Should You Rent or Buy Your Next Home?

Making the move from renter to homeowner – a traditional component of the American Dream – seems to be undergoing a bit of a rethink. Rising home prices, changes in lending hoops to qualify for a mortgage, and the scaling back of a big tax break for many homeowners is altering the equation for people pondering the question: Should I rent or buy a home?

 
If you’re wrestling with that big-ticket question, carefully weighing key personal and financial variables is just as important as reading the housing market tea leaves on whether now is a good time to buy.

Before you crunch any numbers, take the time to think through the best fit for you at this stage of your life. These questions can help:

• Do you want to own a home? Are you comfortable with the financial responsibility that comes with owning? When you pay rent, the rent you pay likely covers the landlord’s property tax and insurance costs. But as an owner you become 100% on the hook for those expenses – and increases – and it’s on you to handle all the maintenance costs. Owning can be a good investment, but convincing yourself to buy for financial reasons when you’re not really comfortable with all the responsibility involved isn’t a recipe for sound sleep.

• What does your five-year career path look like? Any chance you might want to relocate in the near future for work, or perhaps for a new adventure? That makes buying a home a bit riskier. Over the long-term (usually decades), home values tend to appreciate at a rate slightly above inflation. But over short periods, there’s no guarantee that selling prices will be higher, meaning you could come out behind. The longer you intend to stay put, the more it can make sense to consider buying rather than renting. 

• How hungry are you for stability? One clear advantage of owning a home is that you can lock in a steady mortgage payment for up to 30 years, whereas rents are more likely to increase frequently. But keep in mind that it’s only the base mortgage that won’t budge. Your property tax, homeowner insurance, and all the upkeep costs may rise over the years.

The financial hoops you need to jump through to qualify for a mortgage may not be as high as you think. Here are three main ones:

• Can you scratch together a down payment of around 3% to 3.5%? Lower than you thought? This is not your grandparents’ mortgage world. Back then, it was common for banks to require homebuyers to come to the table with cash equal to 20% of the home price. Nowadays, you don’t always need to make a 20% down payment. In fact, it’s possible to qualify for a mortgage with a down payment of just 3% – or even less. But the low barrier to homeownership comes at a price, such as private mortgage insurance (PMI), higher monthly payments, and higher interest rates. For a deeper dive, read “How Much of a Down Payment Do You Need to Buy a House?” 

• Have a good credit score? To land a mortgage, lenders are going to check your credit scores. The minimum credit score required for a conventional mortgage is 620, according to Fannie Mae and Freddie Mac, two federally-backed mortgage companies. But the higher your credit score, the more likely you’ll be able to qualify for a loan, and be offered a lower interest rate. To learn more about boosting your score, read “7 Best Ways to Help Build Your Credit.”

• Got a DTI of 35% to 40% or so? Whenever you apply for a loan, lenders will typically examine how much of your monthly gross income is needed to cover all your debt payments, including student loans, car loans, and the mortgage you’re applying for. This calculation is called your debt-to-income ratio (DTI). As a general rule, a DTI of 35% or so is going to make a lender happy, though it’s also possible to get a mortgage with a DTI of more than 40%. Keep in mind that lenders are going to look at your entire financial picture. For instance, if you are making a 5% down payment, your lender might be pretty strict about needing your DTI to clock in around 35%. But if you’re making a down payment of 10% to 15% or more, you might get by with a higher DTI.