The dream of homeownership remains a big priority for individuals and families across the nation. However, with many areas experiencing limited supply and huge demand, preparation is critical. After all, making the jump from renter to owner is a major step with many considerations and financial implications. That said, navigating this process and planning for homeownership can seem daunting. Therefore, we have put together a home buying guide for tenants to get you prepared to succeed in the highly competitive real estate market. Check it out below!
Is Buying a Home the Right Choice?
Purchasing a home is not something people do on a whim. So, having an honest look at your finances and personal situation as a renter is the first step in this home buying guide for tenants. To help you evaluate whether now is the time for you to buy, make sure the following categories are in order –
Finances and Credit
Buying a home takes money, starting with a down payment. Although many programs assist first-time homebuyers with grants or down payment assistance, renters will still need on-hand funds to make up the difference. A down payment is a percentage of the home’s purchase price and can range from 3% to 20%, depending on the type of mortgage. Additionally, money is needed for other items such as closing costs and inspections. Check out these additional financial concerns that affect your ability to get pre-approval for a home purchase –
- Debt-to-Income Ratio – The debt-to-income ratio allows lenders to evaluate whether you can financially bear the responsibility of mortgage payment and related costs. Simply put, it is calculated by dividing an individual’s gross monthly income by the total monthly debt. That said, this debt includes car payments, credit card bills, student loans, alimony, or personal loans, to name a few. Depending on the loan, lenders look for a ratio no higher than 55% or even lower. So, if you have excessive debt, paying that down first will set you up for success in the future.
Need help calculating your ratio? Check out this free debt-to-income calculator from Wells Fargo.
- Credit Reports and Score – Like debt ratio, credit score plays a role in pre-approval and approval for a mortgage loan. This report paints a picture of your overall fiscal responsibility – Can you pay bills on time? Do you have accounts in collections? Ever filed bankruptcy? Therefore, the higher the score, the more appealing an applicant is to a lender. Typically, a homebuyer’s score needs to be above 620, but there are some exceptions based on the type of mortgage loan.
Unsure what your credit score is? Review your credit reports online to see what lenders see before you apply.
Personal and Lifestyle Goals
Another factor to weigh before deciding to buy a home is your lifestyle and personal goals. After all, settling into a mortgage is much harder to get out of than a short-term lease. So, with that in mind, think about the following areas of your life and decide the next best step – is it renting or buying?
- How long do you plan to stay in this location? – Perhaps you long to move cross-country or maybe only a mile from your childhood home; either way, how long you plan to stay matters. For instance, if you do not reasonably anticipate staying in one location for at least five years, renting may be a more cost-effective option.
- Do you anticipate any career moves? – Today’s job market is changing rapidly. Do you have a job that may require relocation? If so, this is a definite consideration when buying a home.
- Are you ready for the commitment? – Buying a home takes time, money, and a commitment to one location. Unlike renting, homeowners cannot simply pick up and go. Therefore, when deciding to build a home, ensure you are truly ready to settle down in your chosen spot.
- Will relationships be a factor? – Future relationships or marriages may affect your home buying plans. What if a current spouse is transferred for a job? Just as you should evaluate your own career and personal goals, consider the goals of any significant other.
- Are you prepared for the ongoing financial needs of a home? – Whether it is ongoing maintenance, preventive repairs, upgrades, a new roof, or emergency expense, the financial needs of a home go far beyond closing. So, take a look at typical maintenance costs for the size home you want and see if that is feasible for you.
When Do I Notify My Landlord I am Buying a Home?
So, you plan on purchasing a home, but what about your lease? As a renter, breaking a lease may have financial implications that could jeopardize your homebuying journey. Furthermore, ending too soon could leave you without a place to live if a sale or circumstances fall through. Therefore, open communication with your landlord is critical.
First, review the terms of your residential lease agreement. More often than not, this will clearly outline any applicable notice requirements or lease break fees. Typically, tenants must provide between 30- and 90-days notice to move or break a lease.
That said, the buying process can prove unpredictable, and it is not always possible to have a clear-cut timeline. However, giving your landlord the head’s up regarding your intention can help both parties prepare for an eventual departure. For example, if your lease is coming up for renewal, inquire about doing a month-to-month tenancy for a short time or signing a 3-month extension to accommodate your buying process.
Bottom line, it is important to follow and fulfill your lease requirements, and communicating with your landlord is the best way to ensure a smooth transition.
Step by Step Home Buying Guide for Tenants
So, you have evaluated your finances and have decided to move on from renting. Congratulations – let’s buy a house! Keep in mind; renters must complete many processes and steps on their journey to a new home.
While everyone’s path to homeownership is unique, the home buying guide for tenants below will help get you started with the basics.
- Research & Planning
- Get Pre-Approved
- Find Your Realtor & A New Home
- Submit an Offer
- Time to Inspect
- Facilitate an Appraisal
- Finalize Loan, Approval, and Offer
- Head to Closing
- Welcome Home
Research & Planning
The first step in this home buying guide for tenants is to complete some due diligence before beginning to narrow your search. The goal here is to take some time to familiarize yourself with common terms, work out a budget, research types of loans, gather helpful documents, and decide what you are looking for in your first home. Starting with these basics will help you move efficiently through the next few steps. Keep in mind, the real estate market is very competitive, and preparation is key. So, before going any further, make sure you can answer the questions below –
- What is your budget? – Affordability and understanding the maximum you are comfortable with will help you confidently make an offer when you find your dream home. Check out this free online affordability calculator to get started.
- Do you have the paperwork needed to apply for preapproval? – Applying for pre-approval means the mortgage lender runs basic financials to give you the amount you would likely be approved for. This is very helpful during your home search. We will talk more about what is needed in later sections.
- What type of loan might work best for me? – There are a ton of mortgage types, local programs, and grants available to first-time homebuyers. Consider attending a local home buying seminar to learn about and take advantage of every available option.
- Where do I want to live? – The first rule of real estate is the location! So, narrow yours down based on a commute, budget, amenities, school district, crime rates, taxes, and any other factors that matter to the day-to-day life in your new home.
Common Homebuying Terms Every Buyer Should Know
The real estate industry is full of terms that help buyers and sellers navigate the homebuying process. Check out a few key terms below that everyone should know –
- Preapproval vs. Prequalification — Preapproval involves submitting preliminary financial paperwork to prove income and helps to lock in an interest rate for your mortgage. Prequalification can be done over the phone and online and offers an approximation of how much home an applicant can afford.
- Adjustable-Rate vs. Fixed-Rate Mortgage — Adjustable-rate mortgages have a variable interest rate that can fluctuate throughout the life of the loan. On the other hand, fixed-rate mortgages maintain a consistent interest rate over the course of the loan.
- Earnest Money Deposit — The EMD is a deposit that accompanies a buyer’s offer and is credited back if the sale goes through. Typically, submitting an EMD shows a seller that you are serious about closing on the property.
- Contingency — Real estate contracts contain clauses or contingencies that spell out certain events that must happen within a set time frame; otherwise, the contract may be altered or voided.
- Counteroffer — Once you make an offer, the seller can accept, decline, or make a counteroffer. If they make a counteroffer, this overrides the original, rendering it null and void.
- Closing Costs — Closing costs encompass the total fees and charges that must be paid to complete the property’s transfer ownership.
Looking for more common real estate transaction terms? Check out Bank of America’s Glossary of Real Estate Terms for every step along the way.
The next step in this home buying guide for tenants is selecting a lender, reviewing loan options, and getting pre-approved. Generally, this involves answering some basic financial questions and submitting income documents for lender review. Additionally, the lender will pull a credit report and evaluate your overall financial viability to determine approval or denial. Let’s examine this process a bit further below –
What to Look for in a Mortgage Lender?
With so many lenders to choose from, how do renters know which is best for them? Take a look at some points to consider below before choosing to apply for pre-approval –
- Interest Rates Offered Compared to Fair Market Rates
- Types of Mortgages Offered
- Length of Mortgage Terms Offered
- Repayment Penalties
- A Reputation of Excellent Customer Service
Documents Needed for Mortgage Pre-Approval
Lenders will need to verify identity, income, and credit to process an application for pre-approval. That said, these approvals generally last for 60 days, after which you may need to re-apply. However, some lenders may offer a 30-day extension, depending on the circumstances. Also, be sure to inquire whether your pre-approval includes a locked interest rate. Below is a partial list of the common documents lenders will require –
- Proof of Identity
- Social Security Number
- Two months of bank statements
- Past two years of Tax Returns or W2s
- Most recent two months of paystubs
Find Your Realtor & A New Home
Despite many individuals using the terms interchangeably, a real estate agent, broker, and realtor are not one and the same. For first-time homebuyers, the National Association of Realtors® recommends working with a licensed realtor. Realtors are real estate agents who are a member of the NAR and maintain the association’s code of ethics. Therefore, their expertise is invaluable to buyers. Often, friends or family may have a realtor recommendation, but you can also search online for qualified professionals in your area.
Always schedule an initial meeting or call with a prospective realtor to ensure their personality is a good fit. After all, teamwork during the homebuying process is critical, and you need someone you can trust.
Does your chosen realtor require you to sign a buyer’s agreement? Learn more about buyer and broker agreements in real estate from HomeLight.
Next, it is time to search listings, narrow down the attributes you are looking for, and set up showings. Your realtor will walk you through the process and facilitate home tours. That said, homes nowadays do not stay on the market long in many areas. So, prepare to see multiple homes and allow plenty of time to find the right one.
Submit an Offer
You have finally found the perfect home for you, and it is time to submit an offer. Drafting the offer is handled by the realtor and then signed off on by the buyer before going to the seller. Therefore, to complete the offer, the realtor will need to include the specific information below –
- Offer – The actual monetary amount the buyer is offering to purchase the home. This number is up to the buyer, but the realtor will help guide you through local comparison sales and advise buyers on what is appropriate based on the home and market.
- Pre-approval Letter – Include a copy of your lender’s pre-approval letter, which shows the buyer’s ability to back up their offer financially.
- Time Frame to Close – Your realtor will take any personal considerations specific to you, but this typically averages between 30 to 60 days.
- Ask for Closing Cost Help – Sometimes, a seller may be willing to cover closing costs. However, in a highly competitive seller’s market with multiple offers, this can hurt your chances of the seller accepting your offer.
- Contingency – For first-time homebuyers, it is common to have a clause that the offer is contingent upon receiving final loan approval.
- List of Appliances – Include a list of all appliances you expect to remain in the home, such as a stove, refrigerator, or washer/dryer.
- Earnest Money Deposit – A small deposit (around 1% of the purchase price) included with the offer to convey your serious intention to complete the purchase. If accepted, this counts towards the down payment.
Once the offer is submitted, there may be some back and forth negotiations, especially if the seller has multiple offers are on the table.
Time to Inspect
Offer accepted and one step closer in this home buying guide for tenants! Next, set up a home inspection as soon as possible. Your realtor may be able to recommend a qualified local professional but keep in mind that great inspectors are often booked a few weeks out.
The home inspection is a detailed examination of every system in the home. Your inspector will finish with a detailed report that reveals general conditions and any areas of concern. Also, this is something the buyer should plan to attend as the inspection is the most complete explanation of the new home you will ever have. That said, keep an eye out for potentially costly warning signs such as the following –
- Water Damage
- Foundation or Drainage Issues
- Evidence of Pest or Termite Infestations or Damage
If the issues are serious enough to be a deal-breaker, your realtor will assist in negotiating with the sellers to complete repairs before closing, discount the sale price proportionate to the repair costs, or back out of the sale altogether.
Facilitate an Appraisal
Each lender will need to complete a property appraisal through an Appraisal Management Company or AMC. This process tells the buyer and the lender what the market value of the home truly is. For buyers, you ideally want and need this number to be as close to the purchase price as possible. Large gaps could mean the lender decides not to approve the loan and therefore does not allow the sale to go through. Alternatively, if the appraisal is low, the buyer may need to come up with the difference, which could be a significant amount.
Finalize Loan, Approval, and Offer
Once your offer is accepted, and the inspection and appraisal processes are underway, buyers will continue working through the mortgage approval process. Often referred to as “making application,” this involves submitting a full application through the lender to include – extensive information about the property for purchase, the buyer’s financial situation, employment history, credit, and more.
During this time, you will start to hear the word escrow a lot. The lender will work with a third-party escrow or title company to collect all necessary funds and documents to complete the closing process.
Another part of the home buying process is obtaining homeowners insurance, setting up utilities to begin upon closing, and showing proof to your lender.
Additionally, at this stage, the buyer and seller will finalize any final offer details and agree to a date for closing.
Head to Closing
Almost there! Before closing on the property, the buyer and realtor do a final walkthrough to ensure everything is as it should be and any agreed-upon repairs were addressed. If everything looks good, it is time to sign an endless parade of paperwork. Depending on many factors, the closing process can take up to 1 or 2 hours, and do not worry if the seller is not present. Generally, the seller may have the option to sign everything separately and early to streamline the process.
However, either way, the buyer will attend closing with their realtor, lawyer, title company, and potentially the lender and sign all necessary paperwork. Once the buyer reviews all paperwork, the title company will disburse funds, and the mortgage company will wire funds to the recipient bank. Then, after funds have cleared, the buyer walks away with keys in hand after successfully going from a renter to a homeowner. Congratulations!
Throw out the welcome mat; the place is officially yours! So, now comes the fun part of this home buying guide for tenants; it is time to move in and make a house a home. Now that you can come and go as you please, it is time to finalize a few things –
- Set up any remaining utilities such as cable or internet service
- Complete any desired upgrades or renovations
- Move-in furniture and personal items
- Start a maintenance emergency savings fund for all of those “just in case” repair needs.
Most of all, enjoy this great accomplishment!
Which is Better – Renting or Buying?
The answer to whether renting is better than buying depends on many factors, including finances and lifestyle. As home prices rise, many younger and elderly generations favor the flexibility and freedom of rentals. Generally, first-time homebuyers have experienced renting and then take the leap to purchase. However, no matter which route you choose, there are positives and negatives. Let’s review some of the differences below in our comprehensive home buying guide for tenants.
Why Should I Rent?
- Added Flexibility – If you like to move from place to place, renting is a far more flexible option. Generally, lease terms last from 6 to 24 months or even month to month. Thus, making it an attractive option for those who enjoy a change, experiencing various cities, living in different housing types, or those whose job requires relocating.
- Cost – It’s no secret that owning a home is a big expense. Depending on the home, a mortgage may be less than monthly rent. However, a homeowner faces many expenses that renters do not. Plus, owning is a long-term financial commitment as opposed to a lease.
Why Should I Buy?
- Better Control – Renting a home means that, essentially, someone else has decided many of the things you can and cannot do. A residential lease dictates everything from where to park to how long guests can stay without landlord permission. However, owning your own home means you are the one in control.
- Build Long-term Wealth – Unlike renting, buying a home means you own real property, and that property can appreciate over time. This has long been considered a great way to build long-term wealth and security. However, the decision to rent or buy can also be influenced by location as some locations are cost-prohibitive for first-time buyers on a budget.
Looking for a Home to Rent Until You Buy?
Choosing to buy a home is a big decision and not one to be taken lightly. That said, if you decide renting is the better option for you in the short or long term, Bay Property Management Group can help. Check out our website for the latest rental home listings across Southern PA, Central Maryland, Washington DC, and Northern VA.
Are you a homeowner whose circumstances have changed, and now you need to rent your home? We can help with that too! At Bay Property Management Group, our Northern Virginia residential property managers walk owners step by step through the process of getting your home or investment property rent ready. So, get started with a free, no-obligation home analysis below.