Buying a Home While Renting: What to Consider

Many people purchase homes while they are still renting properties. However, there are a few key things to consider, including the cost of renting versus buying in your area, your financial readiness to own a home, and what the terms of your rental lease are.

This guide will address these issues so you can make an informed choice about making the transition from renter to homeowner.

Can You Buy A Home While Still Renting?

Some people live with parents, relatives, or friends while they are waiting to purchase or close on a home. Living with relatives can make it possible to save more money and build a bigger cushion before you take on the cost of a mortgage payment.

However, there's no requirement to do that, and no restrictions on buying a home while renting. Many people rent for months or even years while they save up a down payment and get ready to buy a home. Then, they make their purchase while still living in their rental.

Financial Considerations for Going from Renting to Owning

If you are currently renting and thinking about buying a house, it's important to consider your financial situation. You want to make sure you are in a good financial position to buy. That means you can qualify for and easily afford the new mortgage loan you'll take on.

Here are some of the key financial details to look at during this process.

• Credit history: A strong credit record may help you to qualify for a mortgage with a lower interest rate than you would with weaker credit.
• Current savings: You will typically need a down payment to purchase a home as well as money saved to cover closing costs. It's also a good idea to have an emergency fund so you're prepared for the costs of homeownership.
• Housing market: The housing market where you live can impact how much it costs to become a homeowner. If there is strong demand in your market, you may have to pay more to buy a property that suits your needs.
• Lease term: When you lease a rental property, you make a commitment to your landlord to stay until the end of the lease term. If you break your lease early when you find a house, you may lose your security deposit. Depending on your contract, you may even have to keep paying rent until your landlord finds a new tenant.
• Monthly budget: Your monthly budget affects how much money you have to spend on a new home. Ideally, you'll keep your housing costs to around 25% to 30% of your income or less. This helps prevent you from being house poor – committing so much of your income to your housing payment that you struggle to afford basic necessities or financial goals.

You can get a good idea of what a new mortgage loan will cost you by getting prequalified for a mortgage. Once you know what your new payment will look like, you can confirm it's affordable for you.

5 Tips for Making the Transition from Renter to Owner

If you're renting and ready to buy, here are five tips to help make the transition easier.

1. Set Up Your Budget

As you prepare to buy a home, you'll need to make room in your current budget for a down payment and closing costs. You will also need to consider what your new budget is going to look like as a homeowner.

Buying a house doesn't just mean taking on a new mortgage payment. You will also have to pay for homeowners insurance, property taxes, maintenance costs, and possible homeowners association fees. When you consider your mortgage budget, don't forget to account for these added expenses.

One good way to determine if your home will be affordable is to essentially "practice" making mortgage payments by saving the difference between your current rent and your future loan costs.

For example, if your rent is $1,500 and your mortgage will cost you $1,800, put the extra $300 per month into savings for a couple of months to see what it's like to live with the new payment.

Not only does this approach help you see if your mortgage will really be affordable, but it also allows you to save more for your future home.

2. Keep Working to Improve Your Credit Score

The more you can improve your credit score, the more doors you open for yourself when you apply for a home loan. A better score can make a major impact on whether you are approved for a loan, how much you can borrow, and what rate you'll pay.

You can improve your credit by paying all of your bills on time and by paying down debt to improve your credit utilization ratio. You should also generally avoid opening up any new credit, as this could temporarily lower your score.

Finally, check your credit report regularly to track your progress and to make sure there are no errors or identity theft issues that could affect your mortgage approval.

3. Pay Down Existing Debt

When you apply for a mortgage, your lenders will look at your debt-to-income ratio, which is the ratio of how much you pay in debt relative to how much income you make.

Your DTI ratio impacts mortgage approval as well as the amount you can borrow. That's because lenders typically set a maximum DTI. Lenders do this because if you commit too much of your income to debt, your payments could quickly become unaffordable. To keep your DTI ratio low, you’ll want to pay down other debts you might have before applying for a mortgage.

4. Assess the Local Housing Market

You should research your local housing market when deciding whether to buy a home. If prices are very high, this could make purchasing a property more difficult.

Very high prices could also suggest that the market is in a bubble and that prices are likely to fall in the future. This is why it’s always a good idea to start looking early and don’t just settle for the first property you see that you like. Carefully research properties in your area to see what you can afford and whether the cost of ownership seems reasonable.

5. Understand Your Current Lease Agreement

Finally, you should review your lease agreement. Pay attention to how much longer your commitment to your landlord lasts, how much notice you must give before leaving, and what penalties and costs you'd incur if you break your lease early.

The details of your lease agreement will determine if it is feasible to move while you still have an obligation to your landlord.

How to Manage Overlapping Housing Costs

If you cannot break your lease but you find the perfect home, you may have overlapping housing costs for a period of time. This could mean you have to pay both rent and a mortgage. Here's what to do in this situation.

• Be proactive with your budget: If you know you will owe double housing costs, save for that so you have money in reserve.
• Get the right closing date: You may have some flexibility regarding when you close and move into a home. This will depend on your contract with the seller. If possible, try to time your closing date to avoid breaking your lease.
• Transition to a monthly lease: When you first sign a lease, you may have to commit to a one-year arrangement. However, many landlords allow you to transition to a month-to-month lease after your initial term ends. This could provide more flexibility if it’s an option.

Renter to Homeowner FAQs

If you still need to know more, here are the answers to some frequently asked questions about making the transition from renter to homeowner.

When Should You Break a Lease to Buy a Home?

It could make sense to break a lease to buy a home if you have the money to comfortably afford the property, and you have found a home that is a perfect fit. You need to understand the consequences of breaking your lease, though. If the costs will be prohibitive, you may want to wait to purchase until you can legally end the lease agreement.

Can You Buy a Property You Rent?

In some cases, a landlord will allow you to buy the property you rent. In fact, there are certain rent-to-own property arrangements where you agree up front with the landlord that your goal is to purchase the property. Often, part of your monthly rent payment goes to your future purchase in these situations.

Does Renting Affect Your Mortgage Approval Chances?

As long as you are paying rent and utilities on time, renting should not negatively affect your mortgage approval if you will be ending your lease before you move into the home.

If you continue to owe monthly payments on your rental after closing on the house, this could increase your debt-to-income ratio, because your rent is a monthly obligation. A higher debt-to-income ratio could reduce how much money you are able to borrow to buy a home.

When Should a Renter Get Prequalified for a Mortgage?

It is a good idea for a renter to get prequalified for a mortgage. Prequalification helps the renter to understand what their budget is and what homes they can look at. This process is quick, and it usually lasts for 60 to 90 days, so it’s a good idea to get it done early in the process.

Final Thoughts: Buying a Home While Renting

Buying a home while renting is not only feasible but common. You just need to make sure you're in the right financial space to buy.

Getting prequalified gives you important information about what your mortgage loan is likely going to look like. You can use this information to confirm the payment is affordable and you want to move forward with the purchase. Reach out today to Freedom Mortgage to start the prequalification process and find a home loan that's right for you.