Making the Move From Renting to Owning - Everything You Need to Consider

So you are considering switching from renting to buying; you can stop all the moving and security deposits, be your own landlord, build equity, and have a financial future. No matter how far away your home ownership goal is, there are essential things to consider before you purchase a home. Let’s look at the important considerations to help you prepare for the transition.

Home buying takes time

Home buying is not an overnight process; it is a big step, and the more you prepare, the more successful you will be and the smoother the transition. Be patient and expect to have issues you must pass. Finding and keeping in touch with an experienced real estate agent and mortgage lender will help. Making informed rather than impulsive decisions, know the neighborhood, your budget, and the mortgage process before you start your search. 

Know what you want and have a “why.”

With rising rents, in the long run, homebuying is cheaper than renting. Answer all of these questions to help you decide on what you are looking for:

• Do I have sufficient time to care for a home?
• Will I stay in this location for more than two years? (if not, renting may be better)
• What is the rent vs. buy costs in my area?
• What are real estate prices doing in my area? (going up or down)
• Am I financially comfortable making this commitment?

Get your credit score up

If you are applying for any mortgage, you want to do the right things for your credit. The closer your credit score is to 780, the lower your mortgage costs will be. Don’t open new credit cards or other accounts; this can drop your score, costing you more, or even preventing you from qualifying.

• Pay bills on time; one late payment can drop a score 60-100 points

• Don’t make big purchases on any credit account (credit cards, HELOC's, lines of credit, etc.); your credit utilization will go up, causing your credit score to go down.

• Don’t close an old or unused credit account; this lowers your total available credit, increases your utilization, and shortens your credit history.
• If you have any bills in collections, talk to the lender before paying them off. Paying off a bill can actually bring the discrepancy to the present, dropping your score. 

You can even build credit without a credit card.

Understand homeownership costs

One thing you must anticipate when you transition from renting to owning is associated costs. As a renter, typical costs and fees are your monthly rent, a security deposit, utilities, and renters insurance (if you have it.)

As a homeowner, things will change significantly; your mortgage payment is not just the principal and interest; you pay PITI, principal, interest, taxes, and insurance (homeowners and mortgage insurance if you put less than 20% down.) But on top of these, you’ll have other costs; maintenance (1% of the purchase price per year), utilities, closing costs (3-5% of the costs), HOA fees, landscaping, waste, and other expenses.

Beyond ongoing maintenance costs, first-time homebuyers are shocked by upfront home buying costs, such as new furniture if buying a bigger space. Additionally, moving can be costly, especially when moving to a new state. Make sure to account for all costs, as they may not be something that you have included in your monthly or annual rental expenses.

The non-financial costs are primarily a loss of freedom; you can’t just leave at the drop of a hat; you have a commitment that you must contend with, but for most, the benefits outweigh this cost.

Know your mortgage options

Depending on your circumstances, there are so many different mortgage loan options available to look at. A 20% down payment is not always needed, FHA and VA loans can be obtained only requiring 0% to 3.5% down and folding the closing costs into the mortgage. ARMs can help you keep your initial mortgage payments low.

If you need to save for a down payment and closing costs, know how much you will and determine how long it will take to save that amount.

Expect a lifestyle shift

This shift is nothing to fear, but you must expect it. Homeownership means more stability and fewer moves. You will not be renewing a lease or asked to move, and rent payments won’t go up. You can put down roots in the community, and design, renovations, and landscaping are all up to you. The change also comes with responsibility, meaning maintenance, repairs, and replacements will be up to you.

The path to financial growth

Homeownership is a big step toward long-term financial security and stability. As opposed to renting, your mortgage payment adds equity to yourself rather than building wealth for your landlord.

Equity = property’s current value – mortgage amount owed

Why does equity matter? Your home is an asset; this asset is more valuable as the equity grows. You can use the equity for retirement, borrow against it if there is a need, or pass it on to an heir.

Ask questions

When you want to purchase a home, seek out the guidance of professionals who can help you. A real estate agent can be a mentor for much of the process. You want to find someone that you feel comfortable with and who, ideally, is accessible to answer questions and has your best interests in mind. Working with a mortgage lender who has the experience to make the borrowing process smooth and wants to match you with the best funding for your needs is also essential. These two professionals will help you with questions and be there for you when needed. They are there to make your move from renting to owning as smooth as possible. 

Down Payment Requirements

Loan requirements vary whether it's a low-income 3%, 5%, or a full 20% down program.Most require a credit score of at least 620, except for Freddie Mac's Home Possible, which requires a minimum credit score of 660 and FHA loans which allow a credit score as low as 500. And overall, the larger your down payment is, the better your terms will be.