Homeownership vs Renting, are there Advantages or Benefits? | Axos Bank

Should You Make the Leap from Renting to Homeownership?


 

In late October of 2015, a French sailor clung to the rigging pole of his disabled sailboat as it was tossed to and fro in frigid 20-foot seas 400 miles off the coast of Alaska. Nearby the rescue boat, Tor Viking, floated in front of the doomed sailboat. With his cat Pip securely tucked in his jacket, Emmanuel focused on the perfect time to make the jump to the rescue boat. After a few moments of hesitation, Emmanuel made that daring leap – headfirst – landing safely on the Tor Viking. When asked what delayed his jump, Emmanuel explained that he was waiting for the right timing because he would not have gotten a second chance.

Going from renting to owning a home may be a leap, but you can take comfort in knowing that unlike Emmanuel, your timing doesn’t need to be perfect, and you’ll likely get more than one chance at it.

Regardless of what industry experts or family members say, you are the best judge of what is right for you.

Homeownership is both a personal choice and financial decision. Reviewing the benefits of homeownership, some purchase considerations, and the financial requirements needed to qualify for a home loan, can help you determine when the time is right for you to take the “leap.”

Benefits of Owning a Home

Often associated with the “American Dream,” homeownership is a source of pride for many people. It can provide benefits that not only enhance your quality of life, but also improve your financial well-being.

Being able to settle into a home for the long-term and decorate it to your taste is frequently cited as a benefit. Other advantages include greater privacy and the ability to build strong social ties in the community.

After purchasing a home, many people express feelings of:

  • Stability
  • Freedom
  • Security

There are some distinct financial benefits you may enjoy after purchasing a home, too. As a homeowner, you can take advantage of mortgage interest and property tax deductions. In most cases, with each mortgage payment, you will be building equity in your home. Also, because the value of your home will generally increase over time, it can provide a substantial nest egg for the future.

To sum it up, the main financial benefits of homeownership include:

  • Tax advantages
  • Building equity
  • Value appreciation

Purchase Considerations

If you have never owned a home, there are a few things you may want to review before moving forward.

Income Adjustments

Disposable income is your gross pay less taxes and other mandatory deductions – your take-home pay when you are an employee. After paying housing, utilities, food, clothing, transportation, and other bills, the remaining balance is your discretionary income. Depending on the price of your home, your mortgage payment could be higher or lower than your previous rent expense which will also affect your discretionary income.

Maintenance Costs

Like a car, your home will require regular maintenance. Your homeowners insurance will cover major damage from fire, wind, hail, and vandalism. Home warranty insurance may be an option when you are buying a home, and can be included as part of the sales contract. It’s designed to cover kitchen appliances, wiring, plumbing, furnaces, air-conditioners, water heaters, garage doors, etc.

Commitment to a Location

Unlike renting an apartment, if you decide to move to another location, you can’t just give notice. It’s often suggested you stay in a home 5 years or more before moving. This is based on the costs associated with getting a mortgage and the initial interest-to-principal ratio of mortgage payments.

Co-borrowers – Partners in Homeownership

A mortgage agreement is a contract between the lender and the borrower(s). If you are purchasing a home with a co-borrower, whether spouse, significant other, friend or family member, you’ll be partners in this financial commitment. Your combined income will be used to qualify for the loan, you will both appear on the title, and your credit will be linked as long as you share the mortgage.

Financial Requirements

Qualifying for a home loan will require that you provide some documentation. There are variations in loan programs and lenders, but you can expect to submit information related to the following:

Credit

Once you give your consent, your lender will run what is called a tri-merge credit report. You actually have three separate credit reports and credit scores, one each from Experian, Equifax, and TransUnion. Each bureau has its own credit score formulas and the information reported to each bureau may be slightly different. A tri-merge credit report is a single report with combined information from the three credit bureaus, but the credit scores are listed individually.

Monitor your credit for errors and avoid situations that may lower your credit score such as late/missed payments, taking on additional debt, and closing credit card accounts.

Income

Your lender will also review your income to make sure it is both sufficient and consistent. Lenders like to see two years at the same company or at least in the same industry. Most lenders will ask for two years of documented income from W2 Forms, recent pay stubs, bank statements, and tax returns.

If you are self-employed – in other words, a freelancer, business owner, or independent worker – your income will be calculated using your tax returns, 1099s, and profit and loss statements.

Debt-to-Income Ratio

Your credit report and the income documentation you provided are then used to calculate debt-to-income (DTI) ratios. First, a front-end DTI ratio is calculated for housing expenses (aka mortgage payment, mortgage insurance, property taxes, and homeowners insurance) divided by your gross monthly income. Back-end DTI ratios include the above-listed housing expenses plus other debt that appears on your credit report (credit cards, car loans, personal loans, etc.) divided by your gross monthly income.

For example: You plan to make a $1,500 mortgage payment which includes the monthly cost for mortgage insurance, property tax, and homeowner’s insurance. In addition, you have a monthly car loan for $300 and two credit card payments that average $150 and $50. Your gross monthly income is $6,000.

Front-end DTI is 25.0% ($1,500 divided by $6,000)

Back-end DTI is 33.3% ($1,500 + $300 + $150 +$50 divided by $6,000)

Acceptable ratios vary by lender, loan program, and underwriting process used. Conventional loans usually require ratios of no more than 28 percent and 36 percent. FHA loans are usually looking for maximum ratios of 31 percent and 43 percent. VA loans generally only require a back end ratio of 41 percent or lower.

There are exceptions to each loan program, so don’t lose heart if your scores are outside the range. A higher down payment, strong payment history, large savings amount, good credit, or a minimal increase to the borrower’s current housing expense could all make a higher ratio acceptable.

Down Payment

Down payment requirements also differ by the loan program selected. A VA loan generally doesn’t require any down payment. FHA loans require a down payment of 3.5 percent. Conventional loans are frequently associated with a 20 percent down payment, but this is not mandatory. There are conventional loan programs that offer low down payments of 3-5 percent for low-to-moderate-income homebuyers.

Cash Reserves

Cash reserves are money in addition to the down payment and any closing costs. They aren’t common for the purchase of your primary residence. However, they could be a requirement if your credit score is low and your down payment is small. This extra money or reserve is usually mentioned in terms of monthly mortgage.

When it comes to homeownership, unlike the sailor on the sinking sailboat, your timing doesn’t need to be perfect. In most cases there is a wide window of opportunity when it comes to buying a home. And, when you’re ready, taking the leap from renting to homeownership can be personally rewarding as well as financially beneficial. Owning a home offers stability and security to many individuals. In addition, there are tax advantages of homeownership and often long-term financial benefits that aren’t possible when renting. Although family and friends may push you, the decision of when to purchase your home is uniquely yours.

Axos Bank, a federally insured institution, has experienced mortgage specialists who can help you navigate the home buying process; please contact us at 1-888-546-2634 today.

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