How to stop renting and buy your first home in 2022

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Here are 7 practical steps to take when you want to stop renting and buy your first home.

As rent prices continue to climb, many people are wondering if they should buy their first home. Especially now that interest rates are low, people are looking to buy a home and start building equity before they rise again.

But buying a home is a process—and not one you should rush through. In this article, you’ll learn seven practical steps to successfully go from renting to buying your first home.

Points to remember:

  • Make sure your finances are in order 
  • Before making any offers on a home, find a mortgage lender and get preapproved—or better yet, pre-underwritten
  • Make a strong offer on a home you love and work toward a quick, smooth closing

How do you know it’s time to stop renting?

How do you know you’re ready to leave rent behind and start saving for your first home? Here are a few signs:

  • You want to stay in the same area long term or at least a few of years
  • Your rent keeps increasing
  • You’re ready for the responsibility of owning a home
  • You’re successfully paying down your debts

If you decide it’s time to stop renting and buy your first home, here are the seven steps you should follow.

1. Check your finances

Mortgage lenders look for very specific qualifications. To make your application as attractive as possible, make sure you meet most lending standards:

  • Credit score of at least 620 (or 580 for FHA loans)
  • Debt-to-income ratio (DTI) less than 40%
  • Housing expenses taking 30% or less of your gross monthly income
  • Stable job or self-employment for two years

In addition to checking your employment history, lenders will also consider your assets such as CDs, stocks, bonds, mutual funds, and retirement accounts as well as any extra income from a side hustle, military benefits, child support, or Social Security.

Take a good look at each of these factors to see if you’re financially ready to own and maintain a home.

2. Pay off your consumer debts

Want the lowest mortgage interest rates? You’ll likely need a credit score in the 700s and a low DTI.

You can improve both those numbers by paying off your debts. This includes credit cards, car payments, student loans, business loans, and medical debts. Depending on how big these loans are, you may not be able to pay them off right away, so start by paying off your smaller debts and then work on your larger ones.

Golden Retriever lying on bed
Paying down debts is just as important as saving up for a down payment when buying a house so you can get pre-approved for a mortgage

3. Save for your down payment and closing costs

It’s tough to save money when you’re spending around 30% of your income on rent. But saving for a down payment doesn’t have to take as long as you think.

So how much money do you need to buy a home? Contrary to popular opinion, you don’t have to put down 20% of the purchase price. Many conventional mortgage lenders will accept a down payment of 5%, and FHA lenders will take 3.5%.

Your monthly mortgage payment will be higher if you pay less than 20% down because you’ll also likely need to pay a private mortgage insurance premium. But for many, it’s still less expensive than rent prices, which hit an all-time high in 2021.

You should also save around $4,000 to $5,000 for closing costs and, ideally, enough for several months’ worth of living expenses just in case.

Consider placing your money in a separate high-interest savings account or mutual fund so that it will earn interest in the meantime.

4. Find a lender and get pre-approved

By now, you should be ready to look for a mortgage lender.

If you already have a real estate agent, they can help you find a good lender. But if not, start by checking your local bank, nearby credit unions, and online lenders. Don’t simply go with the first one you find, though. Speak with multiple lenders and compare their rates.

Once you’ve found a lender, you’ll need to compile several important documents for them to review. That includes:

  • Recent rent payment statements
  • Tax returns from the last two years
  • W-2s from the last two years (or 1099 forms and Profit and Loss statements if you’re self-employed)
  • Last two pay stubs
  • Bank account statements (including checking, savings, and retirement accounts)
  • Statements for other money assets like CDs, bonds, mutual funds, or stocks
  • Divorce decrees if you receive alimony or child support
  • Social Security or disability statements if applicable
  • Signed letter from the gift-giver if applicable

5. Find a local real estate agent and start house hunting

Once you have a preapproval letter, you’re ready to browse online listings. By now, you hopefully have a real estate agent who can help you find what you need. They may ask you:

  • How many bedrooms and bathrooms do you need?
  • How much yard space?
  • How much square footage?
  • What features are important to you? (For example, do you need a single-story home? Do you have your heart set on a big kitchen?)

Your real estate agent will show you several homes in your area that you may be interested in. They’ll also alert you as soon as a desirable home hits the market.

There are several important things to look for when touring a home. Take a house-hunting checklist with you to keep track of what you like and dislike about each one. This will help you make an informed decision instead of relying on memory alone.

outdoor lamps turned on
Know your goals first so you can make a savings plan and hit the market with a strong offer

6. Make a strong offer

Once you find a home you love, it’s time to make an offer. Don’t wait too long to do this. Chances are, other home buyers have also seen the home and are ready to place a bid as well.

Whether you offer above, below, or exactly the asking price depends on the current market, so be sure to ask your real estate agent for advice.

Since you’re already pre-approved for a mortgage, your bid is inherently strong. But if the market is competitive, consider the following strategies to craft an even stronger offer:

  • Offer asking price or slightly above
  • Waive some contingencies
  • Provide more earnest money
  • Offer to cover some of the seller’s costs
  • Make an all-cash offer
  • Provide a quick close

Closing more quickly may be difficult while you’re renting. If you can’t make the closing date line up with the end of your lease, ask your landlord to let you leave early. They may say yes so they can fill the home with a new tenant at a higher rent.

7. Close on your new home

Once your offer is accepted, you’ll need to pay for a home inspection, which can uncover any hidden issues with the home.

If the inspection exposes any major problems—such as a leaky roof, cracks in the foundation, or faulty plumbing—you could negotiate with the seller. But if you waived an inspection contingency, you’ll likely lose your earnest money if you walk away from the offer. 

If all goes well, though, you’re ready to move forward and close the deal. You and your real estate agent will meet (likely at your title broker’s office) to sign the official paperwork.

Wrapping up how to go from renting to buying your first home

Congratulations! You’ve now officially stopped renting and bought your new home. If you properly checked your finances, saved for a down payment, got preapproved for a loan, made a strong offer, and successfully closed, you’re in a great place to begin building equity as a new homeowner. 

FAQs

When should I stop renting and buy a house?

Buying a home is a big decision that shouldn’t be made lightly. That said, if your rent keeps increasing, your finances are healthy, and you have enough money for a down payment and closing costs, you may be ready to stop renting and buy your first home.

Is it better to keep renting and save or buy a home?

If you have a job that requires you to move every few months—or if you simply don’t want to be tied down—then continue renting and saving. But if you’re ready to settle down for at least a couple of years, that’s a sign it’s time to buy a home and start building equity.

Is buying a house cheaper than renting?

Buying a house is usually cheaper than renting because landlords have to charge more than the mortgage payment and maintenance expenses in order to make a profit. That said, closing costs are around $5,000, so if you’re buying a home, make sure you can stay for at least several years to recoup that cash in equity.

Can you buy a house without ever renting first?

Yes, you can. Just make sure you have a stable source of income, a healthy credit score, and a low DTI. These are the factors lenders consider during the preapproval process.

About the author: Jenny Rose Spaudo is a content strategist and copywriter specializing in real estate, PropTech, and finance. She’s written for companies like Edward Jones and PropStream as well as publications like Business Insider. Visit her website at jennyrosespaudo.com and connect with her on LinkedIn.

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