4 Signs You Should Keep Renting a Little Longer
Many people are eager to buy a home because they can start building equity , benefit from increases in property values, and make the place their own.
But while becoming a homeowner can have financial benefits under the right circumstances, it could also hurt your finances if you buy before you're actually fully prepared to do so.
In fact, if any of these four signs apply to you, then you'd likely be better off renting for a little bit longer rather than purchasing a home.
1. You aren't sure you'll be staying put for a few years
When you buy and sell a home, you have to pay transfer taxes, title insurance fees, costs for an attorney or escrow agency to close on the loan, and a host of other miscellaneous expenses. If you're selling a home, you also have to pay commission to a buyer's and seller's real estate agent in most cases.
These closing costs can be very expensive. If you stay in your home for several years, you can usually make back the transaction costs and break even on the home purchase because ideally your property will go up in value. But if you have to sell a short time after you've bought the property, you could lose a lot of money on the transaction costs associated with the sale.
If you're lucky enough to make a profit on the sale of your home, you could also end up paying more taxes if you didn't keep the home for at least two years before selling it. You can avoid paying capital gains taxes on up to $250,000 (as a single filer) or $500,000 (as a married joint filer) but you must use the home as your main residence for at least two of the previous five years before selling it.
If you are planning to move in less than two years, you may want to hold off on buying since you could end up either losing money or paying taxes on gains that you could otherwise avoid.
2. You haven't been with your job for long
When you apply for a mortgage , lenders look at your debt-to-income ratio. That's the amount of debt you have relative to the amount of income you have.
You may not necessarily get credit for every dollar of income, though. Typically, if you haven't made a steady income with the same employer or in the same job for at least two years, then lenders may not count all your income. That's because it's seen as too uncertain whether the money will keep coming in the future.
If you only recently got a raise or started a new job, you'll probably want to rent a little bit longer until you have a more stable employment history to show your potential mortgage lenders.
3. Your financial credentials aren't in order
If you have a lot of debt or your credit score is low, then you may not be approved for a loan at a competitive rate since lenders look at both factors when deciding if you can borrow and what to charge you.
Rather than accepting an expensive mortgage from the limited number of lenders who are actually willing to give you a loan, you may be better off renting for a few years while you work on paying down what you owe and getting your credit score in order.
4. You don't have a ton of money saved
Buying a home is an expensive proposition. You'll need a down payment , which would ideally be 20% of your home's value.
A down payment is required to protect lenders. While some mortgage lenders allow you to borrow with a down payment as low as 3% to 10% -- depending on the lender -- putting down less than 20% necessitates a higher monthly payment due to private mortgage insurance (PMI).
You will also need money for moving expenses and for closing costs, which could equal 2% to 5% of the loan's value. And, it's a good idea to have an emergency fund to pay for unexpected home repairs or cover your monthly housing costs if you experience a decline in income.
So, if you don't have several months of living expenses saved up, a down payment to put down on your home, and enough cash to cover closing costs, continuing to rent is the right move until you can save up those funds.
While it may not be appealing to keep renting if you're eager to buy, there are undoubtedly situations where doing so is the right choice -- and if any of these four things apply to you, you may end up a lot better off if you wait a while to get a property of your own.
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