Renting a House vs. Buying a House
Buying vs. renting is a big decision, and it is not always black and white. There is usually a gray area that some people don’t take into consideration. When people ask me whether they should rent or buy, I usually respond that “it depends.” Whether you should buy or rent depends on your specific situation and what your overall career, financial, and family goals are. There are several factors to consider before signing the massive amounts of paperwork required to buy a home, or even lease it.
What does your specific situation look like if you are considering buying a house?
How much debt do you have? Do you have a down payment ready? Do you have children? What city do you live in? FHA loan or traditional loan? How far would your commute to work be? What is your credit score? These are just a few things to consider before deciding to buy a house.
If your credit score is south of 580, then you may be required to put down more money than you anticipated. I am not a huge fan of FHA loans because you have to pay private mortgage insurance; however, with a low credit score this may be necessary. If your debt-to-income ratio is too high (higher than 43%), then you may not be eligible to qualify for a mortgage. If you live in a city that has a competitive housing market resulting in high prices for first-time home buyers, then it may make more sense to rent until you are able to buy.
For people who have children, school districts will usually make or break a deal. You may determine that you can afford a house, but it is in a suburb way outside of the city you work in, meaning that your daily commute would be egregious.
Finally, set realistic expectations when considering whether to buy a home. Generally, your property taxes and homeowner’s insurance will increase every year, major appliances will break and need to be repaired, you may need to furnish your new home, and there is usually something every year that you would like to improve in your home. So, be prepared to spend more money after the initial purchase.
Some things to consider before making one of the largest transactions of your life:
Having your down payment ready (5% - 20%), plus closing costs and a good size emergency fund, would be ideal. Make sure your credit score is somewhere north of 725. Not that you can’t get a loan with a low credit score; it is likely just going to be at a higher interest rate. If you can show two years’ worth of tax returns with the same employer, this will also help with the loan approval process. Also, committing to staying in the same home for five years can play to your advantage if you decide to sell after that. Usually, you will have some equity and price appreciation in your home by then. Consider trying to spread the costs of new appliances, furniture, etc., out over a couple of years, rather than making all those purchases as soon as you move in.
Renting is not always a bad thing. In fact, renting can set you up to be in a solid position financially before you buy your first home. You don’t have to worry about replacing a roof or getting a quote for a new air conditioner. This predictability gives you the opportunity to save up for a down payment. Although it can still be a challenge in expensive cities to find a place to rent that will still allow you to save, it can be done. I live in Austin, Texas, which is known for being an expensive place to live; however, there are still places to rent that are inexpensive enough to allow you to save for a house.
What is your time frame? Not your parents’ time frame or your friends time frame--what is your time frame? This is important because so many people rush into buying a home because everyone else is doing it. Renting can serve as an opportunity to get your finances in order, interview realtors, research the various loan options available, drive through the neighborhoods you want to buy in, increase your credit score, etc. Take advantage of this time and make sure you feel confident when your lease expires.
The average person spends more time researching their next vacation trip than researching what it takes to buy their first home. Considering the amount of money you are investing to get your home and the six-figure loan you will be obligated to pay in installments every month, I suggest spending time well in advance, to make sure your first home is a blessing and not a curse.
Chris Vasquez, is a Financial Advisor with Lucien, Stirling & Gray Advisory Group, Inc. in Austin, Texas, and is passionate about helping people achieve the financial life they want. Chris emphasizes that daily behavior with your finances is more important than knowing every detail about financial planning.
All content provided in this blog is supplied by Chris Vasquez and is for informational purposes only. Barclays takes no position as to the views, and makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.