March 8, 2022
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Knowing when to dive into homeownership when you are currently renting can be tricky.
Knowing when to dive into homeownership when you are currently renting can be tricky. How can you be sure to time it correctly with so many things to juggle? According to Nolo, the best time to buy a house while renting can't be determined by a magic formula. Instead, it depends on your unique situation. There needs to be alignment in your financial goals and personal aspirations before you buy.
That is, your financial goals might be getting your debt under control and socking away extra money for a deposit. But, if you're thinking of applying to a graduate program in another city or adding to your household, it might not be a good idea to purchase just yet, as you can't be sure what house is right for you. According to NextAdvisor, having your financial goals in order is a higher priority than any life choices around owning a home. However, do remember that personal choices are still on the list. If you want a better idea of just how to time buying a house while renting, you need to consider each of the things below.
1. Buy when you've saved your deposit
If you're trying to buy a house while renting, don't start moving forward until you know you have the deposit you need. A traditional house deposit is 20% of the home's purchase price, which might be easily achievable in just a few years in markets with a lower median house price. For example, according to Zillow, in the Texas market, the average home price is in the mid $280,000 range. Since the Texas Comptroller reports the state's average salary is between $50,000 and $60,000, a down payment of the same amount could be saved exponentially quicker than in a market like California, where the average price is $500,000 more.
According to Rocket Mortgage, however, the only reason to put down 20% or more as a down payment is to avoid Private Mortgage Insurance (PMI). If you work these premiums into your monthly payment, you can put down a deposit of as little as 3%. This makes putting enough away for a house deposit more accessible for more Americans through things like downsizing their current lifestyle, asking for a raise, taking on a side hustle, and tackling their debt.
2. Consider home ownership if you have enough for closing costs
One of the things that most renters forget to save up for is closing costs. This means that, unfortunately, you'll have to save even more money on top of your down payment for the extra bits at the end of the homebuying process. According to Quicken Loans, the total closing costs associated with a home are anywhere from 3% to 6% of the house's final cost. So, a $250,000 home would have roughly $7,500 to $15,000 in closing costs.
According to Investopedia, closing costs cover things like loan application fees, credit report fees, the first year of homeowner's insurance premiums, and additional home inspections. In some states, closing fees might also cover an attorney's fee if one is required to be present at closing, as well as courier fees if you need any documents specially delivered. As long as you plan for closing costs and factor them into your savings budget, they don't have to be an unexpected expense or become a burden during your home buying journey.
3. Move when your lease is over
Sometimes all the stars align and you somehow plan your closing date in your new home right around the time that your rental lease ends. Moving into your new home when your lease ends is great if you can make that magic happen. But, if there is still significant overlap between your rental agreement and when you're ready to buy a house, don't panic. You still have plenty of options to consider. The first is breaking your lease and leaving early.
According to NewHomeSource, before informing your landlord, read your lease carefully for any potential home buying clauses. If enacted, this clause would release you from your responsibilities with a lot less drama. In fact, consider requesting this clause in any lease going forward, as a form of protection.
If there isn't one, your next step would be to ask your landlord to go month-to-month on your lease. This means that each party would only need to give the other 30-days notice of intent to vacate. You can also consider finding someone to sublet your place or take over your rental agreement. Breaking your lease doesn't always mean huge payouts and legal drama. However, BiggerPockets also advises first time homeowners to slow down. Just because your lease is coming to an end doesn't mean you have to rush into a home.
4. Buy when you'd like to relocate anyway
If you are trying to time buying a house while renting, take a moment to consider your life over the next one to two years. If you anticipate moving to a different city for a new job or being closer to family, it can be a good idea to transition from renting to owning during this period. According to Rocket Mortgage, if you are moving to a different state, it's best to connect with a real estate agent that's local to your new area, rather than one in your current city.
You can connect virtually with your agent to establish a rapport, and if you can't make it out for in-person viewings, agents can now easily provide virtual tours. The team at Wealthfront also recommends that even if you participate in these virtual tours, visiting your new city for at least a few days is essential. Putting in an offer on a home completely sight-unseen might have bad repercussions, so it's best to avoid that.
5. Purchase a home when you need more space
Many renters transition from a rented apartment to an owned house during big life changes. These could be things like purchasing a home together with your partner, having a child, getting a pet, or even getting a new job that requires a home office. According to Dolly, you might also want to move for an external reason, like your urban neighborhood doesn't have the amenities a young family might need, or maybe the storage space in your tiny apartment simply isn't enough.
Travelers Insurance says there are a few things to think about when you're upgrading and enlarging your living space. In your smaller apartment, things like the breaker box, main plumbing lines, and other amenities might not have been in your unit. With more space comes more responsibility, so remember to familiarize yourself with the nooks and crannies of your new home.
6. Pay down debt, then transition out of renting
Something you will hear a lot about while transitioning out of renting is the status of your debt-to-income ratio. Your DTI is exactly what it sounds like: It's the combination of all your debt (student, consumer, medical, asset) weighed against your yearly income. The lower your debt-to-income ratio, the better time it is to buy a house. This is because the less current debt you have, the easier it will be for you to get a great rate on a mortgage since your credit score will be higher.
According to Acorns Harvest, if your DTI is currently too high, you can lower it by negotiating lower interest rates on consumer debt by organizing a credit card balance transfer. You can also make a dent in your debt by focusing on paying off higher-interest debt first, as it accumulates faster. Credit.com adds that completely refinancing your debt is another way to pay it down at a quicker rate, as is bringing in more monthly income via negotiated raises or a new side hustle.
7. Decide on the style of home you want, then buy
You shouldn't stop renting a house and buy one until you're sure what kind of house you want. Even if you're looking for a starter home and don't plan to live there for the rest of your life, it's a good idea to have done some brainstorming before you start going to showings or putting in offers. According to America's Best House Plans, one of the easiest ways to narrow down the type of house you want is to take a simple online quiz, just like this one from HGTV.
When renting a house, your design creativity is severely limited, as most rental agreements don't allow you to paint rooms or hang photos with nails, let alone complete any sort of upgrades or renovations. While house hunting, you don't have to know what color couch you want in your living room, but knowing whether or not you like split-level houses, bungalows, or new construction mansions is essential to know before you stop renting.
8. Buy as soon as you're pre-approved for a mortgage
Trying to buy a house while renting can be expensive. You have to pay down your debt, save your down payment, and all the while still make sure to pay your rent on time. However, if you're trying to perfectly time buying a house while renting, you'll need to have a realistic idea for your home-buying budget based on your current finances. To find out how large of a home loan a mortgage lender is likely willing to give you, you can apply for a mortgage pre-approval.
According to Investopedia, lenders will look at things like your current income, your total employment history, your credit score, and your debt-to-income ratio (which you're already working on lowering, so good for you!). Once they assess your entire financial history, they'll give you the number they're willing to lend you. If the number works for you, great! It's time to start your house search. However, if it doesn't work, you can decrease your debt and increase your savings to try again later. In the meantime, you can keep renting.
9. Consider buying after you've done your market research
Don't dive into becoming a homeowner without first doing your research. To make the best choice possible and avoid being taken advantage of, be sure to know the state of the current market, as well as common terms in the real estate lexicon. According to Insider, some common ideas to be familiar with are the various types of mortgages (i.e., balloon mortgage, interest-only mortgage, fixed-rate mortgage) because not all mortgage types will be right for your unique financial situation. So, not knowing the ins and outs of them could lock you into a bad monetary choice.
In addition, you need to know terms around the purchasing process, like escrow (the safe place your money lives while you finalize arrangements) and title search (how you make sure the home's current owner actually owns it). Purchasing a house sometimes can feel like learning a new language, so the most important thing is to form a solid relationship with a good real estate agent. This way, you can clarify any terms or ideas you aren't sure about through expert advice.
10. Ensure you're secure in your current job
Before you can stop renting, you need to qualify for a suitable mortgage. To do this, you'll need to time it so two things are true at once: You're currently employed, and you have a good work history. According to Free And Clear, homeowner hopefuls need to have at least two years of consistent job history under their belts before applying for a mortgage. Lending companies don't care if you have a fancy job title. They just want proof that you have a way to continue bringing in consistent money to take care of the upcoming monthly payments.
You also don't need to have been at the same job for the same two years. If you've bounced around in your employment recently, you'll just need to prove that you did so to increase your income (e.g., you took a new job in your field at a higher salary), or your income at least stayed the same with each new position. Remember: You don't need to justify your reasoning behind your employment history, just the hard numbers.
11. Purchase a home when you haven't made any other expensive purchases
If you are currently renting a place to live and are in the process of trying to purchase one instead, be sure not to open any new lines of credit anytime soon. Opening a new credit card, taking out a personal loan, or even purchasing a new car with a monthly payment requires a few things that will work against you. According to the National Foundation for Credit Counseling, one is what's known as a "hard hit" on your credit score, which means an official inquiry. These inquiries temporarily lower your score. The second thing is that new debt of any kind increases your DTI, which reduces your chances of a suitable mortgage.
According to Credit.com, while it's not a great idea to take out new credit during the home buying process, it's even more important to be especially careful during the period between being pre-approved for a mortgage and closing on the house. This is because your pre-approval won't be honored if there is a significant change in your personal financ
12. Buy when the mortgage would be less than your rent
Buying a house is likely to be the biggest purchase you ever make in your life. So, when you transition from being a renter to a homeowner for the first time, you want to make sure your finances are in order, and it's a choice that will benefit you both now and in the long term. To help decide if owning vs. renting will be better for you at this stage in your life, you can use budget calculators to consider the ongoing costs of homeownership and determine the best financial choice.
For example, NerdWallet has a great tool where you can plug in numbers like the home's cost, your down payment size, and your mortgage's potential interest rate to get a better idea of what your monthly payments might be. In some cases, a mortgage payment might even work out to be less than your rent, which means it's the perfect time to buy. According to The Mortgage Reports, even factoring in things like HOA fees, insurance, and maintenance, might make the investment worth it if you're building equity in your home instead of paying your landlord's mortgage.
13. Move during the offseason for a competitive edge
If you're trying to outsmart the housing market when buying a home, it's nearly impossible to do. Instead, a better option is to follow more general annual trends. While they aren't set in stone, they are typically more predictable. For example, according to Rocket Mortgage, more people move in the summer to not disrupt the school year. Ensuring their kids start at a new school in the fall tends to be important for families, so avoiding a summer move can be strategic.
If you are moving mid-school year, you might be able to give yourself even more of an advantage of moving during the winter. This is because while some families might be okay with swapping schools in the spring or fall due to unforeseen circumstances, a significantly larger proportion of people do not want to move in the winter under any circumstances. Just the thought of carrying a couch down icy steps or loading a moving van in freezing temperatures makes us shiver. However, if you're willing to do that, you might find a housing market more conducive to buyers.
14. Research homeowners insurance before you move
While renting, it's possible that you took out renter's insurance to cover your belongings in case of disaster. However, once you become a homeowner, you will need to consider insuring not only a home's contents but the actual home itself. According to the Insurance Information Institute, there are different levels of homeowners insurance available to you, depending on the type of coverage you want.
For example, you might just get a policy covering your home in case of a disaster. However, you can also be covered for any injuries that might occur on your property, like if a guest falls down your stairs or your dog bites the mail carrier. Homeowners insurance doesn't cover everything, though. If you live in a market where there are earthquakes (like California) or floods (like Florida), then you will need to purchase a separate policy to protect your home against these disasters. Knowing your risk tolerance and the potential premiums for certain locations before becoming a homeowner will make sure you can better time the process. This is because you'll have your finances in order ahead of time.
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