Saturday, May 12, 2018 / by Ian Gray
Not Quite Ready to Buy. What Next?
Do you think any of these things when the topic of home buying comes up?
- I’ll just hang a bit longer to see how this job goes.
- It’s OK here, but I still may move away next year.
- I can’t buy a home until my student loans are gone.
Unless you’re one of the lucky ones who already has your dream job in your dream city, you’ve probably told yourself one or more of these things along the way. Which is all good — it means you’re being careful. But if you really do want to buy a home one day, here are a few strategies that will help you pull your plan together.
Know Your Rent vs. Buy Basics
Perhaps the best thing about renting is that it keeps all options open. If you’re in any way unsure about your city, job or relationship status, renting is a no-brainer.
Most rental agreements allow you to bail within 30 to 60 days, and you’ll typically get your security deposit cash back as long as you took care of the place. On the flip side, if you’re selling a home, you'll be paying 6 to 8 percent of the sale price to your listing agent, and it can take months before you can access the cash you’ve got tied up in the home.
Because of this selling cost, you could actually lose money if you sell too soon. If you bought a $300,000 home two years ago, and the home’s value grew by 4 percent per year, it would be worth about $325,000 now. Woot! But if you sell now to relocate for a job, it’ll cost about $19,500 to $26,000 in listing agent fees, and eat up those gains.
Know Your Rent vs. Buy Breakeven Math
To know how long you need to live in a home before buying makes more sense than renting, use a city specific rent vs. buy calculator.
For example, this calculator tells us that if you bought that $300,000 home in Austin, Texas, buying becomes cheaper than renting in a little over two years.
This helps you understand the end game if you’re going to stay. It also helps you consider whether rental income could outpace your ownership costs if you decided to move later but keep the home as a rental investment.
Build Your Savings
If the thought of home buying is making you hella tense, then it’s time to go into planning mode.
Start by subtracting your rent and all your bills — including money you spend for fun! — from your take-home pay. Hopefully there should be some left. To help you with the savings discipline, set up this amount to be put in a separate account when your paycheck is auto deposited into your account each week. Savings adds up quickly if you’re super disciplined.
One more pro tip: You can maximize savings by contributing up to $18,000 to your 401(k) each year. This money comes out of your paycheck before it is taxed. Also, you can borrow up to 50 percent or $50,000 (whichever is less) against your 401(k) to use for a down payment when buying a home. This lets you tap that savings while still leaving it invested for the long term!
Build Your Credit
The best rates on home loans are given to people with credit scores of 760 or higher. You can still get loans if your credit score is below this amount, but the rates will be higher.
Credit card use is the cause of the biggest monthly credit score fluctuations. To keep your credit score in that sweet spot, pay off your credit cards monthly. If you can’t do this, keep your balances at 30 percent of the credit limit or below.
Debts like student and car loans don’t hurt your credit scores unless you pay them late. And on the subject of student loans: Despite the hype, You DON’T have to pay off all student loan debt before you apply for a home loan. You just have to demonstrate to a lender that you can carry both student loan and home loan payments. Often you can, and if so, then the money you’d otherwise use to pay off the student loan can go toward your down payment.
If you’re light on credit, you can open credit cards, but note two things:
- When you open a card, even if you don’t use it, you will see a temporary drop in credit score. So, open new accounts several months before you apply for a loan.
- Don’t forget to keep the balance of cards at 30 percent of the limit or below. Often, new cards have lower limits, so you can tip over this optimal-scoring threshold more easily.
And for those who haven’t yet established credit: Ask your lender if you qualify for any loans that allow for non-traditional credit such as reliable payment history on your cable, electric or cell phone bills.