Rent or Buy: 5 Questions Consumers Should Ask Themselves

June 3, 2015

WASHINGTON, D.C. – June 3, 2015 – (RealEstateRama) — During American Housing Month in June, the American Bankers Association Foundation is reminding consumers that their local banker can help navigate challenges associated with choosing a home, including deciding what is affordable and whether to rent or buy.

“Housing markets vary across the country. Your local banker can help you navigate housing options in your community and provide direction based on your individual financial situation and long-term financial goals,” said Frank Keating, ABA president and CEO.

“Bankers are well-suited to talk to their customers about their housing options,” said Corey Carlisle, senior vice president, ABA’s Bank Community Engagement Foundation. “Bankers finance everything from single-family homes to apartment buildings giving them valuable perspective for customers searching for a new home.”

Before pursuing a rental or homeownership opportunity, consumer should consider the following questions:

How much money do you have saved up?
Start with an evaluation of your financial health. Figure out how much money you have for a down payment or deposit on a rental. Down payments are typically 5 to 20 percent of the price of the home. Security deposits on rentals are usually about one month of rent and more if you have a pet. But be sure to keep enough in savings for an emergency fund. It’s a good idea to have three to six months of living expenses to cover unexpected costs.
How much debt do you have?
Consider all of your current and expected financial obligations like your car payment and insurance, credit card debt and student loans. Make sure you will be able to make all the payments in addition to the cost of your new home. Aim to keep total rent or mortgage payments plus utilities to less than 25 to 30 percent of your gross monthly income. Recent regulatory changes limit debt to income (DTI) ratio on most mortgage loans to 43 percent.
What is your credit score?
A high credit score indicates strong creditworthiness. Both renters and homebuyers can expect to have their credit history examined. A low credit score can keep you from qualifying for the rental you want or a low interest rate on your mortgage loan. If your credit score is low, you may want to take steps to raise your score, which could improve the terms you’re offered, before entering a loan or rental agreement. For tips on improving your credit score, visitaba.com/consumers.
Have you factored in all the costs?
Create a hypothetical budget for your new home. Find the average cost of utilities in your area, factor in gas, electricity, water and cable. Find out if you will have to pay for parking or trash pickup. Consider the cost of yard maintenance and other basic maintenance costs like replacing the air filter every three months. If you are planning to buy a home, factor in real estate taxes, mortgage insurance and possibly a home owner association fee. Renters should consider the cost of rental insurance.
How long will you stay?
Generally, the longer you plan to live someplace, the more it makes sense to buy. Over time, you can build equity in your home. On the other hand, renters have greater flexibility to move and fewer maintenance costs. Carefully consider your current life and work situation and think about how long you want to stay in your new home.

ABA’s Foundation is also providing resources to help bankers across the country engage with their communities. For more information, visit aba.com/housing.

The American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $14 trillion banking industry and its two million employees. The majority of ABA’s members are banks with less than $185 million in assets. Learn more at aba.com.

Through its leadership, partnerships, and national programs, ABA’s Community Engagement Foundation, a 501(c)3, helps bankers provide financial education to individuals at every age, elevate issues around affordable housing and community development, and achieve corporate social responsibility objectives to improve the well-being of their customers and their communities.