8 Questions to Ask Yourself When Deciding to Rent or Buy a House

Buying a home isn't for everyone. These questions will help you sort out whether it's a good financial move for you.

If you’re at the age when your peers are making major life moves — getting married, having kids and buying homes – you might be feeling it’s time to join them. Or you may simply just be at that stage all on your own.

Either way, plenty of young adults are starting to get the home-buying itch. While there are a lot of appealing benefits to homeownership, taking on that kind of debt is not without risk. The decision to rent vs. buy is one you should make carefully.

If you’re trying to figure out your next move, consider asking yourself these eight questions. The answers should steer you in the right direction.

1. What Is My Top Financial Priority?

Buying a home will slow down your ability to make progress on other financial goals. You’ll need to focus on lowering expenses or increasing your income so you can afford a down payment and monthly mortgage payments. (This guide can help you understand more about how to determine your down payment on a home.)

That extra cash will be funneled toward your mortgage rather than paying off credit cards or student loans if you have them. Other financial goals, such as saving for retirement and building an emergency fund, may also have to take a back seat.

Assess your competing financial goals and decide which ones take priority. Buying a house might come first in your book, or perhaps you’ll decide to work toward other money goals before committing to a mortgage.

2. Do I Have Savings For a Down Payment & Closing Costs?

Renting requires some savings – you’ll need enough cash to cover the first month’s rent and the deposit.

To buy a home, however, the minimum you’ll need to have saved is usually 6% or more of the home’s value. Even FHA loans require a minimum down payment of 3.5%, and closing costs add another 2-3% to the costs.

But that’s the minimum; a 20% down payment is better to give you a decent amount of equity and avoid private mortgage insurance.

If you don’t have sufficient savings, you’ll need to focus on saving for a down payment before you’re in a position to buy. And even if you do have savings, it’s worth it to think through the best use of those savings and whether you’d rather allocate that cash to other goals.

3. How Do Home & Rent Prices Compare?

Housing markets also affect whether it’s a better idea to rent versus buy. If you’re facing sky-high rent prices that climb each year, a mortgage starts making a lot of sense. On the other hand, if you want to live in an expensive area, you could be priced out of buying a home (especially without extensive savings).

4. How Long Do I Plan to Live Here?

The longer you live in a home, the more likely it is that the financial investment of buying a property will pay off.

If you like your city, have a steady job, and are ready to live in the same space for a few years, buying is often more cost effective, but not always. You may want to crunch the numbers to see how long you’d need to live in a home to break even on your initial costs.

5. Will I Qualify for a Good Deal on a Mortgage?

You’ll need a decent income and good credit to qualify for the lowest rates and best terms on mortgage loans. It’s sometimes possible to get a mortgage if you have bad credit, but you’ll pay a lot more over time. (Haven’t checked where your credit stands? Now’s the time. You can get your two free credit scores, updated every 14 days, on Credit.com.)

Think of it this way: most mortgages last 30 years. With that in mind, you may see that it’s financially worth it to spend a few months to a year rebuilding your credit if it means qualifying for a lower interest rate for those 30 years. For example, if you boost your credit score by 50 points – from the mid-600s to over 700 – you could qualify for a mortgage rate that’s 80+ basis points lower, according to MyFICO.com.

6. What Other Costs Will I Be Responsible for as a Homeowner?

When comparing costs of renting versus buying, make sure you’re including home-owning costs beyond mortgage principal and interest.

There are escrow costs, homeowner’s insurance, and property taxes. You can expect home maintenance costs to equal 1-3% of your home’s sale price each year. Then there are homeowners’ association fees and new utility costs such as trash collection and water. Meanwhile, renters are usually not responsible for any of these costs.

7. Am I Comfortable with the Risks of Owning a Home?

It’s a popular argument that owning is smarter than renting because you’re investing in a home. But as with any investment, owning a home has its own inherent risks.

There are no guarantees you’ll get a good return on your investment. Just ask the many homeowners who defaulted on their homes after the 2008 mortgage crisis. And even in a strong housing market, there are the everyday risks of unemployment or other financial hardships.

8. How Would Renting vs. Owning Affect my Lifestyle?

Guiding forces in your decision to rent or own are your lifestyle and values. For many, the freedom of choice, privacy, and control that come with owning a home are big selling points. Other people might prefer the convenience, flexibility, and short-term commitment that comes with renting.

Know what you want and choose a housing setup that will help you achieve it. Owning a home can be an admirable accomplishment for some people. Maybe it will be for you, too. Only you know the answer.

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How to Tell If You’re Really Ready to Buy a Home

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Buying a home is no easy feat. There’s a lot of paperwork you need to be on top of to secure the big-ticket purchase. Here’s how do determine if you should pull the trigger or wait until your finances are in better shape.

Banks will let you take on a mortgage payment at no greater than 45% of your monthly income. This means if you’re earning $8,000 per month, your lender will allow you to take on approximately half of this on a monthly basis for a mortgage payment, with other monthly liabilities. The reality is 45% of your monthly income is a huge percentage of your income going toward a housing payment and other monthly obligations, excluding childcare, college savings, savings in general, other household bills and retirement planning. So if you find you’re unable to make those ends meet, chances are you may not be ready to buy a home.

What follows are some ways to keep your mortgage payment as manageable as possible.

Pay Off Debts to Qualify

If you have a workable down payment, but you have debt payments such as a car loan that are pushing you above that 45% mark, you may want to pick the debts that have the greatest balance with the highest monthly payments, and pay those off in full. Doing so will allow you to not only buy more house but, more importantly, to afford a new mortgage payment.

Keep Your Debts in Check

Car payments, credit card payments — whatever payments you are currently making will limit your buying power. These debts should be as absolutely low as possible.

Don’t Focus on High-Interest Debts First

It’s not what you owe, it’s what you pay that counts. The minimum payment that you’re obligated to make on credit obligations independent of whatever interest rate you have is what lenders will look at to qualify you. Yes, that 0% auto loan could adversely affect your ability to borrow, especially if that payment is a few hundred dollars per month.

Just because you qualify for a mortgage does not automatically mean you should pull the trigger. The ideal approach is to purchase a house in the following way: Make the mortgage payment low enough so you can pay off other obligations, have the ability to save and contribute to retirement.

If buying a home prevents you from being able to save or from getting out of higher-interest rate debt such as credit cards, student loans, personal loans, etc., put the housing project on hold or pause and ask yourself whether buying a house is really the best financial move for you right now. In some cases, buying a house — despite the obligations — might still make financial sense. In other cases, it might make sense to just say no.

Remember, only you will be making your mortgage payment. So buy a home when it financially makes sense for you. Low rates are an attractive reason to buy a home, but exercising financial prudence should be your number one objective when buying a home.

Also keep in mind that your credit score will impact your ability to qualify for a mortgage with reasonable terms. If you’re not sure where you stand — or want to see what you need to improve — a good place to start your research is by getting ahold of your credit reports. You can view a free snapshot of your credit report, updated regularly, by signing up for an account on Credit.com.

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6 Tips for Buying a Home in 2016

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Would-be homebuyers eyeing 2016 as the year have a fair bit working in their favor. Mortgage credit continues to thaw, interest rates remain surprisingly flat and more homes are expected to hit the market as Spring approaches.

To be sure, some buyers have a more streamlined path than others. Macro-level outlooks are one thing; it’s another to build the credit and finances necessary to lock down a home loan in the current lending environment.

Whether you’re a first-time explorer or a long-term dreamer, here are six tips to help you make the leap and take advantage of a promising housing market in 2016.

1. Tackle Your Credit Now

Credit looks to be loosening as we head into the Spring homebuying season. Through the first six months of 2015, the average FICO credit score for all closed loans was 730, but that decreased to a 722 FICO score by the end of the year, according to mortgage software firm Ellie Mae.

Still, building the strongest credit profile possible can save you money when it comes to things like interest rates and private mortgage insurance.

To improve your credit, you can get copies of your free annual credit reports each year from AnnualCreditReport.com. Review them carefully for errors or problems that might be dragging down your scores. (You can find more about how to dispute errors on your credit reports here.) Pay your bills on time and strive to keep your credit card balances under at least 30% and ideally 10% of your credit limit. You can track your progress by viewing your two free credit scores each month on Credit.com.

2. Explore Your Options

Homebuying education is key. Studies and surveys consistently show that buyers overestimate their mortgage knowledge or figure their lack of it doesn’t matter. The reality is ill-prepared buyers can wind up in bad loans or simply miss out on maximizing their budget and options.

Take time to learn about the major mortgage types, the upfront costs of homebuying and what might make the most sense given your unique credit and financial situation.

VA loans are arguably the most powerful loan on the market, but they’re not a great fit for every veteran. Federal Housing Administration loans allow for low down payments, but carry costly mortgage insurance. Conventional loans feature tougher credit benchmarks, but come with down payments as low as 3%.

3. Pre-Approval Is a Must

Shopping for homes is the fun part. But it’s way more fun, not to mention useful, to shop for homes you can realistically afford. Work on getting loan pre-approval before starting your home search.

A pre-approval letter shows sellers and real estate agents you’re a serious homebuying candidate. In fact, some agents won’t accept purchase offers without one. Pre-approval also gives you a clear sense of how much home you can buy.

But remember the prefix is there for a reason — loan pre-approval does not guarantee you’ll get a home loan. It’s a big step in the right direction that comes with conditions and contingencies.

4. Know Your Market

Bidding wars are breaking out in communities where housing inventory struggles to keep pace with demand. About a third of homes sold for or above their list price in October 2015, according to CoreLogic.

The likelihood of rising mortgage rates in 2016 may push even more buyers into the game. Look for seasoned real estate agents who really know your market and how to navigate a bidding war if need be. Coming in with a strong offer at the outset can be crucial for buyers competing in hotter real estate markets.

5. Be Patient

Getting to the closing table might take a little longer than normal this year, so plan accordingly. The average purchase loan closed in 50 days in December, eight days longer than the December prior, according to Ellie Mae.

Many mortgage industry professionals point to recent disclosure and documentation changes as the culprit. But those hiccups and delays may subside as lenders, title companies and other industry players better adjust to the new regulations.

A longer closing window can affect everything from purchase contracts and interest rate locks to closing costs and coordinating your move.

6. Avoid Costly Detours

It’s a good idea to keep a tight lid on your credit and finances once you’ve decided to pursue a home purchase. Taking on new credit, changing jobs and even moving money around accounts can raise a red flag with lenders and, in some cases, derail your loan.

Change isn’t your friend during the homebuying journey. It’s not enough to get your credit and finances in order before starting the process – work hard to keep them that way as you move toward closing day.

More on Mortgages & Homebuying:

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