Should I rent or buy? This is an age-old question that countless have asked themselves. But as many quickly realize, the answer isn’t always clear cut. Advocates for buying commonly describe renting as “flushing money down the toilet.” And if you’re fed up with rent increases, fickle landlords and every other headache that comes with living in someone else’s property, buying may seem logical.
However, there are many factors to consider when you buy or rent. Get advice from family and friends, and then decide what’s best for your situation.
1. What is Your Credit Health?
Renting an apartment and buying a home are two entirely different ballgames. And if you’ve rented homes or apartments in the past with little trouble, you might assume that buying a home is equally simple – this isn’t always the case.
Landlords have a screening process in which they’ll review your income, employment stability and check your credit. But while a credit check is part of the application process, it’s not the deciding factor. In this case, landlords mainly check to see if you have any evictions or foreclosures on your record. A low score won’t necessarily stop your approval, especially since renting is sometimes the only option for people with poor credit. If only buying a house were this simple.
Mortgage lenders conduct a thorough background of your financial and credit history. They’ll need to see tax returns for the past two years, current employment checks, bank statements, plus they’ll conduct a detailed credit check. Typically, lenders require a credit score 680 or higher. And if your credit report reveals any negative information, such as two or more late payments, they may reject your home loan application – regardless of whether you can afford the mortgage.
2. How Much Cash Do You Have?
Maybe your credit is in good shape and your salary affords a home loan. You might think that you’re a good candidate for a loan. But before you apply for a mortgage, consider how much cash you have available.
Renting a home or apartment doesn’t require a large amount of money. Sure, there’s an application fee, a credit report fee and a security deposit. However, these fees may run less than a $1,000. The amount needed to buy a home can greatly exceed this figure. Early costs include your earnest money deposit (submitted with your bid), an appraisal fee and a home inspection fee. Settlement or closing costs can run 3% to 5% of the sale price. And let’s not forget your down payment – about 5% of the price on a conventional loan.
3. How Long Do You Plan to Live in the House?
Are you someone who lives in the same place for many years, or do you hop around every two or three years? Because buying a home takes so much of your personal funds, it may not be the wisest decision if you move around a lot. It can take years to recoup your investment, plus months to sell the house. And if you move before you build enough equity, you might sell at a loss.
4. Are You Ready for Ownership?
Some people buy a home simply because they like the idea of owning their own place. There are definitely benefits, such as the ability to decorate at will, make improvements, build equity and deduct mortgage interest. However, owning isn’t always sunshine and roses. If you don’t consider the big picture, you might bite off more than you can chew.
Things are bound to break and home repairs are inevitable. If you own your own place, you’re responsible for the maintenance and repairs – and there will be many. Think about this: roofs, insulation, windows, doors and appliances don’t last forever. And the longer you live in the house, the more you’ll spend to keep the property in good condition.
As a renter, it’s a completely different story. If the roof leaks, an appliance breaks or the pipes rattle, it’s ultimately not your problem. Notify your landlord of the issue. He’s obligated to call the repairman and shell out the cash.
5. How Is Your Current Housing Market?
Then again, maybe you have the income, the credit, the cash and the desire to buy your own property. But there’s a final thing to take into consideration – the current housing market. There are definitely good and bad times to purchase. And if you buy at the wrong time, you might spend more than necessary for your house.
Ideally, you want to approach homeownership when it’s a buyer’s market. In this case, there’s usually a massive supply of available homes – all priced well. When there’s increased competition, homes sell slowly. This creates a lot of motivated sellers who may jump through hoops to sell their homes. They might lower the price to accommodate your budget or offer incentives, such as paid closing costs.