A recent survey asked renters a multitude of questions in order to get a better handle on what motivates renters to become home owners and two matters stood out- saving enough for a down payment and credit questions. Renters have the opportunity to check on their own credit profile for free at a site supported by the three main credit repositories of Equifax, Experian and TransUnion. This site Yet far too often renters don’t check their credit and that can keep many from home ownership simply because there are mistakes on the report suppressing scores. However, the biggest obstacle by far was saving money for a down payment and closing costs.
As rents keep hitting record highs that also means renters have less disposable income to put back every month in a savings account. Mortgage lenders employ an ability to repay formula that compares gross monthly income with housing costs. Housing costs include amounts for principal and interest, property taxes and insurance. Lenders follow this debt-to-income ratio as part of the loan qualifying process. However, there is no such required ratio for rent. Instead, property managers or landlords accept a rental application, review a credit report and even review a pay check stub but there is no debt ratio requirement. This can mean tenants, even those with excellent credit, can get into a rental agreement where the rent is so high there’s very little left over each month.
Unless the renters are eligible for a VA loan or the property is located in a rural area where a USDA mortgage could work, there will be a down payment needed for a mortgage. Fannie Mae recently introduced the HomeReady loan which asks for 3.0% down and the FHA loan asks for just 3.5% down. That doesn’t sound like a lot when compared to a conventional mortgage and a 20% down payment but if your rent takes up more than half your monthly income that can be a barrier. Other living expenses take out the rest and then there’s entertainment to address. There doesn’t appear to be any resolution to this issue other than renters who do want to own a home to sign a lease agreement that leaves a little wiggle room and some for savings.