Should You Buy A House Now Or Continue Renting?

 

Should You Buy A House Now Or Continue Renting?

Since the 2008 global recession and with the pandemic hitting the globe in 2020, most governments are offering economic support programs to bring the economy back on its feet. This has resulted in record-low interest rates, which might make buying a house seem like a good idea. When asking yourself 'Should I buy a house now?', run the numbers to see if the time is right.

The pandemic is still having a negative effect on most businesses, and we're still witnessing many companies restructuring to manage their overheads. With millions of people out of work, why is the housing market hotter than it’s been in years?

We've seen a recent increase in the sales price of properties across most major cities like Dubai, the UK, Singapore, and the US since December 2020, but why?

If so many people are out of work in the financial crisis of the Covid-19 pandemic, how can others afford to buy a house?

The answer is "low-interest rates" offered by most central banks to boost the economy and the purchase of properties. We're now seeing mortgage rates hovering between 2.8% and 3.9%.

Yet, just because the real estate market is hot and mortgages are made more affordable than before, it doesn’t mean you should call up a real estate agent and start looking at houses.

Is Buying a House Right For You?

When contemplating buying a house, ask yourself the following questions:

Is the monthly mortgage installment lower than or equal to the monthly rent I am currently paying?Is my total monthly housing cost lower than 1/3rd of my gross monthly income?Have I saved a 20% down payment? If not, can I get a higher loan to value so that I pay a lower down payment?Do I know how to evaluate the real property value, negotiate to purchase it at its real value, be eligible for financing from lenders?

If the answer to any of these questions is a hard 'No', then it might be worth reconsidering the purchase of a home. It might not be your time to buy now, but it's definitely your time to educate yourself on how to purchase a property that will serve as both your home and an investment.

Let's take each of the above questions and drill down further to trigger your thought process and help you come up with your own questions.

How does the monthly mortgage installment compare to the rent?

Many get scared from the idea of taking a home loan and feeling indebted for a long period of their lives. But when you look at this from a different angle and compare the would be monthly loan installment to the current monthly rent that you're already paying, the idea of paying an installment for a home loan becomes more digestible.

Now, what might comes to your mind is the idea that you need a 20% down payment. We will cover this is in a while.

Would you agree with me that if both the monthly mortgage installment and the rent are in the same vicinity, then it makes more sense to have this same monthly expense buy you a house over the years?

What's your total monthly housing cost?

People love to live in big houses and in houses located in rich neighborhoods. For most, it is a projection of an individual’s wealth, and a lot of people like to be perceived as financially capable of affording to rent or own a good-looking house in a high-end neighborhood. In fact, who doesn’t like big, good-looking houses? But a prudent person may want to keep the amount he or she pays on a personal home, be it a mortgage or a rent, to a maximum of a third of total income.

The monthly housing cost is computed by dividing total housing expenses over total income, where total housing expenses is the sum of real estate taxes for personal home, home mortgage or rent, utilities, personal home maintenance, personal home insurance, and personal home household improvements. The rule of thumb is to have a maximum of one-third of your total income allocated to housing. The higher your income, the better and larger house you can afford.

Have you saved a 20% down payment?

The down payment would be one of the largest obstacles to owning a house. Lenders would want you to have your skin in the game and would lend you 80% of the property purchase price (often referred to as LTV or Loan-to-Value). This also acts as a cushion for lenders should the property lose value in times of recession and when it needs liquidation given the borrower's default on repaying the loan.

All lenders assess the LTV ratio in relation to their risk exposure level when underwriting a mortgage. The smaller the difference between the property’s appraised value and the total amount borrowed, the riskier the loan. The higher the LTV ratio, the closer the loan amount is to the appraised value and therefore, the greater is the lender’s risk exposure. In such cases, lenders perceive that there is a greater chance of the loan going into default because there is little to no equity built up within the property. Should foreclosure take place, the lender may find it difficult to sell the home for an amount sufficient to cover the outstanding mortgage balance and make a profit from the transaction. For that reason, the most-often-used LTV range is between 75% and 80%.

Higher LTV ratios are primarily reserved for borrowers with higher credit scores and satisfactory mortgage history. Full financing, or 100% LTV, is reserved for only the most creditworthy borrowers. But there are also creative ways for the highest LTVs on mortgage loans. such as:

Favorable sale is a term used by banks in certain markets when the borrower buys a property below market value. In some markets, purchasing a property at a lower price gives you immediate equity, and some lenders have excellent policies that allow you to maximize the amount you can borrow when buying a property below market value. Gift of equity refers to a gift that represents a portion of the seller’s equity in the property, transferred by the seller to the buyer as a credit in the transaction. This scenario can apply when the negotiated purchase price is less than the property’s fair market value. The difference in the purchase price and the appraised value is considered a gift of equity. This strategy can be perfectly acceptable by some lenders in some markets, as long as the necessary documentation to prove the amount of the gift and confirm that no repayment is expected or required is filled out by the seller. Trade for equity happens when the buyer trades something other than cash for equity. This could be another property, land, a car, or any other valuable. This form of trading equity for a down payment is legal and could be acceptable by many lenders. Pay “all cash” at a discounted price and finance at market value is a straightforward strategy that can work well for buyers who either have the cash available or can get access to the necessary cash.

A range of possibilities is available for you on getting the most possible leverage after all the hard work in getting a seller to agree to sell at a well-negotiated, discounted selling price. All you need to do is investigate what works best in your market, with your lender, for the seller, and for you.

Bonus: Book a free discovery call for creative strategies for 100% financing

How to evaluate the real property value?

When searching for a house, you will be tempted to move on and put offers on those select few that meet your search criteria. Before you get excited and make an offer, it is important to understand two guiding principles for determining your offer price:

The listing price, which is the seller’s asking price, is not the real value of the property.The property value is based on its financials. This means, you determine the property value, which becomes your offer.

Value is the amount of money that you are willing to pay for something, while the price is the amount of money that you are asked to pay for it. Value can be perceived differently by different people. For home seekers, the value perception can be emotional. Therefore, the offer for a property may reflect those emotions. In most cases, offers made on such emotional decisions are often much higher than what real estate investors offer for the same property. For real estate investors, the decision on the price they offer is based purely on numbers. No emotions are in play. In good deals the numbers work; in bad deals, they don’t.

The message here is that you need to learn how to buy a house as if you are a real estate investor who runs the numbers to determine if this investment makes sense.

Related: Learn how to invest in real estate like an investor

Having banks more flexible to lend you a mortgage for low-interest rates is not enough to get you one. There is also the matter of your creditworthiness, or simply said, how likely you will pay your debt and interest on time.

Related: Free book and resources for determining your creditworthiness