3 Important Steps to Take to Transition from Renting to Owning

Most people would be better off as homeowners than as renters. There are always financial advisors who tell people to stay in rental units and invest their extra income instead of buying a home, but we think that advice doesn’t reflect reality. The fact is, homeownership is how real people build wealth. That’s why we want to help anyone who is ready to transition from renting to owning a home.

But we should caution you that there are certain circumstances where you might want to stay a renter, and that’s okay. But don’t listen to investment advisors who tell you you’re financially better off in a rental. The reasons to stay a renter are straightforward:

  • You can’t afford it. If you’ve budgeted, saved and just can’t work out a way to get into homeownership, you shouldn’t risk your financial future yet. Take more time, work to increase income, and save up for a down payment. Be aware though, that month-to-month, homeownership often costs less than renting. It’s the relatively large up-front costs that might be outside your current budget.
  • You need flexibility. If you are applying for jobs all over the country and think there’s a good chance you’ll be relocating soon, it doesn’t make sense to settle down as a homeowner. Buying a home means putting down roots and staying for a while, so if you’re not ready to do that, it might not be time for you to buy. But bear in mind, you can always become a landlord yourself. If you are forced to move to a new location, you might be able to get someone to rent your home, making your mortgage payment for you and building equity. It’s not as simple as it sounds, but it is possible, and means flexibility shouldn’t always stop you from becoming a homeowner.
  • Your credit isn’t good enough. If you can’t get anyone to give you a mortgage loan because of bad credit, you should delay and work to improve your credit history. After six months or a year, you can apply again and see if you’ve become creditworthy enough to be approved for a mortgage. If you don’t know where to start, a credit report review can help you figure out what’s wrong with your credit and exactly what you need to do to make it better.

If those three obstacles aren’t a problem for you, then you might feel ready to make the leap from renting to owning. But not so fast! Before you jump in with both feet, take these 3 important steps to transition from renting to owning:

1. Learn about the whole process

We think everyone who is starting on the path to homeownership should take a home buyer education course. These courses are approved by HUD and are very comprehensive. They include topics most people don’t think about when starting out, so there are no surprises later. Too many people wait to take the course until after they’ve gone home shopping and are trying to get a loan, but it’s best to get the education first, so you’ll be a smarter home shopper.

If you don’t spend the time up front to learn what’s in store for you, you’ll constantly be reacting to events during the buying process. It’s better if you are pro-active, and get yourself ready in advance. It’ll cause you less stress and you’ll have more opportunities to save money for the inevitable issues that will come up.

You may have trusted friends and family who work in the real estate or mortgage industry who can help you, and that’s great. But if not, we’d say take the time to learn and understand the process before you engage with a realtor or mortgage broker. Choosing the best professionals to help you is part of the process that you’ll learn about if you take a home buyer education course, so getting the education up front will mean you’ll have the right expectations of anyone you work with during the process

2. Get your credit and debt in order

Everyone who is planning to get a mortgage should take some time to review his or her credit and make sure it’s ready. It’s well known that 1 in 4 credit reports contain errors that can affect your creditworthiness, so you should pull and review your credit even if you’ve never missed a debt payment.

You can get a free credit report from each of the three credit bureaus from www.annualcreditreport.com, and you can purchase your credit scores from www.myFICO.com.

Make sure your credit reports are accurate, up-to-date, and reflect positively on you. A certified credit report reviewer can help, or you can get our free Consumer Guide To Good Credit (from our downloads page) to help you with those steps.

If there are negatives you can’t remove, you can add a 100-word statement explaining why the negative item is on your credit report. This statement won’t help your credit score, but a human reviewing your credit report will take it into account, and it can help smooth the way for you with certain lenders. Learn how to add this statement from our Consumer Guide at the download link above.

If you have past due debts, pay them off or get caught up. It’s important to do this in advance of applying for a mortgage (the further in advance, the better) to give yourself time for your credit to get better after getting caught up.  But if you have past due debts that are older than the statute of limitations, be very careful with making a payment as that can “reset the clock,” talk to a certified credit coach about your options.

3. Budget for homeownership.

Homeownership can be less expensive than renting, but there are many up-front costs that you’ll need to be ready for in order to buy. And there are some expenses that come with homeownership that renters don’t have, like emergency repairs and maintenance, that mean having an emergency savings fund is essential.

Create a budget that covers your regular monthly expenses and debt payments. If you have any trouble here, talk to a debt coach for free and you’ll get help preparing a budget you can live with. Part of that budget must include a lot of saving:

  • Save for a down payment
  • Save for closing costs
  • Save for “points”
  • Save for earnest money
  • Save for emergency expenses
  • Save for moving/relocation
  • Save for utility deposits
  • Save for insurance
  • Save for property taxes

If you start with homebuyer education, all of the costs of getting into homeownership will be familiar to you and you’ll be ready to start saving intelligently.

It may sound like a lot, but once you’re ready, you’ll start reaping the benefits of being a homeowner right away, and the sooner you get started on building equity, the faster you’ll build wealth for the future.

Once you’ve taken these first 3 steps, then you’re ready to start the home buying process. Find a realtor, compare mortgage lenders, and shop for homes. By taking the right preliminary steps, you’ll save money on the whole process, avoid a lot of stress, and increase the likelihood that you’ll be successful in becoming a homeowner.

And if you’re starting to feel overwhelmed, remember you don’t have to do it alone. Home buyer coaching is available on demand, and it will help you take every step from renting to owning with a sure foot.

Our Pre-Purchase Coaching and Home Buyer Education will help you become a successful homeowner.Our Pre-Purchase Coaching and Home Buyer Education will help you become a successful homeowner.

About The Author

Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over 19 years experience in the industry.