How to Transition from Renter to Homeowner
Knowing when it’s time to transition from being a renter to a homeowner is an individual decision based on different, yet interconnected, factors that can determine if you’re able to get ahead with real estate. As with most financial decisions, the foremost consideration is cost. Can you afford to make the transition? As it stands now, the median home price is $258,300, and conventional loans generally require a 20% down payment. This equates to $51,660 just for the down payment alone and does not include additional closing costs.
The Benefits of Buying a Home
Going against the home-buying misconception that buying a home can lose you money, the financial upside of pulling together the cash needed to purchase a home is the that real property is an appreciable asset. Putting aside economic issues such as “bubbles,” which over-inflate home values to unsustainable levels, property increases in value over time. Over time, as you pay off your mortgage, your home equity increases. If you decide to sell your home at a future time, that increase in equity could translate into a larger return on your investment. Of course, the condition of the home, its location, and the difference between what’s still owed on your mortgage versus the selling price also factor into how much you will profit from the current equity level.
Home ownership has two additional perks: freedom and privacy. When you rent, you’re tethered to what a landlord or property manager dictates is allowed. Have pets? Want to paint the walls black? Your ability to make changes, even the smallest kind, is severely limited (unless, of course, you have a great relationship with your landlord). Also, if you’re locked into a lease but either need or feel the urge to move, this likely means handing over more cash—depending on the terms of your lease.
The Benefits of Renting a Home
In terms of privacy, most renter’s agreements have a clause that stipulates the landlord has access to the home with a certain amount of notice (usually 24 hours, but this can vary). On the flip side, the landlord is responsible for essential home repairs. Leaky roof? Faulty plumbing? It’s the landlord’s problem to solve. So, there are positives to renting, which includes not having to spend hundreds—or thousands—of dollars to repair a failing air conditioning unit. Additionally, you have more freedom to move when compared to the lengthy process it takes to place a home on the market and then keep your fingers crossed that escrow closes.
Financially, renting is less expensive. After all, you’re just paying rent and utilities monthly. No property taxes. No interest on a mortgage loan. And when you decide to move, most rental agreements that require a deposit also delineate that you’ll receive that money back. Of course, this is further dependent on the condition in which you leave the home. If everything is clean and pristine, and all other rental agreement specifications have been met, then those facts increase the likelihood you’ll get your deposit back.
Signs You’re Ready for Homeownership
Do you have the required down payment amount? What is your current financial situation? Are you trying to repay your student loans? Do you have good credit? Have you discussed your home-buying plans with your partner? These are the first three questions to ask yourself, as these are the first steps anyone can take towards buying a home. If you’ve chosen a non-conventional loan option, such as an FHA, VA, or USDA loan, then the down payment can be as low as 3%. Otherwise, as stated above, 20% is usually required for a conventional mortgage loan.
The same can be said for your current debt as listed on your credit record. Conventional lenders are more stringent about your debt to income ratio as well as a good to excellent credit score. Non-conventional loans have minimum income requirements, even though they do not have as strict demands for the debt to income ratio calculation and their credit rating threshold is much lower.
Do you have a sizable savings? Some conventional lenders also require that you have a certain amount saved up for six months’ worth of mortgage payments. Though this isn’t a widespread practice, it’s a smart move for you to a savings account balance worth at least six months of your monthly salary. This gives you some breathing room in the event an unexpected issue occurs (e.g. losing a job, health issues, or in the event of a natural disaster).
Whether it is a house or an apartment, most people start their journey through adulthood by renting. Therefore, it’s a financially sensible move while you’re establishing your career and deciding where you’d like to plant more permanent roots. You’ll know the time is right to buy your first home when you’ve accumulated good credit, the right down payment, and you’re ready to take full responsibility for all of the time and energy that goes into being a homeowner.