by Maurie Backman | Jan. 16, 2021
Here's why homeownership may be a good goal.
The upside of renting a home is near-term predictability. As long as your lease is effective, your monthly housing costs are easy to account for -- you write out your rent check and call it a day. When you own a home, there's the risk of extra maintenance, surprise repairs, and rising property taxes to add to your costs.
New data from ATTOM Data’s 2021 Rental Affordability Report reveals that, despite those risks, owning a home is still more affordable than renting in nearly two-thirds of the country's housing markets. Specifically, owning a median-priced three-bedroom home is more affordable than renting a three-bedroom property in 572 U.S. counties (though renting is more affordable than buying in 18 of the country's 25 most populated counties).
If you're interested in lowering your housing costs, becoming a homeowner could be your ticket. Here are some things you can do to increase your chances of getting approved for a mortgage and joining the ranks of U.S. homeowners.
A strong credit score can help you get approved for a home loan, but also help you snag the most competitive interest rate on a mortgage. At minimum, you need a score of 620 to get approved for a conventional loan, but get your score up to the mid-700s or higher for the best rates. You can do that by paying upcoming bills on time, paying off a chunk of credit card debt, and correcting any errors that exist on your credit report.
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Mortgage lenders want to see that you're not overextended on other debt before loaning you money, so it helps to whittle down existing loans or credit card balances before you apply for a home loan, especially if they're substantial. Though you may not be able to shed all of your debt, if you're able to, say, pay off your car a few months early, that's one less financial obligation standing in the way of paying a mortgage.
Lenders want reassurance that you can keep up with your monthly payments once you secure a mortgage. It helps to have a stable, steady income source on your application. If you're self-employed with variable income, try to line up some contracts. That way, you can show a lender that you do have some guaranteed income.
Putting down 20% of a home's purchase price helps you avoid private mortgage insurance, or PMI, a costly premium on top of your regular mortgage payments. But that's not the only reason to approach your mortgage application with healthy savings. Lenders also want to see that you have assets to tap in case you lose your job and don't have a paycheck for a while. If you boost your savings, you're more likely to get approved for a home loan.
While owning a home may not be more affordable than renting in every U.S. housing market, for the bulk of the country, it is. If you'd like to buy a home, do everything you can to make yourself a solid mortgage loan candidate. Remember -- when you own a home, you can also benefit from certain tax breaks that renters can't, so there are plenty of good reasons to buy a place of your own.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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