and cons to putting 20 percent down on a home, I feel very strongly that if you’re going to purchase a home (especially right after college), this is a necessity. I’ve made both small and large down payments on homes personally, and I can say it’s far less stressful to make a sizable down payment.
The real cost of buying a home
You’ll need to also keep in mind that there are many more costs to buying a home than just the down payment. You’ll need to factor in things such as closing costs, prepaid expenses, utility adjustments, and lender-required cash reserves. Plus, you’ll want some extra cash-on-hand for yourself. With a starter home, you’ll surely need to fix a few things, and you’ll also want to keep some savings for an emergency.
If all of these costs are making your head spin, then that’s a good thing. It means you’re starting to see money as a finite resource.
Buying a home is more than just your monthly payment. It’s about the total cost you’ll pay for the house and whether or not that’s affordable for you.
So how much can you afford? I tend to avoid the advice that pegs a specific percentage of how much your monthly payment should be versus your income. There are just too many variables—such as where you live. For example, you might pay more a home that’s within walking distance to your job, but you may not need to pay for a car or gas.
How and where to save
Now that you have an idea of what it costs to buy a house or condo, let’s talk about how you should be saving this money. I’m going to leave it to my colleagues on this one since they’ve already done an excellent job covering these topics. There are two things you need to think about here—1) the methodology of how you save, and 2) where you should be putting this money.
First, Kevin Mercadante put together seven steps you should be taking to save money for your first down payment. I’m going to let you read the full article, but one of my favorite tips he provides is to set up an automated savings plan. By moving money immediately from your paycheck (even if it’s just a small amount) you’ll soon forget about missing that money, and you’ll begin to build sizable savings.
Next, Christopher Murray outlines four account types you should be considering when saving for a down payment. Like Kevin’s article above, I’ll urge you to read Christopher’s full piece, but I want to hone in on one thing he discusses—Betterment. Most traditional advice would tell you to keep your down payment savings in a standard savings account. But with inflation, you’re losing money that way.
I have a standard investment account with Betterment that has 40 percent stocks and 60 percent bonds. It’s relatively low-risk that way, but it allows me to use it as a savings account and I feel confident that I’ll earn more than a standard savings account would give me, and hopefully more than annual inflation rates. Make sure you do more research on Betterment before taking a step like this, though.
Buying a house or condo after college is going to be tough—but it’s more than possible. You just need to set a clear goal and start early. You’ll also need to live unlike most college students—below your means, staying in touch with your credit, and saving money you earn.
I’ll leave you with one of my favorite quotes about money, and it’s from Dave Ramsey. In his book, The Total Money Makeover, he says:
“If you will live like no one else, later you can live like no one else.”
Think about that for a minute.
Now go start saving for that home.
- Buying Your First Home? Make Sure You’re Financially Prepared With These Steps
- Is It Cheaper To Build Your Own Home Than Buy One?