Homeownership is a hallmark of the American dream.
Unfortunately, that dream has been put on hold for many immigrants in recent times.
It’s no secret that the housing market is intensely competitive these days. Inventory shortages and surging demand have led to double-digit price growth.
In such an uncertain economic climate, many immigrants are asking a vital question:
should I buy or rent a home?
While both options are compelling, they must be weighed individually. Owning a home isn’t necessarily the best decision, and renting a home isn’t as easy as it might seem.
Check out this quick homeownership guide so you can move forward with confidence.
Renting a Home
There are many benefits to renting a home.
For starters, you’ll always have total clarity on your exact monthly housing costs. After all, your leasing agreement will clearly state your rent—and in some cases, your utilities will even be rolled into that number.
While it’s true that many landlords raise the rent each year, the increase tends to be low. Plus, you may be able to negotiate the rent, especially if it seems exorbitant.
Better yet, if you live in a rent-controlled building, you’ll be immune to all rent increases.
Renting also protects you from the innumerable (and often unexpected) costs of homeownership. When appliances fail or plumbing issues arise, the landlord will handle the cost of repairs.
Though that may seem insignificant, it could save you hundreds (if not thousands) of dollars a year in expenses, even if you choose to invest in renters’ insurance.
Finally, renting provides the ultimate intangible luxury—the flexibility to move whenever your lease ends. While you won’t be able to build equity on the property, you generally have the ability to leave on your own terms.
In other words, you can rent a home until you’re finally ready to settle down somewhere.
Buying a Home
Homeownership introduces equal amounts of reward and responsibility.
On the one hand, owning a home gives you total independence from the renting world. You’ll no longer be beholden to a grumpy landlord and unruly neighbors.
Better yet, you can take command of the space and paint it—or even remodel it—however you see fit.
After all, it’s yours to enjoy.
Of course, buying a home also presents an opportunity to build equity. If you steward it carefully, your home will become a living investment that you can shepherd for decades, if not generations, to come.
On the other hand, owning a home is a major commitment. Once you invest in a home, you essentially forfeit the ability to move whenever you want.
Real estate is an illiquid asset, meaning it can’t be quickly or easily converted into cash without incurring a major loss in value.
Even if you sell the property in an “up” market, you’ll still incur a series of transaction costs and taxes that could offset any significant financial gains.
In other words, don’t buy a home unless you’re truly ready for the responsibility (and you intend to keep the property for a long time).
Do keep in mind that the cost of homeownership generally exceeds the cost of renting.
In addition to your mortgage payments, you’ll also be paying for property taxes, water and sewer services, landscaping services, homeowners insurance, and in some areas, flood and earthquake insurance (which can be very expensive).
Unlike renting, you’ll be responsible for all repairs and maintenance costs, which can add up in a hurry. In fact, the average American spends over $3,000 a year on home maintenance alone.
Again, we aren’t trying to cast a shadow on the advantages of homeownership. Instead, we’re simply highlighting the enormity of the investment before you sign on the dotted line.
Buying a home requires a protracted, multi-step process, including securing a mortgage, saving up for a hefty downpayment and closing costs, finding the right real estate agent, locating the ideal home, and successfully making a winning offer.
If you’re overwhelmed by the home buying process, click here to check out six quick tips for immigrants interested in owning a home in the U.S.
Renting vs Buying a Home: Key Advantages & Differences
Okay. We just covered a lot of ground in a few lines.
To help summarize the discussion, here are the five major differences between renting and owning a home:
1. Tax Benefits
It’s no secret that homeowners enjoy many tax benefits.
For example, the home mortgage interest deduction helps reduce out-of-pocket expenses (as long as deductions are carefully itemized).
In fact, you can deduct home mortgage interest on the first $750,000 of indebtedness.
That’s a huge win for homeowners, but renters will not have access to that tax benefit.
2. Property Values
While it presents a pathway to building wealth, homeownership is not immune to a variety of external factors, such as:
- Economic downturn.
- Housing surpluses.
- Antiquated interiors (i.e., depreciation).
- Maintenance costs.
- Neighborhood issues.
As much as a home can gain value, it can also lose value in the same breath.
Conversely, renting generally absolves you from these unpredictable factors.
In fact, certain negative circumstances—like unsavory experiences in the neighborhood—may actually help lower your rental costs.
3. Repairs and Maintenance
Homeowners are financially responsible for everything that breaks on their property. When pipes burst, laundry machines break, and ceilings leak, homeowners have to foot the bill.
While repairs are expensive enough, homeowners are also responsible for renovations. Over time, a home’s interiors become outdated and gradually lower the value of the property.
Homeowners must therefore invest in remodeling, such as new flooring or kitchen cabinetry, to keep up with the times and help increase the home’s value.
While many renovations may help increase the value of a home, they ultimately come at a net loss to the owner.
For example, the most statistically profitable renovation—a garage door replacement—only recouped 93% of the project cost in 2021.
Again, renters are free to come and go as they please without ever worrying about their unit’s value. That’s the landlord’s job.
Credit Requirements for Homeownership
The topic of credit and homeownership deserves special attention.
After all, your credit score will determine the mortgage you can confidently obtain.
For non-U.S. citizens, most conventional loans will require a minimum FICO score of 620.
As you might expect, higher credit scores generally unlock better interest rates and therefore lower costs.
If your credit score is lower than the suggested minimum, don’t worry. Buying a home with less-than-stellar credit is doable.
There are plenty of steps you can take to boost your credit score in the months leading up to your ultimate purchase—let’s go over a few of your options:
1. Make Payments On Time
Payment history is the most important factor in your credit report. After all, it accounts for 35% of your FICO score.
Lenders value consistency in financial behaviors, whether that means paying medical bills on time or submitting your monthly rent before the first of every month.
Late payments can damage your credit report years at a time. For example, delinquencies (i.e. missed or late payments) can remain in your credit report for up to seven years, even after you’ve paid the past-due balance.
2. Turn On Auto Payments
If setting a reminder in your calendar isn’t effective enough, turn on auto payments to more efficiently manage your incoming bills.
And what are auto payments? They’re scheduled payments that automatically complete recurring bills (like gym memberships, phone bills, and credit card statements). You can easily set them up through your bank or credit issuer.
This is a great way to avoid delinquency and ensure that all of your bills are paid on time, without requiring you to even think about it.
Just be sure to time your auto payments correctly, so they are completed either on or before your due dates.
3. Keep Your Debt-to-Income Ratio (DTI) Low
Debt management is crucial to financial health (and maintaining higher credit scores). More importantly, your debt-to-income ratio is a key indicator of your ability to make monthly mortgage payments on time.
After all, excessive debt is the second most prominent factor in rejected mortgage applications.
For the sake of example, let’s say you make $5,000 a month in pre-tax income. Of that money, $2,000 will go in payments for outstanding debts, with the remaining $3,000 left to cover your living expenses.
In this case, your debt-to-income ratio (DTI) would be 40%, a little bit above the preferred range. Most mortgage lenders seek borrowers with DTI ratios under 36%.
Fortunately, there are a few ways to decrease your DTI:
- Increase the amount you pay each month towards your debts.
- Tackle high interest debt first.
- Control (and limit) your non-essential spending.
- Postpone applying for additional loans.
- Reduce the amount you charge on credit cards.
4. Tout Your Renting Record
Believe it or not, your rental history can play a very positive role in purchasing a home.
In fact, a strong rental history can help you secure a mortgage with especially favorable interest rates.
Remember, mortgage lenders value consistency, so if you can demonstrate a reliable history of paying your monthly rent on time and abiding by the terms of your lease, they will look favorably on your application—even if your credit history is less-than-perfect.
Mortgage loan financier Fannie Mae recently decided to incorporate rent payments in mortgage applicants’ credit history review.
This move empowers millions of borrowers to demonstrate their creditworthiness beyond the confines of their FICO score alone.
Renting vs Owning a Home: Top FAQs for Immigrants
Still debating whether you should buy or rent a home? Here are five quick answers to the most popular questions facing prospective homeowners:
Is Buying A House Cheaper Than Renting?
No. In most cases, homeownership incurs more varied costs than renting—even if your mortgage payment is lower than your monthly rent.
How Much Should I Save Before Buying a Home?
Save as much as you possibly can.
After all, the minimum downpayment on a conventional loan typically hovers around 3%, while many homeowners will choose to pay between 7% to 17%.
Keep in mind that the more you pay upfront, the less you’ll have to pay in monthly mortgage payments afterwards.
To explore your options, be sure to use this down payment calculator.
Note: as for closing costs, you can expect to pay another 3 to 4% of the total purchase.
Can I Buy a Home With Less Than Ideal Credit?
Yes. Plenty of homeowners have imperfect credit.
However, if your credit score is below 620, be sure to follow the aforementioned tips to boost your score and increase your appeal to lenders.
What if I Have Debt?
Most Americans have debts of some kind. In fact, when you take out a mortgage to buy a home, you simply assume additional debt responsibilities.
While debt itself will not preclude you from homeownership, excessive borrowing may burden your financial life and prevent you from obtaining a mortgage.
Can Recent Immigrants Buy a Home?
Yes. All legal immigrants are entitled to homeownership, provided they are financially equipped to handle the responsibility and access the necessary loans.
Over 65% of American citizens own a home, while the homeownership rate of foreign-born residents hovers around 50%. The gap between both population groups has narrowed over recent years, which is good news for immigrants interested in owning a home.
While it can seem difficult for immigrants to buy a home, the government enforces various agencies and laws to work on your behalf.
These include the U.S. Department of Housing and Urban Development agency (HUD) and The Fair Housing Act (FHA), a national law that makes it illegal for housing providers to discriminate against buyers.
As the HUD declares:
“Housing discrimination is not only illegal, it contradicts in every way the principles of freedom and opportunity we treasure as Americans. HUD is committed to ensuring that everyone is treated equally when searching for a place to call home.”
Owning a home is anchored in the American Dream, and that dream extends to all people.
The Housing Market in 2023
It’s no secret that the housing market is in relative disarray.
In 2021, the pandemic housing market boom was in full effect, with home prices surging over 40%.
By the end of 2022, however, mortgage rates doubled compared to the beginning of the year.
As inflation skyrocketed, countless homes sat on the market as sellers sought prices most buyers couldn’t afford.
As a result, contracts were canceled, asking prices dropped, and inventory levels plummeted.
While mortgage rates are starting to fall—offering much needed relief to buyers—the 2023 housing market nevertheless remains uncertain.
Though no one can predict the future, some financial experts, including Morgan Stanley, anticipate a 10% drop in housing prices over the next two years, as evidenced by areas like San Diego, San Francisco, and Seattle, where prices are falling fastest.
Though the market will likely cool, it seems unlikely for it to crash as it did in 2008.
Overall, prices are expected to fall 4% in 2023 to a median home sale price of $368,000—the first annual drop in home prices in over a decade.
In other words, 2023 may be a great time to buy a home.
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