Can you negotiate rent? The short answer is yes. After all, you never get anything unless you ask for it.
So, how do you go about negotiating rent? Rental negotiations can be tricky, so it’s always in your best interest to be strategic when talking to landlords. Here are different ways to negotiate rent, gain bargaining power, take action and (hopefully) get a lower rent from your property manager.
1. Understand the rental market
The first step in negotiating rent is to do your research ahead of time. Look around and understand what surrounding apartment rates are. Compare apples to apples. If you’re interested in a new development, then look at other new developments.
Make sure you have a clear understanding of the amenities that are available and how they compare to the unit you’re considering. For example, if one neighboring apartment complex offers covered parking, a gym and a pool, you’ll want to compare that to an apartment complex with similar offerings. After all, those amenities increase the price of rent. Make this info known to your property manager.
Rental rates are not a secret, but they can change from day to day. Get a competing rate in writing if you can, and if it’s lower than the one being offered, have it with you when you go to negotiate. A lower rate in a similar apartment is a great tool for negotiating a lower price on your own apartment.
2. Consider the time of year
For property managers, timing is everything and there are seasonal trends in the moving and rental industry. In other words, think about the broader supply and demand trends during any given season.
If it’s the end of the month, vacancies are high and you’d be willing to leave if you don’t get what you want, that could be a time when a manager is more likely to be amenable to your offer. However, if you don’t have an alternate place to move ahead of time, you may not want to start negotiating rent until something else is lined up.
As a rule of thumb, winter is usually a good moment to broach the topic of cheaper rent, as it’s harder to find tenants during that time of year. Summer is peak rental season, so you’ll need to be a little more persuasive if you’re trying to negotiate rent during the peak moving season.
3. Sell yourself as a good tenant
Looking for another lesson on how to negotiate rent? If you’ve never rented in that particular complex a few letters of recommendation from personal references will go a long way toward convincing a manager you’d be a tenant worth having, even at a lower rate.
Think of it as a resume for your living situation. Get a letter from previous landlords or apartment managers that says you make on-time rent payments and cause them no problems. Get letters that speak to your character from a former boss, neighbor, or someone in a non-profit organization or church. Just like in a job interview, these professional references can help you negotiate rent and sell yourself as a good tenant for your potential new landlord.
If you’re trying to renew your existing lease at a better rate, remind the manager that you’ve always paid your rent on time and anything else that’s positive. Have you kindly alerted them to maintenance concerns? Have you helped in an emergency? Have you assisted during holiday parties? These situations can go a long way and help you lower the cost of rent on your upcoming lease.
4. Exchange value for price
What’s a lower rent price worth to you? Would you consider doing something above and beyond paying rent that offers tangible value to your property manager?
Think of jobs or tasks around the property — maintenance, cleaning, administrative, marketing — that would increase the underlying value of the owner or manager’s investment. Helping with some of these activities could cut down on expenses and thus, justify the price reduction you’re looking for.
Another “how to” negotiate your rent tip is to bargain with amenities and other things of value. Are you willing to give up your parking space to reduce rent each month? Or, can you pay six months of rent upfront or in cash? Would you be willing to sign a longer lease at a lower rate?
Think like a manager. Everything has a value and most everything is fair game to negotiate or trade with. Don’t be afraid to ask what your manager needs. If he or she has flexibility in pricing (and they usually do), then you might be able to help each other.
5. Experiment with the lease terms
Offering a different move-out date, extending your lease term or reworking the end of your lease term to fall during high season (spring or summer) are some of the ways you may be able to play with lease dates and terms that might be attractive to a leasing manager.
Get your negotiation in writing
As with many things in life, you can ask for and negotiate anything — including rent. If you’re a good tenant, can be persuasive and ask for what you want and need, you can negotiate the terms of your lease and rent prices and walk away with a lower rental rate.
After you’ve worked out a reduced rate with your landlord, make sure you get the new deal in writing so you have a paper trail and proof of your newly negotiated rate.
FAQs around rent negotiations
Rent negotiations are tricky and require a wealth of knowledge and understanding.
How can I negotiate rent for a rent-controlled apartment?
Negotiating rent for a rent-controlled apartment is different. In these cases, research local rent control laws and regulations to understand your rights and limitations. While you may not have as much room for negotiation on the base rent, you can explore negotiations on other aspects, like utilities or improvements.
How can I negotiate rent if I have a low credit score or a poor rental history?
If you have a low credit score or a poor rental history, you can still negotiate rent. Tips to overcome this include offering to pay a larger security deposit, providing a co-signer or demonstrating your commitment to improving your credit and rental history. This can help build trust with the landlord and potentially secure a lower rate.
What if my landlord refuses to negotiate the rent?
If your landlord is unwilling to negotiate the rent, consider proposing alternative terms, such as a longer lease or prepayment of rent. If negotiations remain unsuccessful, you may need to decide whether you’re willing to accept the current rent or look for another rental property.
Can you negotiate rent? It’s worth a shot!
Negotiating rent is not only possible but also a valuable skill for renters. By following these steps, you can strategically and effectively negotiate your rent with confidence. Understanding the rental market, considering the timing of your negotiation and presenting yourself as a desirable tenant are essential elements in the process. Remember, communication is key in this process, and being prepared, courteous and persistent can lead to a mutually beneficial agreement with your landlord.
The information contained in this article is for educational purposes only and does not, and is not intended to, constitute legal or financial advice. Readers are encouraged to seek professional legal or financial advice as they may deem it necessary.
Wesley is a Charlotte-based writer with a degree in Mass Communication from the University of South Carolina. Her background includes 6 years in non-profit communication and 4 years in editorial writing. She’s passionate about traveling, volunteering, cooking and drinking her morning iced coffee. When she’s not writing, you can find her relaxing with family or exploring Charlotte with her friends.
Good morning and thank you for joining today’s call to review Freddie Mac’s business and financial results.
As many of you know, September marked 15 years since Freddie Mac entered government conservatorship. And the company has made significant progress.
While much remains to be done, and this company is committed to the work, today I will cover three topics that illustrate how far Freddie Mac has come since 2008:
First, how the company has intensified its focus on mission, particularly related to affordable housing.
Second, how risk has been reduced.
And finally, how Freddie Mac has made progress in its work to build financial stability.
Then I will turn it over to our CFO, Chris Lown, for an update on the company’s third quarter financial performance.
Ongoing Improvement
Mission
Let’s start with mission.
Over the past few years, Freddie Mac has strengthened its focus on its mission and embraced an expansive view of support for affordable housing.
Freddie Mac strives to meet or exceed a number of affordable housing-related commitments, such as:
Affordable Housing Goals in both Single Family and Multifamily,
The Duty to Serve Plan, which targets high-needs rural regions, manufactured housing, and affordable housing preservation.
And that includes the company’s payments into the Capital Magnet Fund and Affordable Housing Trust Fund, which now top $2.2 billion.
And finally, Freddie Mac’s Equitable Housing Finance Plan, which expands the company’s efforts to promote equity in the Single-Family and Multifamily markets.
Regulatory commitments are the baseline expectation. Today, the company approaches mission more broadly, with a range of initiatives to help renters, lenders, diverse developers and other market participants. For example:
Single-Family improved its technology to help borrowers with thin credit files by allowing lenders to access bank data, tax transcripts and direct deposit data to verify critical information such as income, assets, and on-time rent payments.
Multifamily is helping renters prepare for homeownership though an on-time rent reporting initiative, which helps them establish or raise credit scores. To date, more than 375,000 renters can participate.
Freddie Mac has also provided tools to help borrowers receive down payment assistance, including through Special Purpose Credit Programs and the newly launched DPA One tool, both of which I have discussed previously.
This company’s commitment to housing affordability is more ingrained in its DNA than ever before.
Reducing Risk
That’s equally true for the company’s commitment to strong risk management. Today, it is both a requirement and a vital part of Freddie Mac’s identity.
Here are just a few of the many examples:
Since 2008, Freddie Mac has reduced its mortgage-related investments portfolio down to approximately $85 billion. This is less than one-tenth of its $867-billion peak.
In 2020, the company adopted bank-like capital requirements designed to backstop its risks and has been steadily building total equity to meet those requirements.
And finally, Freddie Mac pioneered credit risk transfer. CRT brings billions of dollars of private capital into the U.S. housing finance system, dramatically reducing taxpayer exposure and lowering the company’s own risk.
In fact, the third quarter marked 10-years since the first Single-Family CRT transaction.
To date, Freddie Mac’s Single-Family CRT program has transferred more than $108 billion of credit risk on approximately $3.3 trillion of mortgages.
Multifamily has also protected a half-trillion dollars of loans via its K-Deal program, which started in 2009.
Ensuring Stability
Finally, let me turn to the growing stability of Freddie Mac’s financial position after 15 years of change and improvement.
In the third quarter the company earned $2.7 billion and grew its net worth to $44.7 billion.
Furthermore, credit quality today is strong in both the Single-Family and Multifamily mortgage businesses. Chris will say more about that in a moment, but it is clear that the changes the company made since 2008 have set Freddie Mac on a new course.
Keeping What Works
While the company made significant strides to improve its focus and performance over the past 15 years, it still preserved the core elements of Freddie Mac that have worked for decades.
That includes support for the 30-year mortgage—the cornerstone of the American housing finance system and Freddie Mac’s business. Thirty-year fixed-rate mortgages accounted for more than 90 percent of the home loans we purchased this year.
Freddie Mac is also helping provide access to housing for low- and moderate-income renters and borrowers.
Support for first-time homebuyers is near all-time highs at 50 percent of purchase loans.
And more than 90 percent of the eligible rental units financed were affordable to low-income and working families.
The company also has preserved small lenders’ access to the secondary mortgage market via the cash window.
And it enhanced liquidity in the to-be-announced market as one of the leaders in the creation of the uniform mortgage-backed security, one of the most significant changes to the market in a generation.
Since inception more than $284 trillion of UMBS have been traded.
Finally, Freddie Mac has maintained its counter-cyclical role. The company’s market presence in the early days of the pandemic and current support for the housing market are solid examples.
Playing an Important Role
Before I turn it over to Chris Lown, allow me to put the work of thousands of talented people over 15 years into context.
Since 2008, Freddie Mac has:
Provided more than $8 trillion in liquidity to the mortgage market,
Helped nearly 11 million homebuyers, including more than 4.1 million first-time homebuyers, and
Funded more than 8.3 million rental units, 87 percent of which were affordable.
Further the company has returned nearly $120 billion to taxpayers, approximately 67 percent more than it borrowed from the U.S. Treasury.
And most importantly, Freddie Mac is a strong, stable organization that is unwavering in its focus on Making Home Possible for renters and borrowers well into the future.
Now, let me turn it over to Chris.
Financial Results (Remarks of Chris Lown)
Thank you, Michael, and good morning.
As Michael noted, this morning we reported net income of $2.7 billion for the quarter, an increase of $1.4 billion, or 104 percent, year-over-year. This increase was primarily driven by a credit reserve release in our Single-Family business versus a credit reserve build in the prior year quarter.
Third quarter net revenues were $5.7 billion, an increase of $509 million, or 10 percent, year-over-year. This increase was driven by both higher net interest income and higher non-interest income. Net interest income increased 4 percent year-over-year to $4.7 billion, driven by higher investments net interest income benefiting from higher short-term interest rates. Non-interest income of $941 million was up 50 percent year-over-year driven by higher Multifamily guarantee income and higher investment gains.
An increase in observed and forecasted house price appreciation drove a $263 million benefit for credit losses this past quarter versus an expense of $1.8 billion in the prior year quarter.
In the third quarter of 2022, the provision for credit losses was driven by deterioration in housing market conditions coupled with lower observed and forecasted house price appreciation.
These increases were partially offset by a $751 million, or 41 percent, increase in our non-interest expense, which was primarily driven by an allocation of $313 million for the accrual for the judgement in the Fairholme Funds litigation and a $314 million decrease in Single-Family credit enhancement recoveries due to a decline in expected credit losses on covered loans.
Our total mortgage portfolio at the end of the third quarter was $3.5 trillion, a 2 percent increase year-over-year.
Single-Family Business Segment
Turning to our individual business segments, the Single-Family segment reported net income of $2.3 billion for the quarter, up $1.5 billion, or 176 percent, from the prior year quarter.
Single-Family net interest income of $4.5 billion was up 4 percent year-over-year, primarily driven by higher income on our investment portfolio, which benefited from higher short-term interest rates, partially offset by lower deferred fee income recognition as prepayments slowed due to higher mortgage interest rates. Mortgage interest rates at the end of this quarter were 7.31 percent, up 61 basis points from the prior year quarter. Non-interest income for Single-Family was $393 million this quarter, up $335 million from the prior year quarter. This increase was primarily driven by higher net investment gains which benefited from higher interest rate-related gains.
Our benefit for Single-Family credit losses this quarter was $304 million, primarily driven by increases in observed and forecasted house price appreciation. In the prior year quarter, we had a provision expense of $1.8 billion, which was primarily driven by deterioration in forecasted housing conditions and lower observed and forecasted house price appreciation.
House prices increased by 2.5 percent this quarter and our forecast assumes an increase of 2.9 percent over the next 12 months and 1.7 percent over the subsequent 12 months.
The Single-Family allowance for credit losses coverage ratio at the end of the quarter was 22 basis points, down from 23 basis points a year earlier.
The Single-Family serious delinquency rate declined to 55 basis points at the end of the third quarter, down 12 basis points from the end of the prior year quarter. The Single-Family serious delinquency rate remains historically low and is down 8 basis points from the pre-COVID rate of 63 basis points at the end of 2019.
In the third quarter, we helped approximately 18,000 families remain in their homes through loan workouts. Our loan workouts have continued to decline as the seriously delinquent loan population has declined.
Our Single-Family mortgage portfolio increased 2 percent year-over-year to $3 trillion at the end of the third quarter.
Credit characteristics of our Single-Family portfolio remained strong, with the weighted average current loan-to-value ratio at 53 percent and the weighted average current credit score at 756. At the end of the quarter, 62 percent of our Single-Family portfolio had some form of credit enhancement.
New business activity was $85 billion, up $2 billion from the second quarter. However, year-over-year new business activity declined $36 billion, or 30 percent, as both refinance and purchase activity declined due to higher mortgage interest rates. Home purchase volume of $76 billion made up 89 percent of our total new business activity this quarter. First-time homebuyers represented 50 percent of new Single-Family home purchase loans. The average guarantee fee rate charged on new business was 55 basis points this quarter.
Multifamily Business Segment
Moving on to Multifamily, the segment reported net income of $362 million, down 23 percent, or $108 million, from the prior year quarter. This decrease was primarily driven by higher provision for credit losses and higher non-interest expense in this period.
The provision for credit losses in Multifamily this quarter was $41 million, an increase of $29 million from the prior year quarter primarily driven by deterioration in overall loan performance. The Multifamily allowance for credit losses coverage ratio at the end of this quarter was 54 basis points, up from 14 basis points a year earlier.
Non-interest expense was $266 million, up $94 million, or 55 percent, year-over-year, primarily driven by an allocation for the accrual for the judgment in the Fairholme Funds litigation.
The Multifamily delinquency rate was 24 basis points at the end of the quarter, up from 21 basis points last quarter and 13 basis points at the end of September 2022. This increase was primarily driven by an increase in delinquent loans in our senior housing and small balance loans portfolios. Ninety four percent of these delinquent loans have credit enhancement coverage.
We have seen a continued decline in demand for Multifamily mortgage financing due to higher mortgage interest rates and a slowdown in the Multifamily origination market.
Our Multifamily new business activity was $13 billion for the third quarter, bringing the year-to-date volume to $32 billion versus $44 billion for the same time last year.
Our Multifamily mortgage portfolio increased 4 percent year-over-year to $432 billion, of which 95 percent was covered by credit enhancements.
Capital
On the capital front, our net worth increased to $44.7 billion at the end of the quarter, representing a 27 percent increase year-over-year.
With that I will turn it back over to Michael.
Conclusion (Remarks of Mr. DeVito)
Thanks, Chris.
Before we close, let me say a few words about the recent announcement that I will be departing Freddie Mac in early 2024.
It is a privilege to lead this company. And Freddie Mac is fortunate to have a strong leadership team, ready to meet the challenge of guiding this company into the future, and an outstanding group of employees who are intensely dedicated to its mission and making home possible.
Thank you for joining us today.
MEDIA CONTACT: Frederick Solomon 703-903-3861 [email protected]
With mortgage rates higher than they have been in over two decades, homebuyers may be looking for alternative ways to finance their home.
An interest-only mortgage can free up some front-end cash, allowing a buyer to cheaply purchase otherwise expensive property, but it carries long-term risks that borrowers should seriously consider.
Here, CNBC Select shares everything you need to know about interest-only mortgages, including how they work and their benefits and risks.
What we’ll cover
What is an interest-only mortgage?
In a traditional loan, borrowers gradually repay the principal (the money borrowed) and the interest (the amount it costs to borrow that money).
This is slightly different in an interest-only mortgage. After a borrower takes out an interest-only loan, they are allotted an introductory grace period, during which they do not have to make payments on the principal of the loan. Instead, they only make interest payments throughout that set period.
Borrowers must then repay the loan in full, whether by lump sum or gradual monthly payments when that set period is over.
Interest-only mortgages are primarily designed for borrowers who stand to make a profit from their loan-funded purchase. For example, if you flip houses, you might take out an interest-only loan to purchase a fixer-upper, since you plan to sell the house at a higher price later. By doing so, you postpone your principal payments until you have sold the renovated house, freeing up front-end cash to make said renovations.
Several of CNBC Select’s top-ranked mortgage lenders offer interest-only mortgages, including Chase Bank and PNC Bank.
CNBC Select found PNC Bank to be the best lender for flexible loan options. PNC Bank offers interest-only mortgages to eligible borrowers with a minimum credit score of 620 and a minimum down payment of 3%. Further, the national lender offers a plethora of tailored mortgage options as well as online and in-person application processes.
PNC Bank
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, HELOCs, Community Loan and Medical Professional Loan
Terms
10 – 30 years
Credit needed
Minimum down payment
0% if moving forward with a USDA loan
Terms apply.
Meanwhile, Chase Bank stood out for its flexible down payment options. Similar to most lenders, Chase Bank offers interest-only mortgages to eligible borrowers with a minimum credit score of 620 and a minimum down payment of 3%. Further, the company offers a wide range of mortgage terms and a number of educational resources to support their borrowers through the home-buying process.
Chase Bank
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, FHA loans, VA loans, DreaMaker℠ loans and Jumbo loans
Terms
10 – 30 years
Credit needed
Minimum down payment
3% if moving forward with a DreaMaker℠ loan
Terms apply.
How to calculate an interest-only mortgage payment
To calculate the payment you’ll make on an interest-only loan, multiply the loan balance by the annual interest rate, then divide by 12.
For example, say you borrow $100,000 at a 5% interest rate. Your calculation would look like this: (100,000 x .05)/12 = 416.67. This means that your interest-only payment would be $416.78 per month.
Payments will then increase to those of a typical, amortized loan, covering both principal and interest. Because your new monthly payment amount is based on the remaining principal, the payments should marginally change as you pay off the mortgage.
Benefits of an interest-only mortgage
The most obvious benefit of an interest-only mortgage is that monthly payments are initially considerably lower than of typical loans. These loans allow the borrower to make larger purchases that they would otherwise only be able to afford a few years down. Thus, interest-only loans might be a wise investment if you are expecting a significant income boost in the coming months and years.
Interest-only mortgages typically turn into an adjustable-rate mortgage (ARM) once principal payments begin, and borrowers can potentially benefit from a lower rate than the fixed-rate average.
But in the same vein, that adjustable-rate mortgage might be significantly higher than a fixed-rate traditional mortgage taken out initially, and this is one among many risks associated with interest-only mortgages.
Risks of an interest-only mortgage
Though a borrower’s monthly payments are initially temporarily lower than those of a traditional loan, there are several considerable risks.
First, if you take out an interest-only mortgage, you will not gain any equity in your home (beyond the equity of your down payment) until you begin principal payments.
Home equity is astoundingly important for your financial future. Equity is the money owed to you should you sell or refinance your home in the future. So, if you take out an interest-only mortgage with a five-year grace period, and you move out in five years, you will likely make no money from the sale of your home (unless the market has boomed exponentially since closing). Your interest-only payments will have realistically acted similarly to rent payments.
Alternatively, if the housing market goes down during your interest-only period and you try to sell your house without paying off any of your principal, you may actually owe the bank money at the time of sale.
Homeowners sometimes take out a home equity line of credit to access cash value tied up in their home’s mortgage. If you purchase your home with an interest-only mortgage, there will be less equity, or less cash, to access if you must take out a second mortgage.
Second, your monthly payments will be relatively high once you begin paying back the principal. This will cause a considerable shift in your monthly budget. Unless you are incredibly financially disciplined, you might not be able to afford these payments. Some interest-only mortgages even require that you pay off the loan in a lump sum when the introductory grace period ends.
Read the terms of an interest-only loan closely and make a sound plan for the duration of the loan. Otherwise, you might end up stuck in financial mud.
Compare offers to find the best loan
FAQs
What is an adjustable-rate mortgage?
One way that buyers can get the keys to a new home without locking in a fixed rate for 30 years is by taking out an adjustable-rate mortgage (ARM), during which interest rates fluctuate with the market through the duration of your loan. Because rates are so high right now, this can save you money in home loan interest down the road when interest rates cool.
What credit score do I need to qualify for an interest-only mortgage?
Interest-only mortgages typically require a credit score of 670 or above.
What is a home equity line of credit?
A home equity line of credit, or HELOC, is essentially a second mortgage that liquidates (usually up to 85% of your home’s equity), or the amount that you have paid toward your principal home loan. A HELOC is more commonly known as a second mortgage. Taking out a HELOC will usually cost you between 2% and 5% of the loan amount.
Bottom line
An interest-only mortgage is smart for the forward-thinking borrower who has a sound plan to make future payments. Otherwise, it makes more sense to pursue a traditional mortgage, avoiding the temptation to bite off more than your wallet can chew.
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Inside: Are you thinking about moving out? This guide will help you identify the costs of moving, calculate how much you need to save, and advice on expenses. You need to learn and plan for the practicalities of living on your own.
Taking the leap to move out and start living independently is a significant milestone.
However, it’s important to ensure you’re financially prepared for this exciting new chapter in your life.
One vital step you need to take is to start saving money, essential for covering your future expenses, emergency fund, and even fun activities. Through careful budgeting, consistent saving, and efficient spending, you can make the transition smoother and stress-free.
Around here at Money Bliss, we focus on the need to save money before making a purchase or taking the next step, so you will be better equipped and stay debt free.
This way, you can fully enjoy the freedom and responsibilities that come with having your own place.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Why is Moving Out on Your Own Important?
There comes a time in one’s life when one feels the need to spread their wings and live independently. We all wanted to move out at 18 – I remember!
This crucial step, however, requires substantial planning. Yet, most just jump right to moving out.
The key thing you must do? Save. But, why so important?
Here’s why: independence means bearing your own expenses. Rent, groceries, utilities, they’re all on you.
Plus, unforeseen emergencies are less shocking when you have a well-stocked safety net.
What’s a good amount of money to have before moving out?
The amount you need to move out depends on many factors.
However, on average, you should aim to have between $6,000 and $12,000 stashed away before you pack your bags.
This sum would cover initial moving costs, deposits, furniture, essentials, and a few months of rent.
Remember, it’s not just about surviving your first month. You’ll need enough to keep you comfortable while you’re settling into your new life.
How much should I save before moving out?
Remember, there isn’t a “magic number.”
Yet, many wonder is $5000 enough to move out?
Your savings should cater to your housing costs, which ideally should not exceed 1/3 of your monthly income. Besides, factor in regional cost of living, moving expenses, and an emergency fund.
What determines the amount needed?
The amount to save before moving out varies greatly. It hinges on factors like your targeted living area because there is a wide fluctuation of HCOL vs LCOL areas, your projected expenses, and your income level. The rent in one city might be higher than in another.
As well as your personal lifestyle choices and spending habits will greatly affect monthly expenses.
Evaluation: Your Financial Status
Your financial status, including current income and expenditures, plays a crucial role in determining the proportion of your earnings you should save before moving out.
If you have a higher income with lower outlays, you can save more, whereas having roommates can significantly cut down your living expenses, enabling better savings.
A careful review of these factors allows you to create a realistic saving plan tailored to your unique financial circumstances.
You need to make sure you are on track to how much money should you have saved by 25.
Assessing your current income
Take a deep look at your income. How much do you earn each month? How regular is this income? These are vital questions.
Your net income (what you earn after taxes) sets the tone for what you can afford. This is the amount listed on your paycheck.
Learn more about gross pay vs net pay.
Understanding your debt load
Debt can be a significant hindrance when contemplating moving out. How much do you owe monthly?
You need to consider your debt-to-income ratio. This is what mortgage lenders do to figure out if I make 70000 a year, how much house can I afford.
If your debt is taking up more than 30% of your income, you need to be careful on how much you spend on rent and other mandatory expenses.
Learn how to pay off your debt faster using Undebt.it.
Know Your Expenses: Breaking Down the Costs
I’ll be honest. This is what most people overlook when they move out or even purchase a new home.
For instance, the couch I loved couldn’t fit into our new house. Sigh.
Now, is the time to learn how to save 5000 in 6 months.
Identifying the cost of moving
Moving costs can bite! They depend on relocation distance, packing supplies, and the complexity of the move.
Movers can range from hundreds to thousands. According to Moving.com, the average costs for a studio or one bedroom range from $501 – $985. 1
Thankfully, you are young and you can pay friends for help with pizza. But, you still need to account for a moving truck if needed.
Hidden costs you need to consider
When moving out, some costs aren’t glaring. These include fees for installing new services, delivery fees for new furniture, or penalties if foregoing a current lease. Yes, these hidden costs can pile up!
Even, the costs to put blinds up at your new place! A room darkening shade can easily set you back $50; I know, I like my sleep.
So, be sure to consider them when saving for your move.
Setting Up a Personal Budget
A budget plays a crucial role in being financially stable. Period.
Call it adulting if you want to, but you cannot spend more money than you make. That is a recipe for a disaster and way too much debt.
By adhering to a well-planned budget, one can prevent financial stress to ensure financial security and start your journey to financial independence.
How to start a personal budget
Starting a personal budget is simple.
List your income and expenditures. Include rent, groceries, utilities, subscriptions, and yes, even luxuries.
The goal is to spend less than you earn.
Then, you can save and plan for your future.
That means you may not be able to afford everything you want. And using credit cards to fill the gap isn’t smart.
The 50/30/20 budget rule explained
For many, the 50/30/20 rule serves as a rough guide for managing your finances.
It suggests allocating 50% of your income to necessities, 30% to wants, and 20% to savings.
This is a beginner-friendly method to manage spending without feeling overwhelmed.
Starting to use a budget app is extremely helpful.
YNAB
Enjoy guilt-free spending and effortless saving with a friendly, flexible method for managing your finances.
Pros:
Comprehensive approach to budgeting, helping you plan monthly budgets based on your income.
Offers expert advice, making it suitable for those who require an in-depth, forward-thinking budgeting strategy.
Superior synchronization skills make it the winner in this area.
YNAB has extra features like goal setting for budgeting, shared budgeting tools for partners.
Option to manually add and upload transactions from accounts each month.
YNAB prioritizes user privacy.
Avoid These Budget Downfall
The most common expenses that are forgotten are irregular expenses such as vacations, weddings, or holiday spending. These variable expenses do not occur on a consistent schedule.
To manage these, note these big-ticket events on a calendar, estimate their cost, divide by 12, and contribute that amount to a high-yield savings account each month, offering you a guilt-free way to cover these costs without stressing over money.
Make sure you remember all of your expenses by checking out this full list of personal budget categories.
Creating and Managing an Emergency Fund
Why an emergency fund? It provides you with a safety cushion.
This fund prevents unexpected expenses from ruining your plans or sending you spiraling into debt. It acts as your financial parachute when you need it the most.
Around here at Money Bliss, we consider it a staple in financial wisdom.
Ideal size of an emergency fund
As a rule of thumb, your emergency fund should cover at least $1000-2000 in savings. This will provide money to cover a car breakdown or new car tires. Honestly, the goal is never to use your emergency fund.
However, you may look at a bigger rainy day fund that will cover 3-6 months of living expenses. This will provide you with a comfortable safety net against unexpected events like job loss or medical emergencies.
But remember: start small. Even $1,000 can buffer you from financial shocks. Check out these mini savings challenges.
Enough Money for One Year
A year’s worth of savings may sound excessive.
However, it provides unmatched stress relief and financial stability that can be life-changing, especially for young adults.
This tip will change your financial landscape immensely and provide you with more opportunities than you can imagine.
You can handle life’s ups and downs more easily when you have an entire year’s expenses sitting in your bank account.
Raisin
Simply select one of the high-yield savings products offered by their network of federally insured banks and credit unions to begin your savings journey.
You can open a free Raisin account in just a few minutes!
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Better Planning for Potential Bills and Fees
When preparing to live independently, don’t forget to plan for unanticipated costs.
Rental fees and deposits explained
When you rent, you’re likely to encounter a range of fees.
First off, you’ll have to foot a security deposit – typically equal to one and a half month’s rent. This upfront cost acts as insurance for landlords against damages. If you leave the place in top shape, you’ll get your full deposit back!
Additional fees could include application fees or non-refundable move-in fees like background checks. Know what you’re paying for before you sign the lease.
Utilities and recurring expenses
Electricity, gas, water, and internet – these utilities fall on your shoulders when you’re living solo.
These costs can eat a hole in your wallet if unchecked!
To avoid surprises, ask for estimates before signing a lease or find a place that includes utilities.
Other recurring expenses? Consider subscriptions. Gym, Netflix, Spotify – they all add up!
Trim
Perfect for the person who hates to hassle with canceling subscriptions and checking spending.
Trim adds value in such ways as canceling old subscriptions, setting spending alerts, checking how much users spent on ride-sharing apps the previous month, and automatically fighting fees.
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Go for a Trial Run Before Moving Out
Adopt the practice of “paying rent” beforehand by setting aside a third of your income into a dedicated savings account which can test your financial readiness for the move. See if you can move out and afford it before you actually move.
Remember, being savvy with money while planning to move out involves carefully auditing your spending over the last 3-6 months and developing a budget that accounts for future expenses, savings, and essential purchases.
This may save you headaches in the future.
Smart Moves: Making Rent Like a Boss
You need to understand how you are starting to make financial decisions.
In fact, reading this financial advice for young adults would be helpful.
Understanding rent payments.
Rent payments can be daunting as prices for a single bedroom apartment are $1700/month. 2
Many landlords may tenants to earn at least three times their rent.
Payments are usually due on the first day of the month. Late payments can lead to hefty fees!
Stay organized by setting reminders or setting up auto-pay.
Considering a roommate.
On the fence about getting a roommate? It’s worth considering!
A roommate can drastically cut your living expenses. Half the rent, half the utility costs… that sounds like a sweet deal.
On the flip side, you may have less privacy and there can be disputes.
However, with clear communication and shared responsibilities, it can be a great experience. It’s a great option if your income is tight. Choose wisely!
Opting for second-hand furniture
Furniture expenses can add up quickly, but there’s a savvy solution: opt for second-hand furniture! Yes, it’s cool to be frugal.
In fact, vintage pieces can add character to your home. Perhaps snag a few items from your parent’s home, Buy Nothing Group, or thrift stores. It’s not about being cheap, but about being smart!
You can always upgrade later.
Key Takeaways Before Taking That Leap
Moving out with roommates not only gave me a firsthand experience of independent living but also exposed me to the nuances of financial management. These initial steps helped me understand budgeting and the importance of balancing expenditures with earnings.
Then transitioning into renting my own place, I was armed with the knowledge I gained and was better prepared to face the challenges, creating a smooth transition to living completely on my own.
Checklist before getting your own place
Before making the big move, have you:
Saved enough to cover deposit, rent, moving, and utility hook-up fees?
Started a personal budget, tracking income and expenses?
Drafted a rough spending plan using the 50/30/20 budget rule.
Built an emergency fund?
Discussed potential apartment rental fees and deposits?
Considered recurring expenses and variable expenses?
Weighed the pros and cons of having a roommate.
Looked into second-hand furniture?
Can you comfortably cover living expenses with your income?
Have you accounted for all possible costs? Think of moving costs, utilities, groceries, health insurance, and more.
Have you considered the cost of living in your preferred location?
How stable is your income? Can it sustain your independence long-term?
Check out this first apartment checklist.
Frequently Asked Questions (FAQs)
Before moving out of your parents’ house, aim to save at least $5,000. But, you want to start off financially sound, so aim higher like $10,000. This amount would ideally cover your moving costs, early rent payments, and the setting up of utilities.
Remember, the real magic figure depends on your cost of living and your current income.
Put simply, saving $1,000 a month is excellent!
As an expert, Money Bliss often recommends saving at least 20% of your income each month. If you can stash away $1,000, you’re well above this bar.
Remember, every little helps when working towards financial independence. Check out our 52 week money saving challenge to get started.
Start Saving for How Much Money I Need to Move Out
Taking the leap into independent living can feel daunting. But with careful planning, budgeting, and saving, it’s an exhilarating journey.
The best advice I can give someone who is looking to move out is to plan ahead for the journey in front of you.
Remember, having anything between $6000 and $10,000 saved up is an excellent starting point.
As you navigate your financial freedom, adopt the 50/30/20 rule for managing expenses. Around here we call it the Cents Plan Formula.
Most importantly, stay prepared for life’s unexpected twists with an emergency fund. And don’t be shy to make some smart moves like considering a roommate or opting for second-hand furniture.
The journey towards independence is rewarding and fun – as long as you’re financially prepared. So pop that calculator, get budgeting, and start saving for your own place!
Source
Moving.com. “Moving Cost Calculator for Moving Estimates.” https://www.moving.com/movers/moving-cost-calculator.asp. Accessed October 25, 2023.
Rent Cafe. “Average Rent in the U.S.” https://www.rentcafe.com/average-rent-market-trends/us/. Accessed October 25, 2023.
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
About a week ago, Bank of America released details of its so-called “Mortgage to Lease” program, which as the name implies, allows homeowners to lease the homes they previously mortgaged.
So let’s take a closer look to see just what Bank of America is doing here.
First things first, this is a very limited pilot program, so don’t assume you can head down to Bank of America, fill out some paperwork, and then ditch your pesky mortgage but not your beloved house.
In fact, fewer than 1,000 customers will be “invited” to participate in the Mortgage to Lease program, meaning your chances of being selected are only slightly better than winning the Mega Millions jackpot.
Additionally, only homeowners in Arizona, Nevada, and New York are part of the pilot, so if that’s not you, you’re out of luck, at least for the moment.
Requirements for the Mortgage to Lease Program:
[checklist]
Mortgage is owned by Bank of America
Mortgage is 60 days + delinquent
All other loan modification solutions have been exhausted or ignored
Face high risk of foreclosure
Have no second mortgages
Still occupy the home
Have enough income to make affordable rent payments
[/checklist]
So while this looks like a lengthy list, it’s probably not all that uncommon. Well, the lack of second mortgages probably is, as most homeowners who are currently in trouble went with 100% financing. And most used second mortgages to get there.
But for those with one loan who still managed to find themselves underwater, or at least behind on mortgage payments, and couldn’t manage a short sale or deed-in-lieu of foreclosure, this program may be a winner.
That is, if you actually want to stay in the home that gave you so much heartache.
How the Mortgage to Lease Program Will Operate
Assuming you do, participants in the program will agree to transfer title of their home to Bank of America, and their outstanding principal will be forgiven. In other words, you won’t owe the bank anything for owing more than the mortgage is worth.
In exchange, you’ll have the opportunity to rent the house you currently reside in for up to three years, with rental payments set at or below the current market rental rate.
The rental payment will be less than the old mortgage payment, and the homeowner will be relieved of normal homeowner costs, such as homeowners insurance and property taxes.
Bank of America will have a property management company oversee the rental properties, and eventually the inventory of homes will be transitioned to investor ownership.
However, if all goes well, the investors can keep the tenants in the homes for as long as they see fit. And possibly even sell them back to the homeowners.
Will it Work?
Bank of America’s Mortgage to Lease program isn’t at all groundbreaking. In fact, Fannie Mae’s very similar Deed for Lease program has been around for more than two years.
Regardless, it seems like Bank of America’s new initiative is very limited in scope, and only targets customers who have made no effort to change their unfortunate situation.
If anything, it seems like a last gasp opportunity to avoid a foreclosure for BofA (and the losses that come with it), while the homeowner in question is probably just seeing how long they can hang on without making a payment (free rent).
My guess is a homeowner that hasn’t shown any interest in a loan mod or any other foreclosure alternative probably won’t be all that interested in this program, given the only upside is staying in a house they can’t afford, or aren’t willing to fight for.
“Don’t allow what’s happening right now from a rates perspective to control whether you decide to continue to be in business or not. A lot of people got into the business because it was a quick buck. We had a refi boom and had all these deals. There was so much business out there. As … [Read more…]
Here are some alternatives to no-credit-check loans that are ideal for individuals with little to no credit history.
Search for Lenders Who Take Alternative Credit Backgrounds Into Account
While credit history is typically used to assess a borrower’s risk, some banks will accept alternative data to determine your eligibility such as salary, rent, or utility payment history and bank statements. Remember that most lenders will only accept alternative data for smaller loans like credit cards, personal loans, and auto loans as opposed to larger loans like mortgages.
To find a lender that accepts alternative credit backgrounds, contact financial institutions in your area or apply for loans online. Make sure to have important documents such as bank statements, W-2s, tax returns, and rent payments readily available.
You can also opt to have alternative data reflected in your credit history. For example, you can sign up for a service that reports your rent and utility payments to the three credit bureaus. This is an excellent way to start building your credit.
Credit tip: You may have better luck if you consult with a lender face-to-face rather than over the phone.
Request a Payday Alternative Loan (PAL) Through Your Credit Union
Some credit unions offer payday alternative loans that are typically lower-cost substitutes to pricey payday loans. PALs are small loans granted in amounts ranging from $200 to $1,000, and they have a maximum APR of 28%. To qualify, you must have been a member of a credit union for at least one month.
Credit tip: You can research credit unions to join by visiting MyCreditUnion.gov.
Apply for a Secured Loan
Secured loans involve putting down a valuable asset as collateral. Assets typically used as collateral include cars, houses, or savings accounts. While these types of loans are beneficial because they have less strict credit history requirements, they are risky in the sense that you could potentially lose the asset you put down as collateral if you’re unable to pay the loan back.
Credit tip: Assess whether you can avoid losing the asset before putting it down as collateral.
Borrow Money From Your Retirement Account
If you have a 401(k) plan, you can take out a loan against your account. Most plans allow you to borrow up to 50% of your savings up to $50,000. Since you are essentially borrowing money from yourself, you won’t need to show credit history to take out a 401(k) loan.
While taking this route could cost you in investment earnings, it is generally a better option than other no-credit-check loans that charge high interest rates. Just make sure to repay the loan within five years to avoid paying taxes and penalties.
Credit tip: Avoid taking out a 401(k) loan if you plan on leaving the company, as you may have to pay it off right away.
Find a Trustworthy Cosigner
If you lack credit history, including a trustworthy family member or friend as a cosigner might help you secure a loan. For a cosigner to improve your chances of being approved, they need to have a good credit score and preferably a long credit history.
However, getting someone to agree to cosign may prove to be difficult, because if you miss payments or default, the cosigner’s own credit will be hurt. Note that this could strain your relationship with the cosigner if you get behind on payments.
Credit tip: If someone in your life agrees to cosign, consider scheduling a reminder to make payments on time.
Turn to a Family Member
If you’re in a position where you need money to cover an expense, consider asking a family member or close friend for a loan. While it might be tough to bring it up, this route can help you avoid getting stuck in a situation with a predatory lender.
Credit tip: When borrowing money from family, consider drafting up a contract to ensure everyone is on the same page about the loan amount, repayment timelines, and any interest that may be charged.
How to Get a Loan With No Credit FAQ
Below, we’ve answered some common questions regarding getting a loan with no credit.
Can I Get a Loan With No Credit?
Yes, it’s possible to get a loan with no credit, although it will be more difficult to get approved, and you may incur a higher interest rate.
What Loans Can I Get With No Credit?
Types of loans you can get with no credit include no-credit-check loans, secured loans, online loans, credit union loans, and family loans.
How Much Can I Borrow With No Credit?
The exact amount you can borrow with no credit will depend on the type of credit account you’re approved for. Remember that the higher your credit score, the more money you’ll be able to borrow.
What Is a Good Credit Score to Get a Loan?
While the exact credit score to get a loan varies, borrowers need a FICO® score of at least 670 to fall within the good credit score range.
How to Build Credit
Establishing credit from the ground up can seem daunting. Here are some ways to start building credit so you can get approved for loans more easily in the future:
Become an authorized user: Ask a trusted person in your life to add you as an authorized user to their credit card account so that you can establish credit history.
Apply for a secured credit card: A secured credit card is a type of beginner-friendly card that requires you to put down a refundable deposit. Since these cards pose less risk to the lender, they’re easier to get approved for when first establishing credit.
Report rent or utilities: While most companies don’t report to the credit bureaus, you can sign up for a rent and utility reporting service that reports these payments to build credit faster.
Apply for a credit-builder loan: A credit-builder loan is an installment loan specifically geared to individuals looking to build credit history. When you take out a credit builder loan, the borrowed funds are placed in a secure savings account or certificate of deposit (CD) and held as collateral until you repay the loan.
Ready to start building your credit? ExtraCredit® is a tool that provides complete credit coverage, including rent and utility reporting and other credit profile-building offers. Try it for free today.
A home for sale in the Ashby Acres community in Phoenix on Sept. 6, 2023. (Photo by Kevinjonah Paguio/Cronkite News)
PHOENIX – High home sales prices and mortgage interest rates are squeezing out first-time home buyers from entering the market, especially as incomes have not kept up, housing experts say.
In 2020, the housing market was in a frenzy. High numbers of homes were selling, agents’ inventories were low and offers were frequently being made over list prices, said Jason Giarrizzo, a realtor with West USA Realty, who has been in the industry for 31 years.
Coming out of 2020, during the COVID-19 pandemic, the market continued to surge as people began buying real estate, Giarrizzo said. “We weren’t sure where the market was going to go, (if) it (was) going to plummet because of you know, the shutdown and everything, but it was quite the opposite.”
A balanced market in the Phoenix metropolitan area would have inventory levels of about 30,000 properties, Giarrizzo said, but by the end of 2021 inventory began to shrink to about 4,400 properties in the area.
Then, home prices hit a high and interest rates began to climb as the Federal Reserve started raising rates in an attempt to head off inflation. “In all my years of real estate, I don’t think I saw the inventory spike to the level that it did in such a short period of time. We went from 4,400 properties just coming into spring to almost 20,000 properties for sale by summer,” Giarrizzo said.
The downtown Phoenix skyline overlooks homes in the Willo Historic District in Phoenix on Sept. 6, 2023. (Photo by Kevinjonah Paguio/Cronkite News)
Now, the inventory is at about 13,000, which is still half of what a balanced inventory is for the Phoenix metropolitan area, Giarrizzo said.
As mortgage loan interest rates have risen, that frenzy has subsided, especially for the first-time buyers market, Giarrizzo said.
Mortgage loan interest rates vary widely based on factors such as the individual market, credit score of the buyer, price of the home, down payment, rate type, loan term and type.
The current average rate for a conventional 30-year fixed mortgage is at or below 8.063% for a $430,000 home in Arizona for a buyer with a credit score of 700-719 who puts 10% down, according to the Consumer Financial Protection Bureau.
Chris Giarrizzo, a mortgage loan officer at Lennar Mortgage, who has been in the industry for over 23 years and is married to Jason Giarrizzo, said many hourly workers are struggling to afford housing, whether it’s a home purchase, or even rent.
The median home sale price in the Phoenix metropolitan area in September 2023 was $435,700, according to Redfin, a real estate firm that tracks prices and trends.
“I actually wouldn’t say necessarily it’s a bad time to buy a home, it’s just a challenging time to buy a home,” Chris Giarrizzo said.
Although mortgage loan rates have been this high before, high sales prices are providing little relief to buyers, she said, and there’s no relief anticipated until possibly sometime next year.
The last time 30-year fixed mortgage loan rates reached 8% was in 2000.
It was a combination of people who moved to the state and people who had more disposable income following the pandemic shutdown that drove the market takeoff in the Phoenix metropolitan area in 2020, Chris Giarrizzo said.
“We weren’t out shopping and weren’t traveling, and so I’ll be honest, not only in my industry, but in several industries, people had said that they had never been as busy. … We were all working a lot of hours,” Chris Giarrizzo said.
A “perfect storm” of high demand, low interest rates and not enough inventory drove home values up, creating the frenzy of people paying over list price because there was so much competition, she said.
First-time homebuyers in the market
“You’ve got a lot of people that are just sitting on the sidelines right now, eager to jump in and buy their first home,” Chris Giarrizzo said.
Many people locked in low interest rates years ago, so even if it makes sense to move or downsize, they don’t, because they’ll be looking at interest rates of over 7%, Jason Giarrizzo said.
A February Realtor.com survey found that 82% of homeowners with existing low-rate mortgages feel “locked in.”
“Even though the frenzy is over, I don’t see a plummet in home values,” Jason Giarrizzo said. “We’re not going to see big spikes in inventory, I think, due to those people that have locked in on those low rates.”
Related story
Interest rates will eventually fall, but when and by how much is hard to predict, Chris Giarrizzo said, noting rates under 3% were largely pandemic-driven and will probably not be seen again.
In August 2021, the 30-year mortgage rate hovered around 2.8%, according to data from the Arizona Regional Multiple Listing Service.
“If we can get rates back into the fours or fives (percent), I think we’ll see a start to return to a more balanced market,” Chris Giarrizzo said.
In northern Arizona, where Jason Giarrizzo also sells real estate, the properties are being sold more quickly and at much higher prices, although there is still low inventory. “I’ve been working more in that $1 million to $2.5 million range, and actually I’m seeing a lot of those deals go in cash,” he said.
But in Payson, and other nonluxury home markets in northern Arizona, the same housing squeeze is being felt, where the housing is largely unaffordable due to the combination of rates and list prices, Chris Giarrizzo said.
J Cruz, a 46-year-old Phoenix park ranger, started his home search two months ago and does not see a light at the end of the tunnel.
“Trying to find a good deal – that’s been very hard and challenging,” Cruz said. “Monthly mortgage payments are way too high for what I want, and it’s not feasible to pay that every month.”
He fixed his credit score, saved for a down payment and recently started the process of getting a home loan.
But mortgage interest rates are one of the things holding Cruz back. “I don’t want to get into a home that I can afford for a few months and not be able to afford two years from now,” he said.
Cruz is in search of a three-bedroom home in Phoenix, Peoria or Glendale, and even though he is a full-time city employee and has good benefits, he and many of his co-workers have part-time jobs to make ends meet.
“Even though we have a full-time job with the city, you know, in today’s economy it is still a little bit hard,” Cruz said.
New-build financing at interest rates lower than market rate is probably the best route for a lot of first-time buyers, especially if they are struggling to qualify, Chris Giarrizzo said.
Federal Housing Administration loans are available for first-time homebuyers, with down-payment options as low as 3.5%.
Zillow Home Loans is offering a 1% down payment incentive to buyers in Arizona to reduce the amount of time that it takes for eligible buyers to save.
The program is intended for buyers who have kept up with high monthly rent payments but have not been able to save for a down payment.
“I would just advise borrowers that the less down you’re putting, the higher your (monthly) payments are going to be,” Chris Giarrizzo said.
This program can reduce the time needed to save for a down payment and provide another option for those who are otherwise ready to take on a mortgage payment
SEATTLE, Aug. 24, 2023 /PRNewswire/ — Zillow Home Loans announced its 1% Down Payment program to allow eligible home buyers to pay as little as 1% down on their next home purchase. This program is initially being offered on properties located in Arizona, with plans to expand to additional markets. With the 1% Down Payment program, borrowers who qualify can now save just 1% to cover their portion of the down payment and Zillow Home Loans will contribute an additional 2% at closing. The 1% Down Payment program can reduce the time eligible home buyers need to save and open homeownership to those who are otherwise ready to take on a mortgage.
Most markets are in the midst of an affordability crisis, and saving for a down payment remains one of the biggest barriers for many potential home buyers. This is especially true for first-time buyers, who are often paying high rents. Typical asking rent nationwide is $2,062, or 3.6% higher than one year ago and up 31% since the start of the pandemic. (The typical rent in the U.S. in February 2020 was $1,597.) The combination of record-breaking home price appreciation and rising interest rates means a majority of first-time buyers (64%) are putting down less than 20%, and one-quarter of first-time buyers are putting down 5% or less.
Zillow Home Loans’ 1% Down Payment program lowers the down payment barrier and increases access to the housing market for eligible borrowers. An analysis by Zillow Home Loans’ shows that by reducing the down payment burden to 1% of the purchase price, a home buyer looking to purchase a $275,000 home in Phoenix, Arizona, who makes 80% of their area’s median income and saves 5% of their income would need only 11 months to save for the down payment. By comparison, the same buyer who needed to save 3% of the purchase price would require two and half years (31 months) to save that amount.
“For those who can afford higher rent payments but have been held back by the upfront costs associated with homeownership, down payment assistance can help to lower the barrier to entry and make the dream of owning a home a reality,” said Zillow Home Loans’ senior macroeconomist Orphe Divounguy. “The rapid rise in rents and home values means many renters who are already paying high monthly housing costs may not have enough saved up for a large down payment, and these types of programs are welcome innovations in lowering the potential barriers to homeownership for those who qualify.”
Home buyers looking to purchase in the next year should take steps to research and prepare for getting a mortgage as they start on their home-financing journey. Among those steps:
Understand your credit profile: Credit scores are key to getting approved for a mortgage, but for many home buyers, understanding credit is complex.
Improve your credit score: Once buyers familiarize themselves with what’s in their credit report, they can take steps to pay down existing debts, pay bills on time, and review their credit report and dispute possible errors.
Avoid closing accounts: Don’t close an account to remove it from your report. Those accounts aren’t automatically removed and will continue to show up on your report.
Hold off on financing large new purchases: Wait to make purchases that need to be financed, such as a car, until after you close on a home. This type of purchase will impact your debt-to-income ratio, which will negatively affect the amount of home loan you qualify for.
Determine what affordability looks like: Once buyers have a good understanding of their credit report and their credit score is at least 620 (generally the lowest score accepted by mortgage lenders) it’s time to understand how much home they can afford. Use Zillow’s mortgage affordability calculator to customize payment details.
Zillow Home Loans’ 1% Down Payment program is currently available to eligible borrowers in Arizona, with plans to expand. Through the 1% Down Payment program, Zillow Home Loans will pay 2% of the down payment for eligible borrowers. The 2% is paid through closing and not as a payment to the borrower. Interested applicants should call 1-833-372-1449 to speak with a Zillow Home Loans representative to learn more about the program and determine if it’s the right fit for their circumstances.
About Zillow Group Zillow Group, Inc. (NASDAQ: Z and ZG) is reimagining real estate to make it easier to unlock life’s next chapter. As the most visited real estate website in the United States, Zillow® and its affiliates offer customers an on-demand experience for selling, buying, renting, or financing with transparency and ease.
Zillow Group’s affiliates and subsidiaries include Zillow®; Zillow Premier Agent®; Zillow Home Loans™; Trulia®; Out East®; StreetEasy®; HotPads®; and ShowingTime+™, which houses ShowingTime®, Bridge Interactive®, and dotloop®. Zillow Home Loans, LLC is an Equal Housing Lender, NMLS #10287 (www.nmlsconsumeraccess.org).
SOURCE Zillow Home Loans
For further information: Media contact: Jessica Drum, Zillow Home Loans, [email protected]
Rent prices are on the rise, with the average cost increasing 18% between 2017 and 2022. But buying a home requires a hefty down payment and good credit. Renting to own your home can give you the best of both worlds, but there are some downsides.
If you’re thinking about signing a rent-to-own agreement, it’s important to weigh the pros/cons of rent-to-own home deals. Here’s what you need to know before you sign on the dotted line.
What are rent-to-own homes?
When you own a home, part of your monthly payments goes toward paying off the principal. If you stay in the home long enough, you’ll own it.
The same doesn’t apply to rentals. Your monthly rent solely covers your costs of living in that home, whether it’s a condo, apartment, townhouse, or single-family house.
A rent-to-own home lets you pay rent to live on the property, with the option to buy it when the lease runs out. In some cases, a portion of your rent goes toward the purchase price, but that isn’t always the case.
How does rent-to-own work?
A rent-to-own agreement is essentially a lease agreement with an option to buy. Rent-to-own contracts should be read thoroughly. Those options can vary from one contract to another.
When you sign a rent-to-own contract, you pay an upfront fee called an option fee. This is typically 1 to 5% of the home’s purchase price, and it’s non-refundable.
It’s important to note that a lease does not relieve you of the requirements to buy a house. You’ll still have to qualify for a mortgage and make a down payment. It’s merely a way to buy yourself some time and possibly put some of your rent toward the purchase price of a home.
Lease Option vs. Lease Purchase
Before you sign, pay close attention to the lease agreement you’re signing. There are two types, and one contractually obligates you to buy the property.
Lease Option Agreement
A lease option agreement is the best deal of the two for you, the buyer. You’re signing a lease option contract that merely gives you first rights to the house when the lease is up. If you change your mind, find a better deal, or can’t qualify for a mortgage, you can find somewhere else to live and move your belongings out.
Since the option fee is nonrefundable, it’s important to note that you will lose money if you choose not to buy. Calculate this loss when you’re deciding whether to buy.
Lease Purchase Agreement
Unlike a lease option agreement, lease purchase agreements obligate you to buy at the end of the lease. Since it’s a contract, that means you’re legally obligated to purchase the house.
This can be risky for a couple of reasons. Once you’re in the house, you may see issues you didn’t notice when you were first touring the house. Things could change with the neighborhood or your circumstances that you couldn’t know at the outset.
But the biggest issue with a lease purchase contract could simply be that you aren’t eligible for a mortgage to buy the house. Make sure you know, up front, what penalties or liabilities you’ll face if you can’t buy the house when your lease is up.
Even though both agreements operate differently on your end, they do obligate the seller to give you the option to buy when your lease expires. This puts you in a position to own a home at a predetermined future date, giving you the opportunity to start planning.
Length of a Rent-to-Own Agreement
Rent-to-own contracts start with a lease period that can be up to five years but is usually less than three. The thought is that the rental period will give a renter time to qualify for a mortgage. During this time, you’ll work on building your credit, if necessary, and saving for a down payment.
In some cases, a rent-to-own arrangement could have renewal terms. That means if you reach the end of the lease and want more time, you can extend the lease. With this option, though, the property owner could increase your monthly rent or the purchase price.
Preparing for Homebuying
During your lease term, you’ll make each monthly rent payment in exchange for remaining in the house. But it’s important during that time that you work toward purchasing the house when your time is up. Here are some things to do to boost your chances of landing a mortgage once your lease expires.
Boost Your Credit Score
Your rent-to-own deal requires that you qualify for a mortgage once the term is up. To do this, you will need to meet the minimum credit score requirements. You can get a free copy of your credit report each year at AnnualCreditReport.com, but there are also credit monitoring services that can help you stay on top of things.
Although requirements can vary from one lender to the next, Experian cites the following credit scores as necessary to land a mortgage:
FHA: If you qualify, a Federal Housing Association loan will accept credit scores as low as 500.
USDA loans: Those who meet the requirements can qualify with a score as low as 580.
Conventional loan: Generally 620 or higher, but some lenders require 660 at minimum.
VA loans: Eligible military community members and their families can obtain loans with scores as low as 620.
Jumbo loan: These loans cover houses at a higher price, so you’ll need a score of at least 700.
Save for a Down Payment
In addition to a good credit score, you’ll need to put some money down on your new home. Down payment requirements vary by loan type, but it’s recommended that you put at least 20% down. That means if you’re buying a $200,000 home, you’ll need at least $40,000 by closing.
There are lower down payment options, but if you choose those, your mortgage payments will include something called private mortgage insurance. This will increase your monthly payment by $30 to $70 per $100,000 borrowed.
If you can’t save up 20%, you may qualify for an FHA loan, which requires as little as 3.5% down. Both VA and USDA loans have zero down payment options, and there are programs offering down payment assistance to those who qualify.
The best part about rent-to-own properties, though, is that some come with rent credits. With a rent credit, a percentage of your rent will go toward your required down payment. Calculate in advance how much you’ll have in that escrow account at the end of your lease to make sure you save enough to supplement it.
What are the pros of rent-to-own?
Rent-to-own homes can be a great option, especially during a tight housing market. If there’s a house you want to buy, but you can’t make a down payment or your credit isn’t where it should be, it could be a great workaround. Here are some of the biggest benefits of rent-to-own agreements.
Rent May Go Toward Purchase Price
Depending on the terms of the rental agreement, renting to own could help you work toward paying for the home. Instead of the full amount of your rent being pocketed by a landlord, a percentage of your rent could go toward the eventual purchase price. Before signing, pay attention to rent credits and try to negotiate the best deal possible.
The Purchase Price Is Locked In
When a landlord agrees to a lease option, the home’s purchase price is written into the contract. That price will typically be higher than what the market says it’s currently worth. This means if the U.S. housing market sees an unexpected increase, you’ll be buying the home for less than its value. Even if the market dips, once you purchase the house and remain there for a few years, you may be able to sell it at a profit.
You’ll Buy Extra Time
For many renters, the rent-to-own period provides time to qualify for a mortgage. If you’ve researched all the options and found you’re close but not quite there yet, a rental period could be just what you need.
Before you choose this option, though, take a look at your circumstances. If substantial existing debt and poor credit mean you won’t qualify, you may need more than the few years you’ll get with a rent-to-own agreement.
No Moving Necessary
Let’s face it. Moving can be a pain. You have to pack everything up, line up a moving truck and get help moving, and unpack your items once you’re in the new location.
With a rent-to-own agreement in place, you skip the hassle of moving. You’ve already been in that home, making monthly rent payments, for at least a couple of years. You’ll simply go through the closing process and switch from rent payments to mortgage payments.
What are the cons of rent-to-own?
If you can get a mortgage, that’s always going to be a better option than renting or leasing to own. But there are some instances where renting without the buy option could be better for you. Here are some things to consider.
Rent-to-Own Home Maintenance
Before you sign any lease agreement, it’s important to read the fine print. One thing to note, specific to own agreements, is who will be responsible for maintenance during the rent-to-own period. If you rent without the promise of eventual ownership, your landlord will take care of those costs. In some cases, rent-to-own agreements require the renter to handle all repairs.
But there’s an upside to handling repairs on your own. To your landlord, the property is technically yours. That means you likely will give it more TLC. Still, it’s well worth it to pay for a home inspection before you agree to a rent-to-own agreement. This will identify any serious issues that will need to be addressed before you buy.
Option Fee
One distinguishing feature of a rent-to-own property is the option fee. This is usually between 1 and 5% of the purchase price and is non-refundable. That means if you don’t ultimately qualify for a mortgage, you’ll lose that money.
Home Values Could Drop
Property values aren’t guaranteed. Your landlord estimates the value of the property, but if you’re in a rising market, you might get that home at a steal. While that’s good news for you, the reverse can happen. If housing prices drop substantially during that time frame, you could find yourself buying a property for more than it’s worth.
Contract Breaches Can Be Costly
Rental agreements are a legal obligation. If you don’t pay your rent, your landlord can evict you and keep your security deposit. But rent-to-own contracts bring an additional level of risk. Missed payments mean you could be evicted and lose all the money you’ve put in. That includes the upfront fee and any rent credit you’ve earned.
All that money will also be lost if you can’t qualify for a mortgage when your rental time is up. These agreements can give you some breathing room. However, if your low credit scores, income, lack of a down payment, or employment situation make you ineligible for a mortgage, you could be searching for another rental while losing everything you’ve paid on the lease-to-own home.
Steps to Buy a Rent-to-Own Home
Once you’ve decided renting to own is the route you want to take, you may wonder what to do next. The following steps can help you ensure you get the best deal in a rent-to-own agreement.
1. Find a Home
This is more challenging than it might sound, especially if you’re looking in a competitive real estate market. Rent-to-own homes are extremely rare, so you may have to find a home for sale and try to negotiate this type of setup.
Typically, homeowners become renters when they can’t sell their homes. This means your rent-to-own contract might be on a home that’s in a less desirable or convenient area of town. For someone whose home has been on the market for a while, being able to collect rent money with the promise of a sale in a few years can be a huge relief.
For best results, find a real estate agent who can help you track down a home and negotiate with the seller. The National Association of REALTORS® maintains a directory of real estate agents, but you can also ask for a referral or find real estate agents nearby who have brokered these types of deals recently.
2. Research the Home
Even if it’s tough to find a lease-to-own home in your area, don’t snatch up the first one you find. Crunch the numbers to make sure the rent and purchase price make financial sense for you. Look at the sale history of the home to verify that the owner’s estimated purchase price is somewhat within what the median home price will likely be when your lease expires.
3. Research the Seller
The seller needs to be looked into as well. This is even more important with rent-to-own agreements since this person will be your landlord for the entire lease period. If you see any red flags during your interactions with the seller, move on.
4. Choose the Right Terms
Before you make a real estate purchase, you would have a closing attorney review the documents. The same goes for a rent-to-own agreement. Run all the paperwork past a real estate attorney to make sure there’s nothing in the contract that will hurt you in the long run.
Your real estate agent should be able to negotiate the best terms for you, including how each rent credit will help you build equity and what happens at the end of the lease.
5. Get a Property Inspection
Any time you make a home purchase, it’s essential to know what you’re buying. The same is true for rent-to-own properties. A home inspector can check things out and make sure you aren’t purchasing a home with serious issues.
6. Start Preparing to Buy
Once you start making rent payments, it’s time to start preparing for your eventual home purchase. Chances are, you’ll have to make a sizable down payment on a home loan, so plan to have that ready. Also, keep an eye on your score with all three credit bureaus and make sure you’ll qualify.
A rent-to-own contract can be a good deal for both the buyer and the seller. It can give you time to save money and improve your credit score. A real estate lawyer should take a look at your contracts and make sure your best interests are protected.
Bottom Line
Rent-to-own homes present a unique option for potential homeowners. This approach offers the opportunity to enter the homeownership arena at a slower pace, allowing individuals to build credit, save for a down payment, and experience living in the home before making a final purchase decision.
However, the rent-to-own path isn’t free from drawbacks. Potential buyers should be wary of unfavorable terms, higher monthly payments, and the risk of losing money if they decide not to buy. Ultimately, like all significant decisions in life, choosing a rent-to-own option requires careful consideration and thorough research.
Frequently Asked Questions
Where can I find rent-to-own houses?
Rent-to-own houses can be found through specialized websites dedicated to these types of listings, local real estate agents familiar with the concept, or sometimes through classified advertisements in local newspapers or online platforms.
Can I find rent-to-own homes on Zillow?
Yes, Zillow does list rent-to-own homes. When searching for properties, you can filter the search results to show only rent-to-own options. However, availability may vary based on the region and market conditions.
How long is the typical rent-to-own contract?
The typical lease term ranges from one to five years, but terms can vary based on the agreement between the homeowner and tenant.
Do I have to buy the house at the end of the lease?
No, the decision to buy is optional. However, if you decide not to purchase, you may lose any upfront fees or additional monthly amounts set aside for the potential purchase.
Can the seller change the purchase price once set?
Generally, the purchase price is fixed in the initial agreement. However, some contracts may have clauses allowing price adjustments based on market conditions.
What happens if the property value decreases during the lease period?
If the home’s value decreases and you’ve agreed on a set purchase price, you could end up paying more than the current market value. It’s crucial to negotiate terms that protect your interests.
Who is responsible for repairs and maintenance?
The agreement should clearly outline these responsibilities. In most cases, the tenant bears the responsibility for maintenance and repairs during the lease term.
What’s the benefit of a rent-to-own agreement for sellers?
Sellers can generate rental income while waiting to sell, often at a premium. It also widens the pool of potential buyers, especially those who need time to improve their credit or save for a down payment.
How do property taxes work in a rent-to-own agreement?
In a rent-to-own scenario, the property taxes are typically the responsibility of the homeowner, as they still retain ownership of the property during the rental period. However, the specific arrangement can vary based on the terms of the agreement.
Some contracts may stipulate that the tenant pays the property taxes directly or reimburses the homeowner. It’s crucial for both parties to clearly understand and agree upon who will cover the property tax obligation before entering into a rent-to-own contract.
If I don’t buy, do I get a refund for the extra money paid?
Typically, the extra money paid above regular rent, often referred to as “rent premium,” is forfeited if you decide not to buy.
Is the rent in a rent-to-own agreement higher than usual?
Often, yes. A portion of the monthly rent may be used for the potential down payment or purchase price, making it higher than the average rent for similar properties.
What’s the difference between rent-to-own and mortgage?
Rent-to-own is an agreement where a tenant rents a property with the option to buy it at the end of the lease. No bank is involved initially, and the tenant isn’t obligated to buy. A mortgage, on the other hand, is a loan specifically for purchasing a property. The buyer borrows money from a bank or lender and agrees to pay it back with interest over a predetermined period.
Does rent-to-own hurt your credit?
A rent-to-own agreement, in itself, doesn’t usually affect your credit. However, if the homeowner reports late payments to credit bureaus, it could hurt your credit score. On the positive side, consistently paying on time and eventually securing a mortgage can benefit your credit.
What is another name for rent-to-own?
Rent-to-own agreements can go by various names, including:
Lease to purchase
Lease option
Rent-to-buy
Rent-to-purchase option
Lease purchase
Each of these terms represents the concept of renting a property with the potential option to buy it after a set period.