Renting Vs. Buying, does it make sense?

The age-old question is whether or not to buy a house or continue renting. Every potential home buyer situation is uniquely different. To discover what truly makes the most financial sense is looking at all possibilities.

Renting: provides the level of flexibility because you’re not nailed down any one location. You can move and relocate easier. Most the time, property upkeep is on the landlord to maintain. Renting in some markets could also fluctuate. For example after your lease is up, you’re on a month-to-month contract, rent could increase anytime or worse the landlord could evict you. Granted, landlords must provide a 30 day written notice, but they do have that right as the owner of the property.Unless you own your business and run the business out of the house, you don’t get any tax benefits renting as its not required to be reported on your income tax return. Renting also provides no impact on your credit score rating.

On The Flip side:

As a homeowner: you have the ability to lock your house payment for the next 30 years thereby allowing you to plan your budget and monthly expenses around a fixed cos. Whether renting or owning, affordability is the number one factor in determining whether or not buying a house makes sense. As a homeowner you also have the ability to write off all of your mortgage interest including your property taxes and in some cases mortgage insurance. Any additions to property any potential upgrades you have the ability to control. Buying a house using mortgage loan financing has a positive affect on your credit score, make your mortgage payment, watch your credit scores rise dramatically.

Renting versus buying, the factors involved.

Most people would agree having the ability to pursue the American dream is the best possible scenario, but not everybody has those types of choices.

Interestingly enough, the three factors required to purchase a house with a mortgage loan financing are also the three factors that people consider in deciding to upgrade into a buying a house.

The following characteristics are no coincidence.

Credit/Debt-many times a bad credit situation such as medical collections or previous past due accounts cause someone to think they can’t get a mortgage to buy a house. Debt is another consideration. Lots of people rent because of the amount of debt they have affects their ability to qualify for financing, increasing their debt to income ratio. That is the amount of debt on a monthly basis (including all minimum payments payment on other loans, credit cards etc.) added to the new house payment divided into the gross monthly income.

Sometimes when you’re just starting out you don’t have credit. You need to have credit in order to get credit, strange as that may sound. Credit and debt are two factors looked at closely when needing mortgage financing for buying a house. This can often be setback to taking the plunge and having a conversation with a loan officer. Many times a good mortgage company can make recommendations to improving your credit score or reducing your debt, so maybe down the road, you could qualify for financing.

Income-no matter what down payment you have, no matter what credit score you have, mortgage loan financing is predicated on the ability to repay. A mortgage loan is made against the borrower’s ability to repay. Income becomes the anchor characteristic of being able to buy a house. What does the job situation look like? Are you considering a possible career change? If yes continuing to rent is a smart choice. Is your employer going through layoffs? What does the future of your job look like? Is your income stable or is it declining? These are big considerations to look at when putting together the idea of buying a house versus continuing to rent. Are you self-employed and do you show enough income on your tax returns in order to take on a new housing expense? Make no mistake a house payment is looked at as a liability, not an asset.

If you are self-employed showing less income on your tax returns and you are thinking about buying a house down the road, consider adjusting your Schedule C. of your federal income tax return to show a profit. While you’ll likely pay more in taxes for doing so, you can in most cases, show the income needed to potentially qualify for mortgage payment. Talk to your tax professional.

Assets-mortgage lenders want to see that you have money saved up in the bank.Reserves is a fancy lender lingo term used to describe the amount of money you have saved up in the bank so in case you lost your job or your income source, you could still make your house payment. This varies from loan program to loan program, however lenders usually want to see six months of mortgage payments in the bank.

If you can show more reserves, that is a compensating factor (if you’re short in one area, you can make up for it in another). If you don’t have the assets in a bank account or an asset account can you show reserves in the form of a gift from friend or family member. Saving up for 20% down to buy a house? It is not necessary because you don’t need 20% down.

Before buying a house, make sure your financial house is in order.

You will want to go over credit, income, and assets and make sure those are aligned with each other. Every circumstance is different, but lenders generally also want to see two years of history in the same field of work or at least the same field. If there is not a two year history, are there  job gaps what happened?

Let’s look at the math: let’s say you’re renting a three bedroom two bath house for $1700 per month. You can buy a house for $250,000 in some cases with no money down with a long-term fixed rate mortgage and have a monthly payment including property taxes and insurance of $1700. Makes sense right? Before buying a house, consider whether it makes more sense to rent vs.buy.