Rental Expenses
Amount
Monthly rent ($):
Monthly rental insurance ($):
Expected annual inflation rate (%):
Current Fairfield 30-YR Fixed Mortgage Rates
The following table highlights current Fairfield mortgage rates. By default 30-year purchase loans are displayed. Clicking on the refinance button switches loans to refinance. Other loan adjustment options including price, down payment, home location, credit score, term & ARM options are available for selection in the filters area at the top of the table.
Introductory Guide to Buying or Renting a Home
Deciding whether to buy a house or rent has a lot do to with your current situation and goals. Though it’s largely influenced by your income, choosing a home ultimately boils down to your priorities and if you want to settle down.
People choose to rent for flexibility and affordability. It allows them freedom to move as needed when major life changes occur, such as starting a new job to explore career opportunities. On the other hand, others prefer the comfort and security of having their own home. This is usually chosen by people who want to settle down for good in an area, especially when raising a family. Owning a home is an expensive financial commitment, but for many, it’s well worth the cost.
Our guide will compare the benefits and disadvantages of homebuying and renting. We’ll also discuss the costs of renting versus homebuying, and when one option may be more favorable than the other. Depending on your situation, we hope to help you find which option suits you best.
Assess Your Personal Plans and Priorities
Buying a house and renting are associated with different needs and expenses. Take time to review your finances, lifestyle, as well as your long-term goals. Depending on what stage you are in life, it might be more practical to rent than buy a house, and vice versa.
Before deciding, ask these five key considerations. Sorting your priorities and goals will help clarify if you should buy a house or rent for the meantime.
How much monthly payment can I afford? Can I afford to take care of home repairs / maintenance? Do I prefer stability or flexibility right now? How long do I intend to live in the house? What are my financial, career, and family goals? While there is no right or wrong answer, one setup can certainly work better depending on your situation. Besides assessing your budget, one major consideration is how long you’ll be staying in a house. If you see yourself moving again within 3 years, then it’s probably better to rent for the meantime. People who are still establishing their career tend to move every couple of years.
It’s also important to ask if you’re having children soon. Having a bigger family will logically require you to search for a larger, more comfortable living space. If this is case, it’s practical to start saving as early as you can to afford a bigger home. With it comes deciding where to stay long-term and working towards a more financially stable life.
After reviewing these factors, let’s take a closer look at the differences between renting and homebuying.
When to Rent a Home
Renting is a good fit for individuals who are still finding a stable career or building their income. You can get a lease for a couple of months to a year and renew it for as long as you need. Since you’re not obliged to stay, you can move to a better job in another city. In general, choosing rent is more practical for people who are going through periods of drastic changes in life.
While the main advantage of rent is flexibility, it should be cheaper than making mortgage payments. Renting is affordable, at least in the short term. However, you’ll notice rent is more expensive in more densely populated cities, examples of these are San Franciso, New York, and Seattle. Your priority should be finding a good location that fits your budget so you can save.
For those planning on getting married or having children, renting for a couple of years can build savings for expensive costs. Single parents and people going through a financially and emotionally taxing divorce, also take advantage of rent. It can help manage debt by downsizing expenses. Generally, the idea of renting is usually temporary until you gain a level of stability. Though in recent years, many families tend to rent indefinitely before they can buy a home.
Normally, we think younger people are more likely to rent than older adults. However, a 2019 study by iProperty Management reported that 33% of renters were actually 30 to 44 years old, while 30% of renters were 45 to 64 years old. This study notes that a larger portion of the rental market is driven by older consumers . Meanwhile, only 22% of renters were under the age of 30. Due to expensive home prices, people may elect to buy homes at a later age. Finally, only 15% of renters in 2019 were 65 or older.
Age of U.S. Renters in 2019
Renter’s Age Percentage of Renters 30 to 44 years old 33% 45 to 64 years old 30% Under 30 years old 22% 65 years old and above 15%
According to Statista , an estimated $43 million U.S. home units were rented in 2019. This figure has remained steady since 2014 but is indicative of the growing rental demand since 1975. In the past years, renting has reflected the downward trend of residential vacancy rates throughout the country. The increasing rental demand is also largely associated with the growing unaffordability of homeownership.
Why is rent generally affordable? Rent doesn’t come with the added costs of homeownership. Unlike buying a house, it does not require real estate taxes, home inspection and appraisal, mortgage insurance, and homeowner’s association fees (HOA). Renters also do not worry about maintenance and utilities. Since landlords are responsible for keeping rental homes in good condition, you don’t have to shoulder these costs. Besides personal upkeep, you don’t need to deal with HVAC repairs, plumbing, and other housing-related expenses. Unless you actually damage the property, your landlord should not charge extra fees.
Though it’s not always required, landlords may request you to obtain renter’s insurance. In 2020, the average renter’s insurance cost $19 per month or $228 per year. This is a worthwhile expense, especially if you’re renting a home for several years. The longer you rent, the more you should prepare for accidents and other unforeseen events.
The Disadvantages of Rent
On the other hand, rent’s primary drawback is lack of property ownership . You do not build home equity with rent. That’s money you could have spent on acquiring your own asset. Because home equity is a source of wealth, you miss the opportunity to tap it for future expenses. There are also no tax advantages with rent compared to taking a mortgage.
Another drawback is rising rent prices . If you factor in possible economic downturns as well as standard inflation, you must anticipate more expensive rent in the future. At worst, if your landlord decides to sell the property, you’ll be forced to move and look for a new apartment. On the other hand, homeowners with a fixed-rate mortgage typically have the same principal and interest payment every month. The owner may pay increasing sales tax or have more expensive maintenance costs, but the core loan payments will not change.
Another issue with rent might be finding a pleasant landlord. Depending on the area, there are landlord horror stories you certainly want to avoid. At the very least, it’s important to find a fair landlord you can get along with. Next, you must abide by your landlord’s house rules. Depending on your rental home or apartment, you might not be allowed to bring pets. Simple activities such as smoking might even be restricted in your unit.
You must also sacrifice a level of privacy when you rent in a condominium or apartment complex. While you may get along with neighboring tenants, you might be uncomfortable sharing a close area with certain people. Some tenants may have children or pets that are noisier than usual, especially if you elect to work from home. Meanwhile, having your own house eliminates the challenges of having to deal with unpleasant tenants.
Finally, since it’s not your house, you cannot fully customize a rental home. Though your landlord may allow certain renovations, buying expensive furniture or repainting walls is not practical. You shouldn’t spend much because you’ll eventually leave. At the end of the day, the landlord will benefit most from the improvements, which is attractive to future tenants. It’s still different when you can finally have a space you can call your own.
Understanding the Cost of Rent
While monthly rent is not as expensive as mortgage payments, it’s important to know what influences rental costs. Rent prices vary depending on your location. It is also directly affected by the size of the property, consumer demand, and inflation rates. Smaller apartments are usually overrepresented in rentals. The cost of a 1 bedroom unit or studio apartment is usually more affordable than a 2 bedroom unit. Due to inflation, renters are likely to pay increasing rents for years to come.
Generally, rent rises when there’s greater demand for rental property. When more people want to rent in a certain area, it drives more competitive prices. Thus, landlords are able to increase rental costs which can even match average mortgage payments in certain locations.
High rental costs are typical in places with large populations and greater opportunities for career growth. These places, which are commonly coastal states, have strong labor industries with many high-paying jobs that draw people. According to Rent.com , states with the most expensive average rental rates in 2020 were Massachusetts, Washington D.C., and California. With more people coming in, less rental units are available for occupancy. Expect to pay much higher rent in places near business districts, shopping malls, hospitals, and other urban conveniences that have high demand.
How the COVID-19 Crisis Affected Rent
During the height of the COVID-19 crisis, general renter activity declined in 30 of the largest cities in 2020. This is caused by people leaving dense urban locations for less populated areas. Rent Cafe also reported that rental activity was slower by 10% in 2020 compared to 2019. Though the rent season typically starts in March all through August, it was delayed for 2 months because of enforced lockdowns. Rent season began in May 2020 which stimulated market activity by 27%. But it was cut short by July 2020 when rental movement decreased by 13%.
The following chart shows how average rent prices changed from 2019 to 2020 for 30 of the biggest cities in the U.S.:
U.S. City 2020 Average Rent 2019 Average Rent Change Y-o-Y San Francisco, CA $3,055 $3,695 -17.30% Manhattan, NY $3,761 $4,215 -10.80% Seattle, WA $1,966 $2,148 -8.50% Boston, MA $3,144 $3,429 -8.30% Chicago, IL $1,794 $1,955 -8.20% San Jose, CA $2,531 $2,742 -7.70% Washington, D.C. $2,083 $2,234 -6.80% Los Angeles, CA $2,359 $2,503 -5.80% Austin, TX $1,372 $1,442 -4.90% Portland, OR $1,493 $1,542 -3.20% Nashville, TN $1,399 $1,431 -2.20% Denver, CO $1,636 $1,672 -2.20% San Diego, CA $2,201 $2,237 -1.60% Houston, TX $1,108 $1,116 -0.70% Philadelphia, PA $1,643 $1,653 -0.50% Dallas, TX $1,247 $1,243 0.30% San Antonio, TX $1,058 $1,050 0.80% Louisville, KY $994 $978 1.60% Charlotte, NC $1,286 $1,256 2.40% Oklahoma City, OK $805 $784 2.70% Columbus, OH $979 $952 2.80% El Paso, TX $812 $789 2.90% Baltimore, MD $1,312 $1,274 3.00% Detroit, MI $1,102 $1,068 3.20% Fort Worth, TX $1,171 $1,132 3.40% Las Vegas, NV $1,150 $1,110 3.60% Indianapolis, IN $933 $894 4.40% Jacksonville, FL $1,162 $1,111 4.60% Memphis, TN $863 $819 5.40% Phoenix, AZ $1,182 $1,120 5.50%
Rent Requirements
Renting a place is a lot easier than applying for a mortgage. However, it’s still important to maintain a good credit record to secure your ideal rental home or apartment. Landlords actually review your credit history and perform background checks when they choose tenants. If you have a questionable record, the landlord might ask you to pay more rent in advance. This assures them your payment is covered in case you’re unable to deliver on time.
Some landlords may even charge more every month if they learn you have poor credit history. This is called an adverse action notice . The notice will also tell you how to get in touch with the credit agency that created your report. During this time, you have the liberty to dispute any errors or misinformation you may find in your credit report. You may also explain the issue to your landlord to address their concerns and avoid more expensive rent.
Furthermore, before signing a lease, the Federal Trade Commission reminds renters to review the following terms:
The amount of rent and when payments are due How long you will rent the house or apartment What happens if you fail to pay on time The landlord’s rules which you must follow Other costs you agree to pay (if any) When you evaluate a lease contract, clarify if the monthly rent includes essential utilities such as water, gas, electricity, or internet. Most homes or apartments for rent should include them. One great benefit it offers is not having to take care of maintenance costs. The less payments you need to make, the more income you can save.
Budget for a Security Deposit
Renting requires a security deposit . It usually includes two payments : one to cover the first month, and the second to pay for the final month. These are used to protect the landlord in case the renter cannot fulfill specific terms in the lease. Typically, renters get the security deposit once they move out. However, others do not get their deposit back if:
They leave the property before the lease period ends They cause damage to the property upon leaving
How long does a lease last? A lease can run for a year or more. If you only intend to stay for months at a time, opt for a month-to-month or short-term lease. This ensures you can leave the property in case you do not plan on staying longer than you initially expect. If you leave earlier, you will not receive your security deposit.
To summarize the benefits and disadvantages of renting, we made the following chart:
Pros Cons Generally more affordable than mortgage payments. Does not build home equity. No tax advantages from rent compared to a mortgage. Provides flexibility to move as you need. If the landlord decides to sell the property, you must look for a new home. The affordability gives you time to save and build income. Due to inflation, you must anticipate increasing rental costs. Allows you to find a place in your desired area. Move closer to work if you need to commute. You might have a hard time getting along with other tenants and your landlord. The landlord is responsible for maintenance, repairs, and utility costs. You cannot fully customize rental property.
When to Buy a Home
Reaching a level of financial stability is the primary requirement for homeownership. Since homes are a very expensive proposition, it’s important to make long-term financial preparations. Buying a home is ideal for consumers who have job security, stable incomes, ample savings, and a good credit score. It’s well suited for people who want to live for a long time in one area, as well as couples who intend to have a family. Buying your own property becomes necessary especially if you have more children. You’ll definitely need sufficient space for your family’s comfort and needs.
The main benefit of homebuying is long-term savings . While renting becomes more expensive in the long run, you’re investing money on property that you’ll acquire. Because mortgages usually have fixed-rate terms , your monthly payment keeps the same principal and interest for the entire loan. Your mortgage payments remain within an affordable range, even if property taxes, mortgage insurance, or maintenance costs change. And when you think about it, you’re better off spending on a mortgage than paying rent for a place you’ll never own. That’s why homebuying is more practical if you’ll live in the same place for a long time.
In contrast to renting, homebuying allows you to fully customize your home . Whatever updates or expansions you make will increase your property’s value. You don’t have to worry about following your landlord’s rules or living uncomfortably with nearby tenants. With more space to yourself, you can finally enjoy the privacy of your home, arranging it however you please. For big families, a larger home provides you with ample living space for years to come.
Build Equity, Build Wealth
Once you can afford it, it’s wise to purchase property so you can build home equity. Home equity is what you owe on your mortgage minus your home’s current market value. When you’re building equity, it means little by little, you are owning more of your home until your mortgage is paid off.Why does it matter? Home equity is an asset that can help build wealth. You can capitalize on your home’s value as it grows over time. When your home’s value increases, you can sell it in the future at a much higher price. You can also tap home equity through a second mortgage or cash-out refinance to pay for major expenses.
Homeowners can leverage home equity to:
Fund home improvement projects to increase your home’s value Have a standby HELOC that acts as a source of emergency funds Help pay for your child’s college education and other important costs Consolidate high-interest debts at lower rates (should be done with caution) The Drawbacks of Homeownership
The main disadvantage of buying a house is the expensive costs. Besides saving a sizeable down payment and budgeting for monthly mortgage payments, you must factor other costs of homeownership. Things like property taxes and maintenance will add to your bills. Here’s a list of housing related-expenses you should budget for:
Home appraisal and inspection (before buying the house) Real estate taxes Mortgage Insurance HOA fees Utilities Maintenance Real estate taxes depend on your property’s appraised value and local tax rate. The U.S. Census Bureau states that U.S. homeowners spend an average of $2,375 on real estate taxes per year. Tax rates also change at least once a year, so you should anticipate higher real estate taxes over time. Next, homeowner’s association fees are optional, particularly if you choose to live in a HOA community. HOA fees take care of civic services such as trash removal and cleaning in common areas. Expect HOA fees to be higher in more high-end neighborhoods.
Another costly expense to take note of is mortgage insurance. Most lenders typically request buyers to obtain basic home insurance coverage to protect their property. In 2020, the average home insurance cost was estimated at $1,445 per year. Meanwhile, other kinds of home insurance protects lenders in case you have trouble making mortgage payments.
Avoiding PMI with 20% Down Payment
For conventional loans, homebuyers are charged private mortgage insurance (PMI) if their down payment is less than 20% of the home’s price. PMI ranges from 025% to 2% of your loan amount per year. It’s an added cost that does not benefit you in any way, but safeguards your lender in case you default on loan payments. PMI is only canceled once you gain 22% equity of your home, which is a loan-to-value ratio of 78%. To avoid PMI, it’s ideal to save at least 20% down when you buy a house.
Finally, to keep your home in good condition, you’re responsible for utilities, routine maintenance, and repairs. Homeowners typically spend between 1% to 4% of their home’s value on maintenance and repairs annually. The larger the home, the more expensive maintenance gets. Just think of the time and money you’ll spend for cleaning rooms, decks, and replacing fixtures. Note that buying an older home tends to incur more expensive maintenance costs compared to brand new property.
In 2020, HomeAdvisor reported that the average home maintenance spending cost was $3,192, while home emergency spending was $1,640. Overall, households spent an average of $13,138 on home services in 2020. This rose from $9,081 in 2019. The increase in home services expenditures is attributed to people spending more time indoors because of the COVID-19 crisis. Frequent home dwelling results in more wear and tear in properties. People who needed to work from home also tend to make improvements on their space.
Owning a house is a long-term financial obligation. The costly mortgage payments require many years of living in a house to justify the expenses. So choose an area where you are comfortable enough to settle down in the next 15 or 30 years.
The Average Cost of A House
Different factors impact housing prices. This depends on the home’s location, size, the economy, as well as how much housing demand there is in an area. Logically speaking, the larger the home, the higher the price. Buying homes in crowded cities and bustling metropolitan areas tend to have expensive price tags. When more homes are in demand, the more competitive prices get. Expect to pay a higher premium for homes located near offices, shopping districts, schools, hospitals, and other prime locations.
Another problem driving property prices is the growing housing supply shortage . Due to the recession caused by COVID-19 in 2020, Freddie Mac announced a housing shortage of around 2.4 million homes. Zillow economist Matthew Speakman stated that less than three months of homes were available in the U.S. market. This is notably the lowest record of housing units since the turn of the century.
How the COVID-19 Crisis Affected Home Prices
Unlike previous recessions that were characterized by massive foreclosures and falling home prices, the 2020 recession was different. In April 2020, during the height of the crisis, home sales prices increased by 4.7% compared to the previous year. The trend continued to increase throughout 2020 and carried on until the following year. In certain points in 2020, housing activity was driven mostly by refinances .record low rates starting in mid-April 2020, as the Federal Reserve kept rates near zero to stimulate market activity. The low rate environment encouraged people to buy houses or refinance their mortgage. Affluent consumers in major capitals were prompted to buy second homes away from the city to retreat during lockdowns. Others bought larger property with more room for a home office.
Historically, home prices have been steadily increasing since the 1960s. Though it can fluctuate depending on economic conditions, the general trend shows home values steadily rising. According to the Federal Reserve , the median sales price of a home in the first quarter of 1963 was 17,800. This would only cost around $150,550 in 2020 when adjusted for inflation. In the first quarter of 1980, the median sales price was $63,700, which then increased to $123,900 in 1990.
By the first quarter of 2000, the median home price increased to $165,300, and by 2010, it grew to $222,900. Come the first quarter of 2020, the median home price rose to $329,000 and is still increasing. Between 2010 and 2020 alone, the median price increased by a whopping $106,100 in just a decade. Overall, the median home price has grown around 18 times larger in 2020 compared to 1963. By January 2021, the U.S. Census Bureau reported that the median sales price for new homes sold was $355,900.
U.S. Median Home Sales Prices, 1963 -2020
Year Median Sales Price Q1 Year Median Sales Price Q1 1963 $17,800 1992 $119,500 1964 $18,900 1993 $125,000 1965 $20,200 1994 $130,000 1966 $21,000 1995 $130,000 1967 $22,300 1996 $137,000 1968 $23,900 1997 $145,000 1969 $25,700 1998 $152,200 1970 $23,900 1999 $157,400 1971 $24,300 2000 $165,300 1972 $26,200 2001 $169,800 1973 $30,200 2002 $188,700 1974 $35,200 2003 $186,000 1975 $38,100 2004 $212,700 1976 $42,800 2005 $232,500 1977 $46,300 2006 $246,300 1978 $53,000 2007 $257,400 1979 $60,600 2008 $233,900 1980 $63,700 2009 $208,400 1981 $66,800 2010 $222,900 1982 $66,400 2011 $226,900 1983 $73,300 2012 $238,400 1984 $78,200 2013 $258,400 1985 $82,800 2014 $275,200 1986 $88,000 2015 $289,200 1987 $97,900 2016 $299,800 1988 $110,000 2017 $313,100 1989 $118,000 2018 $331,800 1990 $123,900 2019 $313,000 1991 $120,000 2020 $329,000
What about monthly mortgage payments? Your monthly payments will depend on your loan amount, the interest rate (APR), and your down payment amount. For example, let’s say you’re buying a house priced at $320,000. If you make s 20% down payment of $64,000, this reduces the loan amount to $256,000. If you took at 30-year fixed-rate loan at 3.5% APR, your monthly principal and interest payment will be $1,150. That’s excluding property taxes and mortgage insurance.
Remember, the higher loan amount you borrow, the larger your monthly payment will be. That’s why it’s better to make a 20% down payment to significantly reduce your loan amount. Furthermore, your monthly payment will also be more expensive if you receive a higher interest rate. In the following example, let’s suppose your loan amount is $300,000 and you took a 30-year fixed mortgage at 3.8% APR. This results in a monthly principal and interest payment of $1,398, which is higher by $248 than the previous example.
In 2018, the average monthly mortgage payment was $1,275 for a 30-year fixed rate mortgage, and $1,751 for a 15-year fixed-rate mortgage. This information was based on research from the Bureau of Labor Statistics.
Don’t Forget the Closing Costs
Closing costs are payments for services needed to process and finalize your mortgage. It typically ranges from 3% to 6% of your loan amount. For instance, if you borrowed $280,000, your closing cost can be around $8,400 to $16,800. While closing costs can be financed into your loan by your lender, it’s best to pay for them upfront. Financing closing costs increases your loan amount, which will make your monthly payments more expensive. You can negotiate closing costs with your lender to help reduce your expenses.
How High Should Rent Increase to Justify Homebuying?
Generally, if your rent is close to or matches your area’s average mortgage payments, you should consider buying a house. Think of this if you’re keen on settling long-term in an area. But again, put off homebuying if it’s not urgent and if you’ll eventually move in a couple of years. If rent is too expensive, it’s better to look for a cheaper area to live in temporarily. On the other hand, if you’re ready to buy a house, it’s good to look for more affordable locations to maximize your savings.
One way to determine how much house you can afford is based on your monthly rent. To calculate it, take your monthly rent payment and multiply it by 200. The figure is derived from the number of payments you need to make if you’ll pay monthly mortgage for 16 years and three months. The resulting amount will be a good approximation of the home loan you can afford. If your rent is high enough, your estimate might be close to the median home prices in your area. Under this situation, consider purchasing a house.
Let’s presume your monthly rent is $1,250. If this is your monthly mortgage payment in the next 16 years and three months, you can afford a house with a loan amount worth $250,000. Depending on the average sales price in your area, check if you can find a home which fits this budget. If the house you need is priced higher, you’ll need to budget for higher monthly payments.
= $1,250 x 200
Another way to estimate conveniently is to use the above calculator. It determines the loan size you can afford based on your monthly rental payment, including the loan term and the interest rate. For example, suppose your monthly rent costs $1,500. If you obtain a 30-year fixed mortgage at 3.5% APR, how much home can you afford? The following results show costs if you make a 10% and 20% down payment.
Loan Details 20% Down 10% Down Affordable loan amount $265,378.19 $265,378.19 Down payment amount $66,344.55 $29,486.47 Price of home $331,722.74 $294,864.66 Monthly principal & interest payment $1,191.67 $1,191.67 Monthly PMI None $132.69 Monthly payment with taxes & insurance $1,500.00 $1,632.69 Total interest costs $163,621.81 $176,113.19
In this example, if your monthly rent is $1,500 and you intend to take a 30-year fixed mortgage at 3.5% APR, you can afford a loan amount of $265,378.19 to purchase a home. If you make a 20% down payment to avoid private mortgage insurance (PMI), you must save $66,344.55 to buy a home priced at $331,722.74. Your monthly principal and interest payment will be $1,191.67. If we add $308.33 in property taxes and other housing-related expenses, your monthly mortgage payment will be $1,500. You’ll spend $163,621.81 in interest costs over the life of the loan.
Meanwhile, if you make a 10% down payment, you must save $29,486.47 to purchase a home priced at $294,864.66. Your principal and interest payment will be $1,191.67. However, if we add $308.33 in housing-related expenses and $132.69 for PMI costs, your monthly mortgage payment will be $1,632.69. Consider the higher payment. Your interest costs will be $176,113.19 over the life of the loan.
In this example, making a 20% down payment will save you $12,491.38 in overall interest charges compared to a 10% down payment. Thus, it’s best to avoid PMI to reduce your mortgage costs.
Qualifying for a Mortgage
Lenders refer to several key factors to determine if you are eligible for a mortgage. They use these as indicators to assess how much you are qualified to borrow. Expect lenders to evaluate your credit score, income and assets, and your debt-to-income ratio (DTI).
Credit score
A credit score is a rating that gauges your creditworthiness, which is your ability to pay back a loan. A consumer’s credit score is based on the following financial records:
Payment history – 35% Types of credits – 10% Amounts you owed – 30% Credit history length – 15% New credit – 10% Credit score classification systems depend on the credit agency reviewing your report. The most widely used credit score system is the FICO score, which is used by around 90% of lending institutions in America. FICO scores range from 300 as the lowest to 850 as the highest.
Essentially, a higher credit score indicates increased likelihood to pay back a loan. Any record of late payments will impact your score negatively. For example, if the credit agency sees multiple instances of overdue credit card payments, it will lower your score. A lower credit score will keep you from qualifying for a more favorable mortgage rate. Thus, it’s best to improve your credit score before taking a mortgage.
You can improve your credit score by paying your bills on time, settling overdue debts, and significantly reducing large credit card balances. But note that it can take while. If you have poor credit, it can take around 1 to 2 years for improvements to reflect on your record. This varies depending on your situation, so give yourself enough time to improve your credit score before taking any loan.
To obtain a good FICO score, aim for credit rating between 670 to 739. Likewise, a higher credit score will make you eligible for the best available rates. The following chart shows how different FICO scores affect a consumer’s rates.
FICO Range % U.S. Population Impact on Rates Exceptional 800 – 850 21% Receives the best available loan rates. Very Good 740 – 799 25% Obtains better than average rates. Good 670 – 739 21% Likely approved for credit. 8% probability of delinquency. Fair 580 – 669 17% Subprime borrowers. Must pay higher rate to compensate for increased risk. Very Poor 300 – 579 16% Likely not approved for credit.
Chart from Experian
Before applying for a mortgage or any type of loan, be sure to check your credit report. Borrowers can request a free copy every 12 months. Be sure to check for any misinformation, such as an incorrect billing address and unrecorded payments. Disputing inaccuracies will also help increase your credit score. To get a free copy of your credit report, visit AnnualCreditReport.com .
Income and Assets
Lenders evaluate if you have a stable source of income and how much you’re earning. This helps them determine if you have enough money to make timely mortgage payments. They also check if you can maintain mortgage payments together with your other debt obligations.
Besides your regular salary, lenders also check if you have other sources of income. Money is considered a regular income if you continue to receive it for as long as two years. The alternative sources of income include the following:
Overtime payments Social Security Payments Extra profits from freelance jobs Income from investment accounts Commissions Military benefits or allowances Child support or alimony payments Moreover, lenders check your assets, which are large savings you’ve made over the years. Having more savings reduces risk for lenders. This means you can continue making mortgage payments even after financial setbacks, such as unemployment or business closure. Large savings provide borrowers with a safety net, affording them enough time to find a stable source of income. You can submit the following assets for verification:
Checking and savings accounts IRA accounts 401(k) accounts Certificates of deposit (CDs) Mutual funds, stocks, and bonds Debt-to-income Ratio (DTI)
DTI ratio is a percentage that measures your total monthly debts against your gross monthly income. This is an indicator that checks if you have enough money to continuously pay for debt obligations. Essentially, a lower DTI ratio means you have enough money to make mortgage payments. Even if an emergency occurs, you will likely be able to keep making payments. Consumers with low DTI ratio impose less risk to lenders, making them appear more creditworthy borrowers. They also receive more favorable rates.
On the other hand, a higher DTI ratio means you are overleveraged. You might not afford a mortgage on top of your current debt obligations. Higher DTI ratio increases risk for lenders, which lowers your chances of loan approval. If your mortgage is approved with a high DTI, expect to receive a higher rate.
Two Main DTI Ratios
Front-end DTI: This represents the percentage of your income that pays for housing-related expenses. It includes mortgage payments, property taxes, mortgage insurance, HOA fees, etc. For conventional loans, lenders prefer a back-end DTI ratio no higher than 28%.Back-end DTI: This ratio represents your front-end DTI costs together with all your other debt obligations. It factors in credit card debts, car loans, students loans, etc. Most conventional lenders required a back-end DTI no greater than 36%. But depending on the strength of your credit profile, it can be 43%. In other cases, with compensating factors such as a higher down payment, it can be up to 50%.
To keep your DTI ratio low, make sure to settle any large debts. Keep your credit card balance low and avoid making expensive purchases before applying for a mortgage. The lower your debts, the better chances you’ll have securing a mortgage. You will also receive a more favorable rate.
Like any major life decision, it’s important to evaluate your current situation before taking a mortgage. If you answer yes to majority of these questions, then you’re likely ready to buy a house.
Am I staying in the area for good? Have I saved enough down payment? Can I afford the monthly mortgage payments? Do I have a good credit score? Have I been employed for a long time? Is my income source stable? Is my DTI ratio low enough? Can I afford maintenance and repair costs? Am I keen on owning my own property? The following chart summarizes the advantages and drawbacks of buying a house:
Pros Cons Homeownership lets you customize your property. Privacy. No landlords or tenants to deal with. Generally expensive. Requires a large down payment. Ideally 20%, on average 10%. The fixed-rate mortgage ensures you have the same monthly principal and interest payments. Comes with other expenses such as real estate taxes, mortgage insurance, HOA fees, maintenance, etc. Mortgages are tax deductible. You must spend time and money to keep the home in good condition. Homes generally appreciate in value over time. No more flexibility to move. Builds home equity which you can tap for future expenses. Remains an illiquid asset unless you sell your house or take out a second mortgage.
In Summary
Whether you rent or purchase a home, make sure your housing arrangement is well within your means. Renting is a practical option for people who need flexibility while allowing them time to save. It can cost a bit more depending on your location, but you don’t have to worry about property taxes, maintenance, and utility fees. Renting for the meantime can help you build savings so you can prepare for major life changes such as getting married, buying a house, and having kids.
On the other hand, though buying a home is clearly more expensive, many people still feel more secure when they own a place of their own. Renting gets costly in the long run, especially if you’re staying in an area for good. If this is the case, it’s worth spending rent money on buying a long-term home. After all, homeownership represents stability, a property you can rely on in case you need assets that can be utilized in the future.
Fairfield Borrowers: Are You Unsure Which Loans You'll Qualify For?
We have partnered with Mortgage Research Center to help Fairfield homebuyers and refinancers find out what loan programs they are qualified for and connect them with Fairfield lenders offering competitive interest rates.
