Buying a House While Renting an Apartment

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 buying a home.

Going from renting to buying

First,  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 buying. But not so fast! While you’re still renting, take these 3 important steps to transition from renting to buying:

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 proactive, 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 buying with a sure foot.

Buying a House While Renting an Apartment

After you’ve prepared by creating a budget, talking to a housing counselor, and completing first-time home buyer education, you can start the process of going from renting to buying.

Talk to a real estate agent

You’ll want to choose a good real estate agent or Realtor and discuss your priorities. If you have gone through first time homebuyer education, you’ll know how to find a good real estate professional to help you.

One important thing for renters to know is that the seller is the one who pays the fees to the various real estate agents involved, so there’s no charge to the buyer. Renters shouldn’t worry about the cost of hiring these professionals, only the quality of the people they’re working with.

Plan your timeline

Be aware that the timeline for buying your first home isn’t usually quick. It could be several months before the whole process is complete, so assume you’ll need 90 days in your current rental before you’ll be able to move out and transition to a new home.  

In some circumstances, you may need to “rent back” the home to the seller, if they aren’t able to move out on your timeline. In this scenario, you become the owner and the seller rents from you for a month or two—this is becoming more common if it’s difficult to find rental properties in your market. 

Talk to your landlord

Depending on your situation, you will need to work with your landlord. If your lease isn’t up any time soon, you’ll eventually need to break your lease and perhaps pay some kind of penalty. Find out if there are any home buying clauses in your rental agreement, which will let you legally break your lease if you can prove you’ve bought your own home. 

Never simply move out without letting your landlord know in advance. They might be able to let you break your lease more easily if they have time to find a renter to replace you. And if you have unpaid rent and your landlord pursues collection, it can tank your credit score at the worst possible time for you as a home buyer.

If there’s no way to get out of your lease early, you’ll have to start saving for an early termination fee and factor that into your home buying budget. It’s usually going to be a couple of months’ rent for this fee. 

If your lease is up soon and you’re not quite ready to move, talk to your landlord about a monthly lease. Don’t sign up for another year if you know there’s no way you’ll be in the apartment that long. Depending on the rental market in your area, your landlord might be happy to offer you a month-to-month lease, especially if you’re giving plenty of advance notice about your plans.

Be sure to get any agreements you make with your landlord in writing. 

Consider rent to own programs

Rent-to-own programs are not as common as they used to be, but they do still exist.

Under a rent to own agreement, you negotiate the option to buy the home down the line, for an agreed upon value. This locks in a price today, which can be great for you in the current market (and is one reason rent-to-own deals are harder to get now). 

You will work with the owner to figure out how much of your rent goes toward buying the house—usually it’s around 25% of the monthly rent payment. In addition to this, you will be liable for expenses related to the upkeep of the home. As an apartment renter you aren’t on the hook for maintenance expenses, but a rent-to-own buyer has to accept some responsibility for these costs. This makes it more expensive for you to back out of a rent-to-own agreement, as you won’t get any of the money back that you put into the property. 

Rent-to-own agreements are risky, and more expensive than renting alone. The real reason to enter into this agreement is if you simply can’t qualify for a mortgage loan, but you can handle the financial responsibility of homeownership.

It’s possible to set up a rent-to-own deal while you’re working on rebuilding your credit—once your score reaches a point where you can qualify for your own mortgage, you buy the property from the seller with a traditional mortgage loan.

Sometimes first-time home buyers can work out a rent-to-own agreement when they’re buying a house from a family member. This is a way to make the renter financially responsible and transfer ownership with less risk to either party. 

Like every other aspect of home buying, negotiating a rent-to-own deal is best done with professional help. Get a qualified real estate attorney to review your contract before signing any such deal.

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 two decades of experience in the industry.