When Should Renters Become Buyers?

Renters today face the highest monthly charges in history and costs just keep rising month after month. In fact, U.S. renters pay 30 percent of their monthly income on rents while homeowners pay just 15 percent on mortgages. The steep cost of rent makes buying appealing, but many renters don’t have enough disposable income after their rent charges to save for a down payment. So what are renters to do when faced with the choice to keep paying astronomical rents or stretch finances to buy?

We asked personal finance bloggers and mortgage experts to get their insight on determining the best time to rent verses buy.

How did you know you were ready to buy your first home?

We were ready to buy as we had been house viewing for some months and then came upon the perfect house for our family. Because we found “the one,” we had the drive to figure out the funds for a down payment. – Ken Walker of Sun Pacific Mortgage & Real Estate

I knew I was ready to buy a home because emotionally it was all I could think about. I was nesting and wanted a nest of my own. My husband had a steady job and was into his career a few years with a growing income year over year. We had little debt and had saved a small down payment. I felt like we were ready for the financial responsibility and we were not going to be in over our heads. – Michelle Mollura of RPM Mortgage

In hindsight, were you truly ready to buy when you did?

When we bought our house, we only thought we were ready. We were so very unprepared for what homeownership really meant, what it involved by way of finances, and how it would affect us. We would have done so much different if we had it to do over again. We’d make sure we got a home inspection, make sure we held out for a house that was more of a fit for us, and we certainly would have made sure that we knew all the costs that were going into the house and whether we could afford them or not. – Shane of Beating Broke

I definitely wasn’t ready to buy when I bought. I bought a home before I became a student of finance, and I have now turned that property into a rental. I think being ready to buy has just as much to do with being ready to make the commitment, as it does with finances. If you’re sure you want to stay where you’re at, and you’re ready to start caring for/working on your own home, then you’re ready to look at your finances and make the decision. Buying is just as much about emotions as it is finances. There are a thousand reasons to buy and another thousand reasons to rent. There is no right or wrong, but if you’re not emotionally ready, it’s the wrong time to buy. – Kalen Bruce of Money Mini Blog

Which financial factors are preventing you from buying?

I live in New York City where home prices are far higher than anything I can afford to purchase. I also lead a very nomadic lifestyle. I can barely commit to living in the same place for more than a year. The time and monetary investment of homeownership doesn’t really lend itself to my life choices and I’m perfectly okay with that. Homeownership isn’t what my “American Dream” looks like. – Stefanie O’Connell of The Broke and Beautiful Life

From a financial perspective, what percentage of your monthly income should buyers apply toward a mortgage?

The standard percentage used by lenders is no more than 28 percent of your gross income should apply toward principle, interest, taxes and insurance. This is a guideline, and most individuals should keep it to 25 percent or less. A good way to figure out how much house you can afford is to build a budget that includes anticipated future expenses such as a new car, vacations and child care expenses. You want to be able to live a comfortable lifestyle without having to sacrifice due to a mortgage you can no longer afford. – Paul Vachon of The Frugal Toad

In my opinion, the first question I ask a client is what their personal monthly housing payment comfort zone is. Therefore, the percentage that my client is comfortable with is the right percentage. I believe this question is more important than what they qualify for from a lender’s perspective because many times a person can qualify for a larger mortgage than they are comfortable paying. In addition, you are the only one who knows how much you spend each month on extra things that the bank doesn’t take into consideration like dining out, vacation, pets, shopping or entertainment. That being said, I think between 35 and 45 percent is reasonable. – Michelle Mollura of RPM Mortgage

I know that many experts recommend spending no more than 30 percent of your pre-tax income on housing, but I think that can be tricky in high cost of living areas. It’s important to consider your housing budget in the context of your other fixed expenses. New Yorkers for example, generally spend significantly less on transit. The average cost of driving in the U.S. is over $9,000 annually. That gives non-driving New Yorkers another $750 each month to roll into their budget, which can help offset higher housing costs. – Stefanie O’Connell of The Broke and Beautiful Life

Would you advise purchasing a home with a down payment of less than 20 percent?

Actually, I would. A 20 percent down payment is the ultimate goal, but even if you’re talking about buying a home that costs only $100,000, a down payment of that size means you need to come up with $20,000, plus money for all of the additional costs. If you wait until you have that sort of cash, you might end up never buying a home at all. Avoid going with a mortgage that requires no down payment whatsoever, which is a mistake because it results in a higher monthly payment, but do not wait if you can’t come up with the full 20 percent. Ultimately, you need to determine your own financial situation and decide whether your income is stable enough and your spending habits disciplined enough to make all of your payments on time. – Andrew Schrage of Money Crashers

Buying a home with less than a 20 percent down payment will most likely trigger the lender to require private mortgage insurance. This can cost an additional 1 percent of the entire loan balance each year. Other reasons why you should put down 20 percent or more include a better interest rate on the loan and a lower monthly payment. – Paul Vachon of The Frugal Toad

When is it financially beneficial to rent instead of buy?

Judging by the average amount in savings accounts and investments, I would say it’s financially beneficial to rent most of the time. There is nothing wrong with renting. Only once you’re planning to settle down, you should look at buying. And then you must make sure you can actually afford a house that fits your desires. – Kalen Bruce of Money Mini Blog

I think, if you’re looking at just the financials, there are only a couple of situations where it’s better to rent instead of buy. The first situation is when you only plan on living in one location for a couple of years. Due to closing costs and other costs associated in buying a house, it can take a few years for buying to get ahead of the rent. The other situation would be in a location where the housing market is really overpriced. Yes, rent rates will be high too, but you might be better off in the long term waiting for the market to correct and purchasing a house for a lower price. – Shane of Beating Broke

When rent is just as much as buying, you need to take a look at the options, assuming you feel you have job stability to keep you in one place for at least 5 to 7 years, as that is the national average time a first-time buyer owns their first home. – Julia Hansen of Guild Mortgage

What savings advice would you give to renters hoping to buy in the next year?

The more you save the more house you can buy; or the larger the down payment and consequently the smaller the monthly mortgage would be. I recommend working out a financial plan that cuts back on things other than your “basics.” It’s amazing what $10 to $50 here and there can add up to toward a down payment. I did it with my wife, for almost one year, and it was perfect timing as we worked out our down payment and got our perfect home. – Ken Walker of Sun Pacific Mortgage & Real Estate

Get yourself on a budget so you know where your money is going each month and you can identify areas where you can cut back. Then, take a look at all fixed monthly bills and look for ways to cut back. You might consider eliminating cable TV temporarily to get rid of that expense or take a look at your smartphone data plan to see if you can save. Then, look at your subjective spending categories. Start using coupons to save on groceries, and use a Deal of the Day website to reduce restaurant tabs. Hold off on clothing and electronic upgrades to free up more money for your down payment, and start selling your unneeded stuff on Amazon, eBay and Craigslist to generate extra cash. That strategy has a dual benefit to it – you earn extra money and when you sign on the dotted line, you’ll have less stuff to move. – Andrew Schrage of Money Crashers

I would recommend contacting a mortgage professional to create a plan for achieving homeownership. Check your credit and ensure that you are doing everything possible to maintain the best score. Paying down debt would be my next recommendation. Often times, debt has a larger impact on the debt-to-income ratio due to the shorter term and higher interest rates on revolving debt or installment debts when compared to a higher mortgage loan. It’s important to understand how large of a loan you will qualify for and feel comfortable paying each month. Once you determine this threshold, the mortgage professional can target the right purchase price and the required down payment, which will provide a savings goal. The mortgage professional can also provide an explanation of loan programs that exist for today’s buyers to find the best fit. – Michelle Mollura of RPM Mortgage

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