Rent vs. Buy

21 05 2010

How do you know if you should rent or if you should buy? Depending on your situation, some people aren’t best suited for home ownership just yet. The following are some why some should just rent and not buy.

Bad Credit?

Do you know if you have good credit or bad credit? Have you done a credit check recently?

If you have a low credit score (FICO score under 620), if you get approved for a loan, you won’t get a good interest rate. You might get a loan from a secondary source with higher interest rate. Not the best situation to get yourself into.

If you have a low/bad credit score and still want to buy, you should try and fix your credit before applying for a loan. If you have 4 late payments it can mean that you won’t be approved for a loan. Not sure what your credit is? You can order your credit report online for free.

High Debt Ratios

When applying for a loan, creditors consider 2 ratios to determine your risk rating (how likely you are to default on a loan payment): Gross Debt and Total Debt. Your mortgage (Principal) payment, Insurance, Taxes, Interest payments divided by your monthly salary to obtain your Gross Debt Ratio. The total debt ratio adds your monthly debt payments to your PITI payment before dividing the total by your salary. A high debt ratio is 50%, which mean that you may not qualify for the loan, depending on the lender’s requirements. If you find a lender who is willing to give you a loan whilst having such a high debt ratio, you may not be able to afford anything (ie. food).

Job Security?

Is your job secure? If you lost your job, would you be able to make your loan payments? If you go into default, you risk losing your home. Would your job require you to move within the next 2 to 3 years? If you had to sell because you were relocating, your property would need to appreciate at least 10% for you to not lose money from the closing costs of selling. When you buy a home, you should plan to stay put for a while.

Maintenance Issues

When you buy a property, it will require maintenance and repairs. Not everyone is a handyman to handle renovations or repairs for their house. Many first-time buyers can’t afford to hire a professional to fix or repair things around the house. A generous rule of thumb is to set aside 5% of your property value to cover maintenance and repairs.

Is Renting Cheaper?

How much are your mortgage payments? If they are triple the amount or more of the amount you would pay for rent, it might not be the best idea for you to buy. This would depend on the house you want to own and the loan you are approved for. If it costs you $1,500/month to rent a house that would cost you $5,000/month to own, does it make sense for you to pay that much to own? Please consult an expert (Accountant, Financial Advisor) to determine what’s the best economical sense for you and your family.

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