Personal Finance

Should You Make the Leap from Renting to Homeownership?

Dec 07, 2018

Going from renting to owning a home may seem like a leap, but there are steps you can take to prepare yourself with the right information to move forward. While it may be daunting, you don’t have to make the switch right away. Regardless of what industry experts or family members say, you’re the best judge of what is right for you.

Homeownership is both a personal choice and a financial decision. Reviewing the benefits of homeownership, purchase considerations, and the financial requirements needed to qualify for a home loan can help you determine when the time is right for you to take the leap.

What are the benefits of owning a home?

Often associated with the “American Dream,” homeownership is a source of pride for many people. It can provide benefits that not only enhance your quality of life, but also improve your financial well-being.

Being able to decorate a home to your liking is one of the major advantages to owning rather than renting. Other advantages include greater privacy and the ability to build strong social ties in the community.

After purchasing a home, many people express feelings of:

Stability
Freedom
Security

There are some distinct financial benefits you may enjoy after purchasing a home, too. As a homeowner, you can take advantage of mortgage interest and property tax deductions. In most cases, with each mortgage payment, you’ll be building equity in your home. Also, because the value of your home will generally increase over time, it can provide a substantial nest egg for the future.

You can use our Rent or Buy Calculator to determine the potential savings of buying a home compared to renting one.

To sum it up, the main financial benefits of homeownership include:

Tax advantages
Building equity
Value appreciation

Purchase Considerations

If you’ve never owned a home, here are some factors to think about before moving forward.

Income Adjustments

Depending on the price of your home, your mortgage payment could be higher or lower than your previous rent expense, which will affect your discretionary income. Because of this, you’ll want to adjust your budget based on your new mortgage and added expenses, like property maintenance. There are digital tools to get you started with this financial adjustment, like our Personal Finance Manager (PFM). It allows you to monitor your balances and spending in one place, making it easier for you to incorporate your new mortgage into your finances.

Maintenance Costs

Like a car, your home will require regular maintenance. Your homeowners insurance will cover major damage from fire, wind, hail, and vandalism. Home warranty insurance is an optional add-on you may be able to include as part of your home purchase contract. It’s designed to cover kitchen appliances, wiring, plumbing, furnaces, air-conditioners, water heaters, garage doors, and more.

Though insurance is helpful, it won’t cover everything. It’s smart to budget for ongoing maintenance and have a special savings account for unexpected home emergencies. Things like pest infestations and overall wear and tear can end up costing homeowners a fortune. Making sure your home is maintained can save you money down the line.

Commitment to a Location

Unlike renting an apartment, if you decide to move to another location, you can’t just give notice. It’s often suggested you stay in a home 5 years or more before moving. This is based on the costs associated with getting a mortgage and the initial interest-to-principal ratio of mortgage payments.

Co-Borrowers – Partners in Homeownership

A mortgage agreement is a contract between the lender and the borrower(s). If you’re purchasing a home with a co-borrower, whether a spouse, significant other, friend, or family member, you’ll be partners in this financial commitment. Your combined income will be used to qualify for the loan, you’ll both appear on the title, and your credit will be linked for as long as you share the mortgage.

Do You Qualify for a Home?

To qualify for a home loan, you will have to provide some documentation. There are variations in loan programs and lenders, but you can expect to submit information related to the following:

Credit

Once you give your consent, your lender will run a credit report, typically pulling data from one or more of the three major credit bureaus: Experian, Equifax, and TransUnion. Information reported to each bureau may be slightly different, resulting in different credit scores. Some lenders pull a tri-merge credit report, which is a single report with combined information from the three credit bureaus, but the credit scores are listed individually due to slight changes in reported information.

Monitor your credit for errors and avoid situations that may lower your credit score such as late or missed payments, taking on additional debt, and closing credit card accounts.

Income

Your lender will also review your income to make sure it’s sufficient and consistent. Most lenders will ask for two years of documented income from W2 Forms, recent pay stubs, bank statements, and tax returns. Axos Bank is unique in its underwriting, as our mortgage team will accept one year of documented income in some instances.

If you’re self-employed – in other words, a freelancer, business owner, or independent worker – your income will be calculated using your tax returns, 1099s, and profit and loss statements.

Another income alternative for purchasing properties is a debt service coverage ratio (DSCR), or rental property loan. These programs use the predicted rental income of the property being purchased to simplify the buyer’s income documentation and to help qualify for better rates for mortgages.

Debt-to-Income Ratio

Your credit report and the income documentation you provide are then used to calculate debt-to-income (DTI) ratios. First, a front-end DTI ratio is calculated for housing expenses (aka mortgage payment, mortgage insurance, property taxes, and homeowners insurance) divided by your gross monthly income. Back-end DTI ratios include the above-listed housing expenses plus other debt that appears on your credit report (credit cards, car loans, personal loans, etc.) divided by your gross monthly income.

Acceptable ratios vary by lender, loan program, and underwriting process used. Conventional loans usually require ratios of no more than 28 percent and 36 percent. FHA loans are usually looking for maximum ratios of 31 percent and 43 percent, however they will allow a DTI up to 50% with compensating factors like a high credit score or a larger down payment. VA loans don’t specify a maximum DTI, although applicants with higher ratios could be subject to additional scrutiny.

Depending on the lender, there may be exceptions, so don’t lose heart if your DTI ratio is outside of these ranges. A higher down payment, strong payment history, large savings amount, good credit, or a minimal increase to the borrower’s current housing expense could all make a higher ratio acceptable.

Down Payment

Down payment requirements also differ by the loan program selected. A VA loan generally doesn’t require any down payment. FHA loans require a down payment of 3.5 percent. Conventional loans are frequently associated with a 20 percent down payment, but this is not mandatory. Fannie Mae and Freddie Mac both have programs featuring down payments as little as 3 percent.

Cash Reserves

Cash reserves refers to extra money a lender would like you to have on hand in addition to the down payment and closing costs. This typically isn’t required for the purchase of your primary residence. However, it could be a requirement if your credit score is low, your down payment is small, or your income is difficult to document. This extra money or reserve is usually mentioned in terms of the monthly mortgage payment. For example, your lender may ask you to have 6 to 12 months of payments in reserves.

Get the Help You Need With Axos

When it comes to homeownership, your timing doesn’t need to be perfect. When you’re ready, taking the leap from renting to homeownership can be personally rewarding as well as financially beneficial. Owning a home offers stability and security to many individuals. In addition, there are tax advantages of homeownership and often long-term financial benefits that aren’t possible when renting. Although family and friends may push you, the decision of when to purchase your home is uniquely yours.

Axos Bank is here to help when you’re ready to make the leap. Our experienced mortgage specialists can help you navigate the home buying process. They’re available at 888-546-2634 to answer your questions.