5 Preparation Steps to Move From Renting to Owning

If you’re thinking of purchasing a home in the near future because of high rent, you’re not alone. A few years ago, one in four homebuyers was looking to purchase a home because of the high cost of rent, according to Redfin. Homeownership is a big decision, so whether you plan to buy soon or further down the road, think through these initial steps to go from renting to owning.

 

Determine Your Own Rent vs. Buy Scenario

Whereas homebuying and renting are comparable on a month-to-month basis, renting still ends up being more costly in the long run because rental costs continue to rise while payments for a fixed-rate mortgage do not. Moreover, when buying, you’re building equity which is not the case when renting. Regardless, ask yourself the following questions when thinking of getting out of the rental market:

  • Do I need a flexibile housing arrangement for my job?
  • Do I have the time and means to upkeep a home?
  • How does the cost of buying a home and renting compare where I live?
  • 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

Many non-homeowners don’t know what size of down payment they would put on a home purchase as they think toward buying a home. 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:

  • Do not open a new credit card or credit account. A new inquiry on your credit report can potentially drop your credit score and affect the interest rate you’re offered or knock you out of qualifying altogether.
  • Do not make 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.
  • Do not close old, unused credit accounts or pay off old bills that are in the hands of a collection agency. Closing an unused credit account reduces the total amount of available credit to you and shortens your credit history. As for old bills in collection, 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.
  • Do remember to pay your bills on time! A 30-day late payment could clip 60-100 points from your score.

Talk to a Compass Mortgage Loan Officer

Meeting with a Compass Mortgage loan officer should be everyone’s first step when considering a home purchase, even if you don’t plan to buy right now. Speaking with a loan officer 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.

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