The question of whether to rent or own a home has been around longer than any of us. The dilemma centers around the fact that when you buy a home your monthly housing cost will increase, at least for the first few years. On the flip side, you will be building equity. And then there’s the whole business of qualifying for a mortgage. It may just be easier to rent, just to avoid the hassles of down payment, credit check and more.
But things are changing.
Why a Landlord May Be More Scrupulous Than a Lender
Lenders make loans, but in almost all cases do not keep the loans. Rather, they sell the loans immediately to Fannie Mae, Freddie Mac or a Wall Street hedge fund. They usually continue to service your loan, meaning they collect your monthly payments and respond to any customer service needs you may have, but they aren’t actually hurt if you default or become a collection problem; they only have to do a little extra work, and in many cases, can charge you for doing so. In other words, it might be a small pain if you don’t pay, but it doesn’t cost them. (And might even make them a little money.)
A landlord, however, is stuck with you. If you become a collection problem, you are his or her problem, and the monthly payments that you don’t make represent a direct hit to your landlord's bank account. Landlords, therefore, have always had to concern themselves with your creditworthiness. On the other hand, empty apartments are a cost that can never be recovered, so traditionally landlords have had to be a little flexible in order to balance the need for a reliable tenant against leaving an apartment empty.
Competition is Making Renting More Difficult Than Buying
In certain cities with strong rental demand, such as Seattle, San Francisco and Boston, landlords have found themselves in a very nice position. They can pick and choose their tenants from a slew of applicants, and consequently credit standards have been rising in those cities, according to a recent study done by RentCafe.com, an apartment listing service. Income standards, as measured by your debt-to-income ratio, are tightening, and security deposit requirements are increasing.
Meanwhile, credit standards – at least as measured by credit score – have remained the same or actually become looser for home buyers, as HUD, Fannie Mae and Freddie Mac work to try to make homes more affordable for a wider cross section of buyers. Down payment requirements remain low, and debt-to-income ratios up to 50 percent of gross income are accepted regularly.
What kind of difference are we talking about?
According to the study, the average credit score for renters who were accepted in San Francisco was 724, while the average credit score for those who were rejected was 611. Boston is even tougher, with an average accepted score of 737 and an average score for tenants who were rejected of 667.
Compare this with what it takes to buy a home. FHA loans allow credit scores as low as 580 and down payments as low as 3.5 percent, while Fannie and Freddie require only 3 percent down, but have slightly higher credit standards. You’ll need a credit score of at least 620 to get a loan that is eventually sold to them.
Do you want to rent or buy? You may not have a choice if you live in a city with super-high rental demand. You could live in Mom and Dad’s basement, of course, but if your decision is rent or buy, the calculus is changing.
The Decision to Rent or Buy is Still Not Automatic
Your monthly payment when you buy a home will still almost always be higher initially than your monthly rent payment, but if you choose to rent you might have to have better credit scores, more cash to get in to your apartment and more income relative to your monthly obligations. And, you might not even be accepted for an apartment, in which case you’ll need to find a different city.
One more argument for buying a home.