The latest hot topic in real estate news is the cost of renting. A recent study conducted by Harvard University’s Joint Center for Housing Studies and Enterprise Community Partners, Inc, found that 11.8 million households are spending half of their take home pay on rent. The industrial standard for a quick estimate of an affordable housing payment (renting or owning) is about one-third a family’s take home pay. You can quickly understand why industry advisers are encouraging more people to purchase a property rather then rent but it’s not that cut and dry. There are many variables and circumstances to consider before you decide to rent or purchase.
When deciding whether to buy or rent, you should consider your employment and lifestyle. Do you currently hold a job and is that job likely to continue without reductions to your salary? Does your employer intend to keep you in the same location or is there the possibility or guarantee that you will need to relocate within a short time period? Are you someone who is looking to commit themselves to one location, one home for several years or do you have a bit of wanderlust?
Obtaining housing regardless of the method, requires the applicant to have their credit history examined. For someone recovering from a prior foreclosure or bankruptcy, their history may not be appealing candidates to lenders and either be denied a mortgage or offered one with a higher than average interest rate that would raise their monthly payment. If you are attempting to pay down a large amount of debt, you may also want to consider holding off on a mortgage for similar reasons. Having a low debt-to-income ratio and a solid history of on time payments will only bolster your financial health and make you a more favorable candidate.
With statistics on rent like the one above it’s difficult not to feel like as a renter you will be squandering all of your money on nothing but the numbers don’t tell the whole picture. If you are a renter and you are spending half your pay on housing, this most likely includes maintenance, landscaping, and some or all utilities. If you own your home, you will be responsible for the taxes, all maintenance (big and small projects), landscaping, insurance, and utilities. You should also consider if you’d be able to handle home maintenance and landscaping yourself or if you would need to outsource these tasks and incur another cost. These costs aren’t calculated into that “magic” one-third rule that gets touted.
After the mortgage industry collapse in 2008, lenders instituted strict rules for borrowers and insisted on larger down payments. This excluded many from being able to become home owners. As the market recovers, lenders have relaxed these rules slightly. In most instances though, you will still need a down payment to buy a home and secure a mortgage. If you have only a small fund and use all of your savings on a down payment though, you will have nothing left to use for furnishing your new home or have an emergency fund to rely on should you need it.
If you’re currently paying a high rent, you may have little opportunities to save for a home in the first place and feel like you are stuck in the rental cycle forever. That may not be true anymore though. As rental prices continue to climb but the purchase market becomes more available to more people, landlords are going to find themselves with a smaller pool of tenants. Experts don’t expect to see rental prices to decline drastically just yet but it may make more landlords open to ideas such as rent-to-own. This provides the renter an option to purchase a home when they are in a good financial position and also provides an exit strategy for a landlord. We recommend both parties of such a transaction solicit the help of licenses Realtors and/or attorneys to draw up the proper documents.
As we’ve shown, purchasing a property isn’t a black and white decision. There is no stigma is renting a home and it’s not always a poor financial decisions as many would have you to believe. We always recommend that you evaluate your unique situation thoroughly before moving forward. Our team can help you with your decision and your search for the home that’s right for you.