If you’re thinking of purchasing a home in the near future because of high rent, you’re not alone. In the first quarter of 2016, one in four homebuyers was looking to purchase a home because of their expensive rent, according to Redfin. Homeownership is a big decision, so whether you plan to buy this fall or down the road, walk through these initial steps to go from renting to owning.
Determine Your Own Rent vs. Buy Scenario
According to the latest Trulia Rent vs. Buy Report, homebuying is 36% cheaper than renting. While rental prices continue to rise and mortgage rates have been favorably low, you need to assess your own personal and financial reasons to determine which option is best for you. Ask yourself these questions when thinking of getting out of the rental market:
- Do I need living flexibility for my job?
- Do I have the time and means to upkeep a home?
- What’s the rent vs. buy cost scenario in my area?
- What’s the real estate market doing in my area?
- Am I comfortable with my finances?
- Do I want the ability to personalize my living space?
Understand the Total Cost of Owning a Home
A mortgage payment is more than just your principal and interest rate. As a homeowner, you’ll pay what is called PITI – principal, interest, taxes and insurance. So on top of your monthly housing costs, you’ll also need to pay for additional protection for your asset (homeowners insurance), fees for community upkeep (property taxes) and protection for your lender (private mortgage insurance) if you put down less than 20 percent on your purchase.
When determining your homebuying budget, you should also factor in the cost of regular home maintenance (roughly 1 percent of your home’s purchase price per year), utility costs and closing costs (which range anywhere from 3 to 5 percent of your home’s purchase price).
Know Your Mortgage Options and Your Homebuying Timeline
Nearly 25 percent of non-homeowners “don’t know” what size of down payment they would put on a home purchase, according to a 2016 Bankrate survey. Knowing your available mortgage options and their qualification criteria is essential in making the switch from renter to homeowner.
For instance, a 20 percent down payment is no longer necessary to purchase a home. Certain loan types allow 100 percent financing but if you need to save for a down payment and/or closing costs, you’ll need to know how much to save and determine how long it will take you.
Strengthen Your Credit Score
If you know you’ll be applying for a mortgage in the near future, there are certain actions you should avoid taking in terms of your credit. For starters:
- Don’t open a new credit card or account. A new inquiry on your credit report can potentially drop your credit score and affect the mortgage rate you’re offered or knock you out of qualifying altogether.
- Do remember to pay your bills on time. A 30-day late payment could clip 60-100 points from your score.
- Avoid making big purchases on your existing credit cards. Keeping revolving balances low will not only help keep your score in good shape (and likely increase it) but will also open up the means for increased mortgage affordability.
- Don’t close old, unused credit accounts or pay off old collections. Closing an unused credit account lowers your amount of revolving accounts, decreases your total amount of available credit and shortens your credit history. As for old collections, don’t pay them off until you have spoken to a lender. Paying an old bill that went to collections brings that discrepancy to the present and can severely drop your credit score.
Talk to a Mortgage Banker
Meeting with a mortgage banker should be everyone’s first step when considering a home purchase, even if you don’t plan to buy right now. Speaking with a mortgage banker can give you an idea on the loan type that’s best for you, what an affordable mortgage payment looks like and what you need to do to get into the best financial shape to buy a home.
Interested in learning more about the homebuying and home financing process? Download our free Mortgage 101 Handbook for loan types, credit score information, the financing process, mortgage glossary and more.