What Makes Sense: BUY a Home or RENT From Someone Else?

Our local rental market is at a per square foot premium price. Financing rates are still hovering at favorable lows. Home prices are slowly climbing again, but remain quite reasonable. So what makes more sense--BUY a home or RENT from someone else? 

Image: The New York Times

While the decision is a multifaceted one for each individual--no two situations or scenarios are alike--I came across this really cool sliding scale style "rent vs buy" calculator in the NY times. This is a quite useful tool that breaks down the numbers that really matter in a very digestible and clear way. You can toggle and slide the factors on nearly all figures related to a real estate purchase, from purchase price to interest rate, years of amortization, and much more. It then calculates a payment threshold that says, essentially, that if you can rent a comparable home for less than X there is no rush to buy that same caliber of home--in that case renting makes more sense. The problem is that the rental costs in this area are surprisingly high--FAR higher than any price per square foot on the buying side of the fence. And unfortunately, "good" rentals (and the landlords that come with them) seem to be getting more and more scarce.

Of course buying a home represents a much larger commitment than renting. There are maintenance costs, future improvements, deciding upon geography, and the intimidation of simply having that "mortgage" payment vs. writing a rent check. But then again, as a homeowner, there is this amazing thing called an itemized tax deduction. <--If you have never experienced this, trust me that the year in which you finally do will be something you will always remember.

So what are the typical hurdles and doubts surrounding buying (especially as a first-timer) in 2014? And what solutions might there be? 

• Not enough money for a down payment - There are many programs out there that will allow for 0% down payment, such as USDA funding and special portfolio programs offered by certain credit unions (you don't even have to be a credit union member in some cases!). And there is also always good old FHA, which is only a 3.5% down payment. Of course with all lending programs, there are qualification criteria and subject property restrictions, but the conventional wisdom ("back in my day" style...) of needing 10% or 20% down to get out of the gates simply doesn't apply to most people anymore.  
• Not enough money for closing costs - Sellers can pay your closing costs. Period. I often get clients to the table with little out of pocket, because we structure the offers to include full closing. It is often "built in" to the sale price, but at the end of the day, getting that $10,000 in closing help at 4 3/8% and wrapping it into a 30 year mortgage = only $49 per month more in a payment. Compare this to coming up with $10,000 to bring to the table and it is often a no-brainer. Mind blown? 
• Perceived inability to qualify for a mortgage - Have you ever talked to a lender? I always recommend a "preemptive strike" with one of these folks months (or even years) before you really think you want to buy a home. A good lender is more than willing to check out your current financial picture, tell you what they see, and give you longer-term advice and directives to get you on the road to home ownership in the future. Simply put, much like with us Realtors, the good lenders know that the real estate relationship is a marathon, not just a slam dunk sprint. They will hang with you through the years leading up to your ultimate buy. 
• "I'm too young to buy a house" - There is nothing unusual anymore about being in your early to mid twenties and buying a home. Nothing. You do not have to wait to get married, or to make over $50K per year, or pay off your student loans first, or ... Young people who understand the process and stay on top of their financial picture can get a jump start on their financial solvency. Many buy their first home with the intent to grab a roommate or two to help adjust to the monthly mortgage, living in their own home for less than rent--often living "rent free" while their roommates pay for them to essentially own a home. Not to mention they then also reap the rewards of their tax write off each Spring <--money they can then save, invest, or apply toward additional home improvements to build equity.
• Perceived "low" credit score/credit blemishes, including foreclosure/short sale/bankruptcy - No two credit histories or profiles are the same, and folks with credit issues--past and present--still buy houses. Every. Single. Day. The right lender will take your profile, ask the right questions, tell you what options you have, OR in the worst case, make real-world suggestions as to how to get your credit back on track in a specific period of time. Quite often, your credit isn't as bad as you think it is. The credit scores you pull as a consumer vs. the scores they pull as lending professionals are not always the same. 
• NO credit history - Maybe you have intentionally resisted having any credit cards, got your vehicle as a gift from your folks (and plan to ride it into the ground), and/or have no referenceable rental payment history. This can be a tough one, and another great reason to consult with a lender early in the process (long before "window shopping" specific properties and making a wish list) to determine the best way for YOU to build a credit history worthy of lending. There are ways to build one fairly quickly and your lender will know for certain. And please don't trust everything you read on Google.  

At the end of the day, it just doesn't make sense for everyone to buy a home--"American Dream" or not, there are simply some folks who should never make that kind of commitment, period. But for the majority of regular income earners, the numbers on moving into a home of your own vs. renting don't lie. With the right advice and some preparation and planning, buying a home just might be one of the smartest decisions you will ever make. :)