Top Reasons to Buy a Home vs. Rent

Paying Your Rent on Time Can Now Help You Qualify for a Mortgage 

Good News! Renters who consistently pay their landlords on time may start finding it easier to get a mortgage. Last weekend, home loan investor Fannie Mae introduced a tool that allows lenders to factor in a renter's on-time payments and use that information to help them qualify for a mortgage. This shift is designed to help more people with limited credit histories or low credit scores become homeowners sooner than later.

Here’s how it works: After applying  for a mortgage the lender runs it through Fannie Mae’s underwriting software to determine if Fannie Mae would buy the loan. If the answer is “no” based on traditional inputs like credit score, etc., renters can get another shot by submitting their bank statements for review. Fannie Mae’s automated system will then scan for a record of 12 consecutive months of on-time rental payments. This system can identify check or electronic rent payments regardless of how it is made (ie. landlord’s payment portal, digital payment platform such as Venmo, Paypal, etc.). 

Fannie Mae estimates that 17% of recent applicants who weren’t recommended for a mortgage under traditional inputs would qualify if rental payments had been taken into consideration.

Another Change in Mortgage Qualifying

Up until now, lenders evaluating a loan application from co-borrowers have only considered the lowest credit score to determine creditworthiness, which means if one of the co-borrowers has a score below 620, the pair wouldn’t qualify for a mortgage.

Now, lenders can average both co-borrowers' credit scores to determine whether they meet the minimum credit score requirements. For example, if you have a credit score of 700 and your partner has a score of 600, the lender will now be able to use the average between the highest and lowest score, in this case, 650, to determine eligibility.

More Starter Homes Are Finally Hitting the Market

In August, Realtor.com data shows that the number of newly listed homes between 750 and 1,750 square feet (often considered “entry-level” homes)  jumped 6.4% compared to last year. Starter homes now account for 37% of total for-sale inventory, up from 30% from a year ago. August was the second consecutive month that new starter home listings grew throughout the USA.

Overall listings are growing as well. August was the fourth consecutive month that national inventory levels have improved,  with more than 430,000 new listings hitting the market that month. A huge  jump in comparison to the 18,000 total listings in August of 2020. 

This  bump in inventory is also helping to moderate price growth. Listing prices were up just 8.6% for the month of August, which was a very welcome change for buyers compared to the major jumps  seen earlier in the year when the market started to explode. 

Buying a Home Has Major Investment Potential

As a home appreciates, it accrues faster than a stock might because you get the appreciation on the entire home’s value, not just the gain your down payment invested. For example, if you bought $30,000 in stock and it appreciated 3 percent per year for three years, you’ve gained $2,782 on top of your $30,000 invested — and if you sold, you’d pay taxes on that money gained. If you buy a $300,000 primary residence with a $30,000 down payment (representing 10 percent down) and it appreciated 3 percent per year for three years, you’ve gained $27,818 on top of your $30,000 invested — and if you sold, you’d be exempt from paying any taxes on that money gained.

Buying a Home Comes With Certain Tax Benefits

Homeowners are allowed to deduct mortgage interest and property taxes when they file tax returns each year. Using the same example of $300,000 home purchase with 10 percent down, a mortgage calculator shows a total monthly housing cost of about $1,731, with $1,231 in principal and interest (using an interest rate of 3.625 percent), $300 in property taxes, insurance of $67, and mortgage insurance (required when putting less than 20 percent down) of $133. The tax deductions homeowners get for mortgage interest and property taxes save the buyer $335 per month in taxes, so subtract this from total monthly housing cost of $1,731 to get an after-tax housing cost of $1,396. This savings can often make owning the same as, or cheaper than, renting.

When Buying, Mortgage Costs Stay the Same as Rents Rise

If you get a fixed-rate mortgage on a home purchase, your mortgage payment can never change. Unless a renter is in a rent-controlled building or neighborhood, their rent is at risk of rising, especially in a high-growth market like Charlotte. Since the mortgage payment is the bulk of the owner’s housing payment, this creates a lot of budget stability. And while owners have property taxes that renters do not, and property taxes can rise as the home appreciates, this fee is tax deductible and can be recouped during tax season. 

What To Do Next?

Finding and financing the right home is one of the biggest commitments you will ever make. Let me help guide you throughout the entire process: from determining your budget, finding the right lender, pre-qualifying for a mortgage, searching for the perfect home, closing and beyond. I look forward to putting my services and resources to work for you!