June 22, 2018.
If you’re finding it hard to keep up with rent, you’re in good company. The latest annual report from the National Low Income Housing Coalition finds that even when working full-time at minimum wage, it’s impossible to pay rent for a two-bedroom apartment anywhere in the U.S. Loan officers say most low- to mid-income renters aren’t aware they could afford to buy.
When should you stop paying your landlord’s mortgage?
At the national level, you’d need to make $17.90 an hour to rent a one-bedroom and $22.10 an hour to rent a two-bedroom apartment or house. Most renters make $16.88 an hour, falling right below the line of affordability. The current federal minimum wage is $7.25, but even raising the hourly wage to the proposed $15 wouldn’t be enough to pay for rent.
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Some states have higher rental prices than others. In Hawaii, you’d need to earn over $36 an hour, or about $75,000 a year, to rent out a two-bedroom. Arkansas is the cheapest state for renters, where minimum wage sits at $8.50 an hour. But renters still need to make almost $14 an hour, or about $29,000 a year, to live in a two-bedroom apartment.
In contrast, a recent MarketWatch analysis finds that homeowners generally see a payoff within just four years, even without accounting for mortgage tax breaks. “Do you buy now or rent and buy later?” Scott Cummins at Cornerstone Home Lending, says. “If you have the opportunity to purchase a home now, then all signs say that same home will only be more expensive a year from now, and the consensus is that the cost of financing will be higher as well. So, if your finances, credit, and employment permit you to buy, then why throw money away on renting?”
It’s a question, say many loan officers, of whose mortgage you want to be paying over the long haul.
You can pay your landlord’s mortgage, a.k.a. your rent, month after month, as long as you can afford it. Or, you could consider your current financial state, the cost of homeownership, and its long-term benefits and pay your own mortgage each month to grow your investment. Cummins frequently works with his buyers to assess the pros and cons of the two choices. Renting can be a better option for some, he says, when you need to improve your credit rating, save for a down payment, or finalize a job change that may put you in a better position to purchase in the near future.
As housing prices and mortgage rates continue to rise, rents rise right along with them. A 2018 Pew Charitable Trusts study found that 38 percent of America’s 43 million renters in 2016 were “rent burdened.” These renters spent at least a third of their monthly income on housing. Seventeen percent of renters described their rent burden as severe, spending at least half of their monthly income on rent.
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Lift the rent burden: 4 mortgage programs made just for renters
When faced with such a sizeable rent burden, paying for a mortgage seems impossible. But loan officers remind renters that, many times, a monthly mortgage payment can be the same as or even lower than monthly rent.
For buyers at all income levels, affordable mortgage options are available — some that come without a down payment:
- Down payment assistance: Down payment assistance programs, or DPAs, vary by state. Your loan officer can clue you into what is locally available. Some state programs offer up to $40,000 in down payment assistance and closing cost funds on loans with a 3 percent minimum down payment and only 1 percent required from the borrower. Other states offer special DPA programs for heroes, like teachers, firefighters, police, veterans, and EMS workers. These DPA programs normally don’t have to be paid back, won’t have a first-time buyer requirement, and can offer assistance up to 5 percent of the mortgage amount.
- HomeReady® Mortgage – Renters like the HomeReady® Mortgage, backed by Fannie Mae, because it makes it possible to get into a house with as little as 3 percent down. Fannie Mae also allows for flexible fund sources, i.e., grants, gifts, and cash-on-hand (subject to additional eligibility), to be used for the loan’s down payment and closing costs. When you put up a 5 percent down payment on the loan, you can sign on with a co-borrower, like a parent, who doesn’t have to live in the property. Signing on with a nonresident co-borrower could make it easier to qualify for a house.
- FHA loan: The Federal Housing Administration (FHA) loan is popular among renters, and especially single-income and first-time buyers, because of its modest minimum 3.5 percent down payment. Compared to non-government-backed loans, FHA loans have more flexible credit requirements. Down payment funds can also be gifted from a close friend, relative, or local government agency. And like HomeReady®, an FHA loan can be signed with a non-occupant co-borrower, like a parent, to make it easier to qualify.
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Mortgage Credit Certificate: An MCC gives homeowners a much-needed tax break on mortgage interest paid for the taxable year. Like DPAs, MCC programs can vary by state and have income, property purchase, and home loan requirements. Some states offer first-time buyer MCC programs to heroes — teachers, EMS, police, firefighters, and more — as well as low- and moderate-income buyers. Using an MCC, you may be able to save up to $2,000 a year in tax credits, growing into the thousands over the life of your loan. MCCs may also be combined with DPAs for even more savings.
“I can’t say enough wonderful things! Cindy [at Cornerstone] made this whole process easier: I was able to drag and drop any documents she needed right into her secure portal — quick and easy.” – Buy a house the easy way. Connect with a loan officer who cares.
With mortgage options aplenty, most renters make the big decision by consulting with a loan officer and getting prequalified.
Getting prequalified through an app or online can be done in minutes and will tell you how much house you can afford to buy.* A loan officer can then look at your finances and help you decide on a plan that makes the most sense for your situation. “I met with a borrower recently who had come to us about year earlier. She had been saving steadily and wanted to move to a part of town closer to her work. The rents in the area were going up and pricing her out,” Cummins says.
Cummins’ borrower hadn’t been with her company very long, but she was hoping to get a promotion that would come with a decent pay raise. Cummins and his borrower decided that renting would be the better option for a few months — but not signing a one-year lease was the key. “Our plan worked, and right at the six-month mark, she received the bump in pay, saved for an additional six months, and was able to purchase a condo unit within the area she desired. The market had not moved much, and so prices and rates were still stable.”
“It was clear to me that had she signed a one-year lease and moved her focus away from buying, she would most likely not be a homeowner today,” Cummins says.
Rents are rising, and homebuying is still affordable. To find out if it’s the right time to buy, take the first step and get prequalified. Download LoanFly to learn how much house you can afford in minutes.* Get connected to a friendly loan officer and get one-on-one guidance each step of the way.
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For educational purposes only. Please contact a qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.