Lisa, 32, lives in Brooklyn and is wondering if it’ll ever be possible for her to buy a place of her own. She’s dreamed of doing so for years, and figured she’d start saving up once she met someone to settle down with. But it doesn’t look like that’s happening anytime soon, and she doesn’t want to put her home-buying dreams on the back burner just because she’s single. Still, how could she afford it? She makes a decent salary as an HR manager, but she is nowhere near having the kind of cash she’d need for a down payment on an apartment. She’s put away a few thousand dollars for an emergency fund, but that’s it — and it was really hard to save up. Is she insane even to think that buying a home could be a possibility? And would it be a good move, financially?
As a young person in New York, I discovered that owning an apartment was code for “my family is rich.” I didn’t know anyone who’d bought a place with their earnings alone — unless they were my parents’ age, in which case they were probably also housing their adult children. Even for my friends with high-paying jobs, the financial commitment of real estate seemed unfathomable — so much money parked in one place. It was hard enough to scrape together the security deposit for a rental, let alone chase the white whale of a mortgage.
Now that I’ve watched some of my peers test the home-owning waters as we entered our 30s, the process seems possible. What used to seem like a quagmire of debt, interest rates, and unaffordable fees is now just a matter of following a formula and deciding which compromises to make (and there will be many). A few of my friends recently packed up for more affordable cities after becoming parents, and now have a house and yard to show for it. They miss New York, but their priorities have moved on. As for me, like the majority of New Yorkers, and 71 percent of our age group, I’m still a renter. Aside from the occasional squabble with my landlord about fixing our sink drain, I’m pretty happy with where I live and what I pay for it.
So, how do you know if buying is your priority? The decision to buy is twofold: First, there’s the cold math of whether you’ve got the money, or —more likely — what you’ll have to do to save it up. And second, there’s the emotional component: You have to want to put down roots. “I find that the rent versus buy question isn’t formulaic. It’s less of a quantitative matter and more of a rite of passage or stepping-stone,” says Kristin O’Keeffe Merrick, a financial adviser at Raymond James. “There’s a great deal of responsibility that goes into homeownership. You must be willing to take care of your home, and you must be able to afford it. If you check both boxes, then it may make sense for you.”
Also, Merrick adds, you need to be ready to stay put for a while. “Buying and selling a home is a long process that requires a lot of capital and patience,” she says. “It’s not prudent to embark on homeownership if you think you won’t stay there for more than four to five years.” Obviously, you can’t predict the future, but if you’re about to make the biggest purchase of your young life, you should know yourself well enough to feel confident in making a long-term choice.
That being said, you’ll have plenty of time to think about it. Saving up for a down payment will likely take a few years and some discipline. First and foremost, tend to your credit score. You’ll want one that’s at least 740 or higher to be eligible for the best mortgage rates, which will save you thousands, and it’s not worth jumping the gun. Second, you should always be putting away 15 to 20 percent of your income for long-term savings (a mix of retirement, big-ticket items, and your emergency fund); once you have your eyes on a prize like a house, you might want to get more aggressive. If it’s possible, find a way to put away 25 percent of your income, or pretend you never got that bonus or raise and sock it away.
Case in point: Annie, 38, bought a studio in Brooklyn two years ago on a librarian’s salary. “I never thought that I could own an apartment — I don’t make a lot of money,” she says. But when she got her first full-time job after grad school in her early 30s, she saw an opportunity. “At the time, I was used to living very, very cheaply, supporting myself on my part-time job as a Broadway usher. Then, when I got the librarian job, I was suddenly making more than double what I was used to. I figured if I kept on living like a student for one or two more years, I might be able to afford a down payment to buy my own place.” She hunkered down in a shoebox-size room with a twin bed until she’d saved up $30,000. “I thought I could stay longer and save up for something bigger,” she says, “but then my roommates started to drive me crazy.”
As for the hard-and-fast numbers: There’s no way to hack this part. However, the internet is teeming with free, user-friendly “home-buying calculators” that add up your costs and help you determine what you can afford. They’ll factor in your local taxes, income and savings, credit score, where you want to live, maintenance fees, and other expenses that are easy to overlook — and they’ll also allow you to futz around with different amounts and see what’s within reach. (Just Google “home buying calculator” and you’ll see what I mean; I recommend Zillow’s, because it includes explanations of each cost category.)
For Annie, the math worked out perfectly. Her $30,000 in savings was enough to cover the 20 percent down payment on her $109,000 studio, plus closing fees, and she pays about $900 per month in housing costs (insurance, mortgage payments, and maintenance). “That’s about what I’d be paying in rent for a similar place,” she says, “so it’s a good deal.” She also made sure to have some money left over to maintain a small financial cushion, just in case — “emergency funds” are even more essential for homeowners, because you’re on the hook for nasty surprises like, say, a flooding dishwasher, broken window, or worse.
While the buying process is multi-step, the rules are straightforward. For instance, experts agree that you shouldn’t try to pay less than the 20 percent down payment (it’ll require you to take out a second loan to make up the difference). Other general guidelines: The value of your house shouldn’t be more than four times your household income, and remember that closing fees (including a lawyer and an inspector) usually amount to about 6 percent of the full value of the house. Also, do not skip the inspection step in the buying process; forgoing an inspector could leave you with a worthless pile of rubble instead of the sturdy four walls you paid for (the seller should pay for essential repairs before you move in). Trying to wiggle out of the above expenses will cost you. Falling behind on your mortgage will compound quickly, and if you default, it’ll be very difficult to get another one ever again. On the upside, first-time homebuyers are often eligible for certain programs that will get you a better mortgage deal (you can check some of them out here).
Some encouraging news for you, Lisa, is that you’re part of a trend: Single women are currently buying homes at twice the rate of single men. “It really is doable,” says Annie. “Once the idea was planted, I kept meeting people who had bought, who were my age, and had normal jobs like I did.” Sure, her neighborhood wasn’t her first choice, and her place is small — but she still loves it. “It’s not perfect, especially in terms of location and size, but it’s a start,” she says.
Ultimately, real estate is an investment — a big emotional one — and you’ll want to balance it carefully with the rest of your finances. “Remember, your home is an illiquid purchase — it will most likely rise in value over time, but that money is not ‘liquid’ to you,” says Merrick. “If you move quickly, it would take several months to sell.” Unlike, say, the stock market, you can’t get your money out of it right away, so you should make sure to keep diversifying. Owning a place doesn’t mean you’ve “made it” — it may represent financial security, symbolically, but it’s only a piece of the bigger pie.