Advice for Renters Priced Out of Homebuying
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For renters looking to transition to homeownership, today's housing market can feel like a dream killer.
Rising mortgage rates, high home prices and a shortage of properties for sale deliver a one-two-three punch.
If you've been knocked out of one too many deals and need a timeout from all the homebuying stress, here's how to regroup and keep the homeownership dream alive.
Give yourself a break
With the rise in home prices and interest rates, the monthly principal and interest on a median-priced single-family home with a 10% down payment is nearly $2,300, using February 2024 numbers from the National Association of Realtors. That's a big chunk of money, and it doesn't even include mortgage insurance, homeowners insurance, property taxes or other housing-related expenses.
It's OK to hit pause if you're frazzled to the point that you can't think clearly or are simply priced out. Give yourself some time to breathe, and know that you're stepping back, not giving up. Not now doesn't mean not ever.
Strengthen your finances
Taking a break from the stress of homebuying can be an opportunity to get your finances in even better shape.
Budget like a homeowner
As of February 2024, it's cheaper to rent than to own a home in the 50 largest U.S. metros, according to data from Realtor.com. Buying a home is a way to build wealth over time, but in the short term, you might feel the pinch of having a larger bite taken out of your budget.
To help prepare for the costs of homeownership, use a mortgage calculator to estimate a monthly mortgage payment, including estimated property taxes and home insurance. Then add 20% of the monthly mortgage for unexpected maintenance and repairs, as well as estimated costs for any utilities you aren't currently paying that you'd have as a homeowner. (For example, if heating and cooling is included in your rent now, add some cash to cover your hypothetical HVAC costs.) Subtract your rent payment from that amount and set aside the rest in a high-yield savings account.
When you're ready to buy, you'll have laid the groundwork for a smoother financial transition from renting to owning. And you can add that extra money you've socked away to your down payment, which will help you make stronger offers and may qualify you for better mortgage rates.
» MORE: How to budget for buying a home
Pay down debt
Paying down credit cards and other debt will improve two measurements: your credit score and your debt-to-income ratio, or DTI. Both are key factors that lenders consider when deciding whether you qualify and at what rate.
A good DTI — the percentage of gross monthly income that goes toward debt — is generally under 36%. The lower the better.
Your credit score is based in part on credit utilization, the percentage of available credit used. Shrinking your debt will lower credit utilization and help your score. Meanwhile, keep making on-time payments to preserve good credit.
If your on-time rental payments aren't currently contributing to your credit score, making sure they're reported could potentially help you build credit. Rent-reporting services can help make your record of rental payments visible to the credit bureaus. This will take a bit of research; you'll probably want to go with an option that reports payments to all three major credit bureaus. While there are a couple of free options, most charge fees.
Avoid optional big expenses
Resist the temptation to vent your frustration in a spending splurge, whether it's running up a credit card balance or buying a new car when the old one suffices.
If you're already itching to move, upgrading to a nicer apartment could feel enticing. But if you're committed to buying in the near future, keep in mind that paying the security deposit and other moving expenses could cut into savings for a down payment.
Reevaluate your wants and needs
This is a good time to look at the big picture. You don't need to say goodbye to your dream home, but you may want to scrutinize your wish list and make sure your dreams are rooted in reality.
Given home prices and mortgage rates, you may need to adjust your home search filters. You may need to shop for homes in a different neighborhood or buy something smaller than originally imagined. If the aim is to buy a starter home, build equity and upgrade in a few years, then that flexibility may pay off.
If you could work elsewhere, you could consider relocating to a less-expensive housing market. Taking a pause can give you time to research the quality of life and cost of living in other locations and weigh whether you want to live somewhere else.
Keep in touch
Besides fine-tuning finances and reevaluating goals, keep in touch with your home search team, so they'll be by your side when you're ready to get back in the game.
Let your real estate agent know if you can make a bigger down payment, for instance. Keep your agent updated on when you might be ready to jump back into the market and the types of homes and areas you're willing to consider.
If you were preapproved for a mortgage, you'll want to tell your loan officer you're pausing your search. Make sure you know when your preapproval will expire, too. Most mortgage preapprovals last no more than 90 days. Renewing your preapproval before it's too late will help you avoid going through the whole process, including a hard credit inquiry, all over again.
