A couple months ago I published an article on How I bought a house at age 20. Since then, I have been asked if it would be possible to buy a house directly out of high school. I know I wasn’t ready for home ownership when I bought my first house, and I doubt the average 18 year old would be ready to own a house either, however it isn’t an average 18 year old that is going to be in a position to buy a house either! Theoretically it would be possible to purchase a house at age 18 with some proper planning.
If you remember from my previous article on buying a house at age 20, there are a few main requirements that need to be met to purchase a house: credit, work history, and cash.
Establishing Credit To Buy A House At 18:
Unless mom and dad are going to cosign (which they absolutely should not) then to buy a house a teenager would need to establish some credit. The only other avenue is finding a bank or credit union that is willing to perform manual underwriting, rather than going by a FICO score.
Establish A Savings and Checking Account: The first step is establishing a savings and checking account at a local bank or credit union. This starts a relationship with that institution and also encourages good savings practices. All lenders require several months of bank records in order to buy a house.
Get a Secured Credit Card: A secured credit card is a card limited to the amount of money preloaded to it. This can build credit, but prevents the possibility of spending more than you have.
Have Auto Insurance: Car insurance companies often report to credit bureaus, so having car insurance in your name can help establish credit history.
Even if you do all of these steps you will not be able to establish a credit score strong enough to qualify for decent lending rates, but having a credit score will give you the ability to at least get a mortgage. Expect to pay at least 2% more in interest than the rates you typically see advertised. Since the home being purchased will be a low value home, the difference made by the interest rate isn’t that much. A $25,000 30 year mortgage at 4% is $119 per month. at a 6% rate it is $150 per month. $30 a month is not a huge deal. Remember you can always refinance later or better yet, pay the house off early.
Earnings While in High School:
Getting a Job: The largest barrier to being able to buy a house at 18 is being able to earn enough money to qualify for a mortgage when 16 and 17 and still in high school. Most states have unbelievably restrictive child labor laws that absolutely need to be repealed. We complain about how lazy millenials are, but we don’t allow them to work, pure craziness! but I digress… In Michigan 16 and 17 year old “kids” in high school are limited to 24 hours per week during the school year, but can work full time hours during the summer.
If a young adult starts work on his 16th birthday and works 24 hours per week during the school year and 32 hours per week during the summer (thanks Obama!), at minimum wage he or she would earn $3,390 during the 13 weeks of summer and $7,237 during the school year. This results in a total yearly income of $10,627. Using a 28% lending guideline, the total of mortgage interest, principal, taxes, and insurance should be limited to $248/month. Assuming the monthly total for taxes and insurance would be around $100 a month this leaves $148/month for the mortgage itself. Assuming a lack of credit history would mean the teen is paying 2% over market rates in interest, this would limit a 30 year mortgage at 6% to $25,000 and a 15 year mortgage at 5.25% to $18,000. The down payment would be added to this amount.
Starting A Business: The good news is that there are no child labor laws on the self employed. If the teenager in question has his or her own business, then they can work as many hours as they want, greatly increasing the amount of money they can earn and thus the price of house they could get.
Saving Cash To Buy A House At 18:
Since the teen is living at home he probably has very little real expenses. He should have been able to save at least 75% of his gross income for the two years in question, resulting in a cash pile of $15,940. Setting aside $2,000 for closing costs and $4,000 of an emergency fund would leave roughly $11,000 for the down payment. Since this down payment would be in excess of 20%, he would not have to escrow property taxes and insurance. If he went after a 30 year mortgage he could buy a $36,000 home, if he went after a 15 year mortgage he could get a $29,000 home.
This is one of the VERY few instances where I actually side with a 30 year mortgage. I typically recomend a 15 year or a 20 year fixed rate mortgage. I think a 30 year is acceptable in this scenario because the main limiting factor in buying a house here is yearly income which should change drastically on his 18th birthday when the restrictive child labor laws go away and he can work as many hours as he wants. This is also assuming the buyer will have a down payment in excess of 20%. What kind of house can a teenager get for $36,000? Depending on the location it is possible to find a decent house for this amount, check out my article on buying a house in Benton Harbor. Buying a house based off of earnings made in high school also ensures that overall the house will become a very small percentage of total earnings as time goes on and he enters the real world.
Should You Buy a House at 18?
Here’s the kicker, while it is possible, it may not be a good idea to buy a house at 18. I think all of the steps to get there should be done regardless though. As a teenager you should build credit, you should work, and you should bank a bunch of cash, but most likely there are better things to invest in than a house when you are 18. College, retirement savings, and establishing a large emergency fund should take precedence over buying a house. Self education on personal finances should also be a major endeavor. Taking action on buying a house without doing diligent research can be a disaster. I highly recomend reading Dave Ramsey’s Complete Guide to Money before making a home purchase.
One major negative effect of buying a house is that it ties you down to a specific location. Buying and selling a house is a painful and expensive process, so unless you are committed to staying in the area for a long time (several years) buying a house makes little sense. Being mobile when young allows you to easily get up and move for an exciting and lucrative job opportunity is necessary. Before deciding to buy a house when turning 18 make sure that you are comfortable with the job market and the educational opportunities available in the area.
How old were you when you bought your first home? Do you think 18 is too young to buy a house?