Rent costs have risen at an astonishing pace over the past few years, making homeownership an urgent goal for the millions of Americans who can no longer afford to rent.

At the beginning of 2022, year-over-year rent growth hit a peak of 17.8%. By comparison, the year-over-year rent growth in May 2018-19 averaged 2.4%.

And the growth is widespread: Rents are up in 96 out of 100 of the largest U.S. cities.

If the high cost of rent has you on an urgent home search, you’re not alone. 

Buying a home is more than shelter; it’s a long-term source of wealth as you build equity in your new property.

First, let’s dig into Compass Mortgage’s five essential steps to go from renting to owning. Then, get started today with a mortgage preapproval: the first and most important step in the home buying process.

Determine your own rent vs. buy scenario

Since the start of the coronavirus pandemic in 2020, there has been a major shift in consumer wants and needs, as well as major economic shifts that have influenced some of these needs.

According to  the 2022 Rental Affordability Report produced by ATTOM Data Solutions, owning a median-priced home is more affordable than the average rent on a three-bedroom property in 58 percent of the 1,154 U.S. counties analyzed. 

The report determined that homeownership remains more affordable even though median home prices have increased more than average rent prices and average wages in 88 percent of the counties analyzed.

Besides affordability, buying a home is more beneficial long-term for building wealth. It’s a true investment, because home values usually go up over time.

All that being said, the decision to go from renting to owning is a personal decision, based on an individual’s or family’s unique goals and plans.

Ask yourself these questions when thinking of getting out of the rental market:

• Do I need living flexibility for my job?
• Do I have the time and means to maintain a home and make all the repairs?
• What’s the rent vs. buy cost scenario in my area?
• What’s the real estate market doing in my area?
• Am I comfortable with my finances?
• Are common lease terms still working for my situation?
• Can I be responsible for making monthly mortgage payments?
• Do I want the ability to personalize my living space?
• Do I want to pay rent to a landlord?

Research the areas you’re considering or enlist the help of a local real estate agent who understands the market in that area. Qualified, experienced real estate professionals can also give their best recommendations to help you transition from renting.

Understand the total cost of owning a home

Your mortgage payments are more than just your principal and interest rate. As a homeowner, you’ll pay what’s called PITI: principal, interest, taxes and insurance. 

On top of those monthly housing costs, you’ll need to pay for the following:

• Homeowners insurance, which is additional protection for your asset
• Property taxes, which are fees paid to the local government for community upkeep
• Private mortgage insurance (PMI) if you put down less than 20% on your purchase (PMI protects lenders from possible default)

When determining your homebuying budget, you should also factor in the cost of regular home maintenance, utility costs and closing costs.

Regular home maintenance takes up roughly 1% of your home’s purchase price per year, while closing costs can range anywhere from 3% to 5% of your home’s purchase price.

Know your mortgage options and your homebuying timeline

A 20% down payment is no longer necessary to purchase a home. 

Certain loan types allow 100% financing, but if you need to save for a down payment and closing costs, you’ll need to know how much to save and determine how long it will take you.

The average down payment on a house or condo in 2021 was 12%, according to the National Association of Realtors. For homebuyers aged 30 and under, that number was just 6%.

Knowing your available mortgage options and their qualification criteria is essential in making the switch from renter to homeowner.

Strengthen your credit score

If you know you’re applying for a mortgage in the near future, there are certain actions you should avoid taking in terms of your credit.

Consider the following dos and don’ts of credit scores prior to applying for a mortgage.

Don’t open a new credit card or account

Any new application or transaction on your credit report can potentially drop your credit score and affect the mortgage rate you’re offered—or knock you out of qualifying altogether.

Do remember to pay your bills on time

A 30-day late payment could clip 60-100 points from your score.

Don’t make large purchases on your existing credit cards

Keeping balances low on revolving credit will not only help keep your score in good shape—and possibly even increase it—but will also open up the means for increased mortgage affordability. (Credit cards are a prime example of revolving credit.)

Don’t close old, unused credit accounts or pay off debts in collection

Closing an unused credit account lowers your amount of revolving accounts, decreases your total amount of available credit and shortens your credit history. 

As for debts in collection (older debts referred to third-party collectors), don’t pay them off until you have consulted with a lender. 

Settling an old debt which has been referred to a collection agency brings that discrepancy to the present and can severely drop your credit score.

Do save money 

You’ll want to use your credit card and pay it off regularly, but that doesn’t mean you should rely on it for everything. Just because you can charge all new furniture to a card doesn’t mean that you’ll for sure be able to pay it off and avoid accruing more debt. 

Don’t get yourself in a place where you don’t have anything else to use other than a credit card. Start a savings account and put away what you can afford. 

Talk to a full-service mortgage lender

Meeting with a full-service mortgage lender like Compass Mortgage and getting preapproved for a loan should be everyone’s first step when considering a home purchase, even if you don’t plan to buy right now. While preapproval is helpful, let us tell you about Get Committed®, a unique feature of obtaining your mortgage from Compass Mortgage. Get Committed® goes beyond preapproval to a loan commitment.

Speaking with the mortgage professionals at Compass Mortgage can give you an idea about the loan type that’s best for you, what an affordable mortgage payment looks like and what you need to do to get into the best financial shape to buy a home.

If you’re ready to get started with your preapproval or just want to ask questions about the whole process, reach out to the lending experts at Compass Mortgage today.

The Compass Mortgage team treats our customers like family and promises a simple, personalized loan process where together we will find the most affordable loan option for you.

We look forward to supporting you as you go from renting to owning your own home.

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