Knowing When It’s Time to Buy

Even if you can afford it, buying may only be right if you’re sticking around.

An interesting phenomenon is happening in key markets throughout the U.S. when it comes to real estate and home affordability. While renting has traditionally been seen as a financial stepping stone that people take before they buy their first home the numbers today in many markets show that it actually costs less to own a home than to rent the same property.

Now a new data study by the real estate experts at Zillow zeros in on the exact amount of time it takes to “break even” on a home purchase. It’s basically the amount of time it takes for the cost of getting a mortgage – with down payment, closing costs, etc. – to equal the cost of renting the same property. It’s called the “Breakeven Horizon.”

As the map above shows, the Breakeven Horizon in most major markets is less than two years. That means within the first 24 months of owning a property, it becomes more affordable on your budget to own that property. Essentially, within two years homeowners are getting a better deal than renters in the same area.

That makes owning the better financial option, assuming that you plan on staying in a home longer than the Breakeven Horizon. So while the study notes that this may limit ownership goals of Millennials who statistically only keep a job for three years. Since this means they have a high potential for needing to relocate for a new job opportunity, it may not make as much sense to buy since they’d turn around to sell right after the Breakeven Horizon.

For everyone else however, this is another example of concrete data that shows exactly how much more affordable it is long-term to buy a property instead of continuing to rent. Of course, in many cases it’s the cost up front that presents the biggest challenges. That factor and low credit scores are the two biggest obstacles preventing renters from making the leap into ownership.

Overcoming obstacles in purchasing a first home

One problem people may be having when it comes to making the decision to get into the market comes with perceptions about what you need in order to qualify for a good, stable mortgage that won’t put you at a high risk of foreclosure or financial distress.

“FHA loans are designed to help borrowers who face such challenges to find ways around them so they can buy their first home,” says Maria Gaitan, Housing and Business Development Manager at Consolidated Credit. “FHA loans only require a down payment of 3 percent instead of the 20 percent you see with  conventional loans. Additionally, credit score requirements may not be as tough as you think either. Many lenders are even working with buyers who have FICO scores under 650.”

Still, many buyers are wary of loans that don’t follow the traditional borrowing scheme – due in large part to the role Adjustable Rate Mortgages (ARMs) contributed to the real estate market collapse in 2008.

“Some people assume that because they’re getting alternative financing through the FHA that it’s the same as the high-risk loans that led to the collapse but that’s just not the case,” Gaitan explains. “In fact, you can qualify for an FHA loan that has a fixed interest rate just like a mortgage. FHA just makes it easier to get into a loan on the front end.”

With that in mind, Gaitan encourages renters to reach out to a HUD-certified housing counselor to see how far away from ownership they really are.

“In many cases, people may think homeownership is unreachable,” Gaitan says, “but once the housing counselor reviews their budget and finances, they can help that person draft an action plan to achieve ownership within the next few years.”

The video below with former Consolidated Credit Housing Director Joseph Cvelbar has some helpful tips on how to overcome barriers that may be blocking you from ownership. If you have questions or you’d like to request a free, confidential budget and credit evaluation with a HUD-certified housing counselor, call us today at 1-800-435-2261 or find more information in our Homebuyer Education center.