How Do I Decide if I Should Rent or Buy a Home?
One of the famous questions we hear from people is should I just keep renting or should I buy a home. There is not a simple answer to this question, as it depends on several factors, including your:
- Credit history
- Financial stability
- Ability to maintain the property
- Desire to set roots
While you need a good credit score to rent a property also, you especially need one to get a mortgage approved from most lenders. Also, your interest rate and points (costs) on your loan can be impacted by your credit score. Hence, if you have a poor credit history, you may want to work with a financial advisor and work on repairing your credit prior to trying to buy your first home. A good way to think of it is your credit history shows a lender your willingness or commitment to honor your financial obligations - and pay your mortgage on time.
If you are hoping to buy a home in the next two years, let’s connect and talk about how we can help you strategize a path for making that happen - including connecting you with a lender who can guide you through improving your credit history in preparation for making a home purchase.
Another consideration when buying a home is the stability of your income and savings. When you apply for a conventional loan, the lending officer will look for a steady, reliable source of income as well as any other debt payments (car, vacation home, boat, college, etc) you may have. They add up all your debt payments and divide this by your gross income (before deductions for taxes, insurance, etc) to determine if you can afford the property you are trying to purchase. According to the Consumer Financial Protection Bureau, studies evaluating mortgage loans found that borrowers with a higher debt-to-income ratio were more likely to have difficulty making monthly payments. Hence, most lenders will not approve a loan that exceeds a 43 percent debt-to-income ratio.
Also, a lender will be looking for a stable job. Hence, if you are planning to buy a home soon, now is not the time to switch jobs. A lender would prefer you to have a two-year history in your given position. However, they are willing to make exceptions, as some buyers are just starting a career or are moving for a new job. You will want to keep a copy of your offer letter available to show a potential lender if you are beginning a new position so they can see the strength of your new position.
The other thing to consider is that not all people work directly for someone else in a salaried or hourly paid position. If you are self-employed, work on commissions, or do gig work, it is key to work directly with a lender who understands your situation. You may need to ask around to find a good lender that specializes in these situations. Also, you will want to give yourself a little extra time to get your pre-approval letter before you make an offer on a home, as verifying income for some situations can be challenging.
While your credit history shows your willingness to pay your bills, your income demonstrates your ability to pay.
ABILITY TO MAINTAIN A PROPERTY
Home maintenance is a topic many people don’t take into full consideration when deciding to buy a home. As a renter, your landlord has an obligation to maintain the property to certain health and safety standards, so if certain things wear out or are damaged in the property - they have to fix it. However, if you own a home, those things become your obligation.
For example, if your hot water heater breaks in a rental, your landlord is responsible for repairing or replacing it in a timely manner. However, if you own the home - it will be your responsibility to cover the cost of a plumber to come assess the item and either repair or replace it. Little surprises like this can sneak up on a person, so you will want to connect with your financial advisor and determine how much money you should set aside each month as a contingency fund for repairs such as this. In addition, you will likely need a monthly budget for home maintenance - such as lawn mowing supplies or money to pay someone else to do it, etc.
If exterior maintenance is an issue for you but you want to own a home some condos or patio homes come with some maintenance included in a monthly Homeowners Association fee that you pay to live in the community. They may be a good option for you if exterior maintenance is an issue for you.
DESIRE TO SET ROOTS
Finally, your decision to rent versus buy should also take into account your short-term plans. If you don’t plan to live in an area for more than five years, you are not likely to recoup the cost of buying and selling your home in that time period. There are exceptions to this rule, but this is a rule of thumb for the amount of time needed for a home to appreciate enough to offset the closing costs, realtor commission, and prep work needed to sell a home. However, it should be noted that this is not a guaranteed timeline. The real estate market fluctuates with the economy.
Also, if you live in a home for less than two years but are lucky enough for it to have appreciated in that time to the level that you are able to sell at a profit, you will be required to pay long-term capital gains, which is 15 to 20 percent. However, if you live in the property for two or more years, you are able to make $250,000 (if single) or $500,000 (if married) tax-free profit.
Written By Dr. Marci L. Hardy, PhD
SOURCE: Consumer Financial Protection Bureau. What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important? November 2019. https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/. Accessed September 27, 2020.
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