When it comes to buying vs. renting, everyone's got an opinion. Talk to your average real estate sales agent, and you'll hear the auto-response, "Now is the time to buy!" Talk to a property manager and you'll hear, "Now is the time to rent!" And a million and one articles, books, and podcasts claim to settle the matter for once and for all, enumerating the pros and cons of each option.
But the thing is, most aspiring homeowners don't need to be convinced that "now is the time to buy." And most renters don't really need to be told that their leases give them some time and space to save, build up credit profiles, and shop around. I decided to try to cut through the real estate mantras and ask two top metropolitan (Washington, D.C., area) real estate professionals the following question:
How can renters and first-time buyers both achieve greater financial freedom?
That is the topic of this three-part series.
My two experts? Property manager David Norod, principal broker of WJD Management in Fairfax, Virginia. And Beth Kenney, an award-winning realtor in Reston, Virginia, who's been working with first-time homebuyers for over 20 years. David shared some insider tips for winning financially as a renter--and Beth offered equally compelling hacks for getting into home ownership (especially if you live in Virginia).
The Criteria: Transcend the "Duh Factor"
- A low debt to income ratio is more important than good credit--and, for many young professionals, an easier variable to control.
- A meager savings account need not prevent you from making that first home purchase.
Sure, every applicant knows income and credit will be checked (and most know that credit card debt and carrying lots of credit cards are black marks on an application)--but according to David Norod, most rental applicants believe the landlord's financial checking ends there.
"What's most important to me," Norod insists, "is the debt-to-income ratio--an applicant's debt repayment commitments (including rent) as a percentage of income."
WJD Management screens out applicants whose debt to income ratio would exceed 40 percent. Every landlord and property manager establishes that threshold a little differently. However, few will allow a tenant to have total monthly debt-plus-rent commitment above 50 percent of their income.
Here's an example: Using Norod's metric, a $5,000 monthly take-home pay allows for a total monthly debt (including rent) of $2,000. For a debt-free candidate, that's about enough to rent a small townhouse in parts of the Northern Virginia metro area. However, if you're paying $1,150 per month in car loan credit card debt, monthly gym contract, and student loan repayments, the rental max dips to $850. (In other words, better go find yourself a couple of housemates.)
Monthly Payments Are the Enemy
The most obvious way for first-time renters to strengthen their applications is to wait on all discretionary credit card purchases--and any decisions to enter into monthly recurring contracts--until after you've made your housing commitment. At the very least, your application will be stronger while you shop for a rental. (At best, you'll find out you really didn't need the gym membership or the new Apple watch after all.)
One other important financial qualifier beyond available income is the applicant's job history. "If I see job changes that go along with moves from one city to another, that doesn't concern me," Norod says. "But if the job changes are all in the same local area, that's a big, big red flag."
Always Be Nice to the Gatekeeper
One final note on the renter side of the discussion. Keep in mind when you're dealing with a professional property manager that this person serves as the gatekeeper. A guardian who's been hired to apply both data and human judgment to keeping the property safe from nightmare tenants who might make the place uninhabitable. (And every property manager has those stories--from urine-soaked living room menageries to basements that became festering mildew dungeons. That gatekeeper has a lot of responsibility--and hence lot of leeway in deciding how to present you to the landlord.
Here's an example. An applicant was late in paying a $29 credit card service fee they didn't realize had rolled over to the next month's bill. Yup, these kinds of minor oversights can happen to anyone. Yet, they result in the same black mark on your credit report as missing a payment on a $5,000 balance.
Who gets to interpret (or at times even overlook) negatives on a credit report? The property manager. And if you seem like the type of person who might just be crazy, neglectful, irresponsible, or downright horrible to work with, the data will do the deciding. So, Norod advises, it's a good idea to put your best foot forward as you deal with the property management staff.Work with their process, explain anything that needs explaining, and generally... be nice.
Buyers: Know the Solution to the "No Down Payment" Dilemma
"What's the biggest thing first-time homebuyers don't know?" I asked award-winning Realtor Beth Kenney.
Her answer: "The growing number of programs for those with good credit."
Most importantly--programs that don't require much money down. And we're not just talking about FHA--though of course that's the best-known program, with its famous 3.5 percent down payment minimum. New programs continue to open up--many of them state-specific. Kenney offers as an example a program now available to first-time homebuyers in the state of Virginia.
"The VHDA [Virginia Housing and Development Authority] loan," she points out, "is available to first-time buyers with credit scores of 680 and above." (And a credit score of 740 and up opens even more doors.) The program actually funds $3,000 of a first home purchase. And what's more, it allows up to a 5 percent gift from anyone--Mom and Dad bribing you to elope rather than marry, Great Aunt Bessie leaving an early inheritance, a guilty ex who once jilted you. Doesn't matter to the lender--a gift's a gift.
The lender pays the private mortgage insurance (PMI) under this program, and sellers can often be convinced to pay the closing costs.
Voila! (Assuming the benevolent 5 percent gift-giver, a homebuyer with good credit can end up with no down payment and a lower monthly payment than renting. Not to mention the lovely tax break that comes with the home mortgage deduction.
A Caution and a Tip for First-Time Homebuyers
"The caution I give," says Kenney, "is that you really need to be committed to the area and plan to stay for three to five years. Otherwise you might end up underwater due to commissions."
The main thing is, she says, to work with an agent who has good relationships with several lenders. As programs and first-time buyer incentives become available, you'll be the first to know.
And in the meantime, if you've kept all your options open by renting (and you're beloved by your landlord for being the perfect tenant), you'll have maximum flexibility to make that leap into buying when the time is right.
Yes, it all begins with good credit. You know that already--and if your credit sucks, you'll have to make some changes to get that straightened out. Remember, though, whether you're looking to rent or to buy, a credit score is only the starting point. If you have a steady income (or two steady incomes as a couple), regard your pay as a form of wealth that landlords and lenders prize. (That is, it's not obliterated by a mountain of debt obligations.)
And for those who think it all comes down to data and impersonal black-and-white scores, remember that relationships count too. They count in real estate, just as they do in any other area of where other human beings hold valuable assets that you want.
Be nice. Communicate well. Put a high value on experience and knowledge. Open yourself up to trusting in a kickass agent.
And don't ever assume you can't buy.