An Extensive Guide For Moving From Renting to Homeownership
A house is the most expensive asset most of us will ever buy. Typically, it involves years of hard work, investment, and some pretty deep life choices. It goes without saying that jumping from renting to owning is as tempting as it is frightening.
In this guide, we’ll dive into the different things to consider when getting ready to buy a home and end your time as a renter.
Making the Right Move
The housing market may look hostile, but buying a home is still one of the most solid investments one can make. However, miscalculating the steps between renting and buying can land you in some serious financial troubles.
Luckily, the reasons for not buying a home are pretty straightforward:
- You haven’t saved the funds yet to put a down payment
- You don’t have funds to cover closing costs
- You have a low credit score
- Not the right time to switch
Lack of funds or a low credit score should stop you before you even start. It’s not worth the risk of making your financial situation worse.
Even if you do have funds, it may not be the right moment if you need flexibility. Timing is important to consider too.
Buying a home usually involves settling down for a while. So, if you’re planning to move to another place soon to work or study, it might not be the right moment for such an investment unless you’re planning to become a landlord once you move by keeping this purchase as an investment property. Learn more about real estate investing here.
If you feel it isn’t the right moment yet, check out our guide on rent vs buy decision.
A Hybrid Solution
Rent-to-own homes or lease-to-own homes are becoming a popular alternative for those who can’t afford the upfront costs of buying a house.
In this type of agreement, renters agree to rent a home for a specific period, during which rent counts towards the down payment of the house purchase price.
At the end of this period, usually five years, renters can choose to pay for the difference or move out. If you take the proper steps to get qualified for a loan with a bank, you should be able to pay off the seller and take ownership using a mortgage from the bank.
Things to Get Right Before You Stop Renting
If you’re determined to become a homeowner, here are some steps you’ll have to take to make the process smoother. Please read them with care.
- Credit Score of 620 or better
- Income history
- Savings fund
- Work with a realtor to find a home
- Close on the home and get the keys
A high credit score will make your life easier when shopping for mortgage options. Try to improve your credit score as much as you can in order to strike better deals. Most loan institutions will be looking for a credit score above 580 and in some cases, above 620.
The higher you can get your credit score, the better deal you can get on the interest rate, which can save you thousands of dollars per year on the interest payments you make paying back the loan.
Lenders will assess your ability to pay your mortgage by analyzing your income and employment status. Stability is quite important here, and most lenders will favor those with more than two years in the same job.
Make sure you have good job history and multiple pay stubs that you can provide a lender.
Lenders will analyze your current debts against your income to determine how much new debt you can afford to take on.
They will create a debt to income ratio limit that you can’t go beyond (usually 48% of your income), so make sure you pay down existing debts before applying for a mortgage if you want to qualify for a larger mortgage payment. Or increase your income.
Be ready to cover the upfront costs of buying a house. Lenders will look at you with more favorable eyes if you show that you have at least 20% of the house’s value to start the conversation.
There are deals with lower percentages, though they typically involve other costs, such as private mortgage insurance (PMI). Anytime you put less than 20% down, expect to pay an additional monthly fee for mortgage insurance.
You can put as low as 3.5% down when taking out an FHA mortgage. Investment property loans will usually require 15% down as a minimum. Standard conventional loans let you go as low as 3% down if you have a good credit score and can qualify for conventional.
Choose Your Place
Buying a home is a long-term decision, so choosing where to live is as important as the house itself.
Consider the distance to work, school, and the city center. Check if the neighborhood is dangerous or noisy. Above all, really try to imagine yourself living there and see how it feels.
Get in touch with an experienced realtor who does several deals per year and knows the market well. They can guide you through property showings, writing an offer, having inspections, and negotiating terms with a seller.
Getting the Key
Closing day will soon arrive after you get a property under contract. Be prepared to move in by arranging a moving service to help you transport items from your rental unit to your new home.
Make sure you’re squared away with your current rental lease, catching up all payments and late fees and have the contract terminate at the date of closing for your home so you can make a seamless move.
Buying a house isn’t as easy as grocery shopping, but it’s still a pretty attainable goal if carefully planned. Plan ahead of your decisions, and don’t hesitate to look for professional help whenever you feel overwhelmed by the task.
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