Would it be better for me to rent or to buy now? I have a low credit score, but have over $100k for a down.?

Question

I have just accepted an offer on my home and will have just over $100k from my equity from that sale to use for new housing. My credit is poor (I'm currently paying 12% interest on the home equity loan on the house I'm selling). Would I be better off to wait and rent until my credit history improves?

Answer 1

100K down will probalby get you a pretty good rate no matter what your credit is as long as you don't go crazy on the price of the new home(I would say spend no more than 200-250K as 50% down will usually get you an awesome rate). The key here is going to be how long you plan to stay in the home. The general rule is that if you are going to be in the house 5 years or longer, buy. If less, rent.

There are other considerations that go into it such as whether or not you will be walking into the home with equity, your tax situation, and how much you could earn via investing if you don't put the entire 100K down.

Answer 2

Depending on where you buy, 100 grand could be a very significant down payment. That large a down may help offset what a lender may offer you as an interest rate.

In any case, assuming you can get lending, a buy is still a better deal, since your rental payments represent money you will never see again, while house payments, even at high interest will still be largely tax deductible for a few years to come.

Meanwhile, timely mortgage payments will help improve your credit score, and you can eventually negotiate a refinance loan, with a better interest rate, later.

PLUS, you will build a little more equity into your home. Not to mention any appreciation in the real estate value.

No such thing in a rental.

Answer 3

Since you would not be borrowing 100 percent - than your rate would be better than the rate you are currently paying. As long as your middle credit score is 500 or higher, you can get financing and the rate would be in the 8's.

Talk with a broker, a broker underwrites for many company's (I underwrite for 150 companies) so I only have to pull credit 1 time, and they look at my credit. A single lender (not a broker) has programs available, but they may not be able to help you and your situation, so you go elsewhere, and than that person pulls your credit (see what I mean.) If you shop, your credit is pulled and that is considered a soft pull, for a 30 day period. Just like shopping for a auto, it is good for 30 days. If you apply for a credit card, that is considered a "hard" pull and it drags down your credit score. When looking for a home, please do not apply for a credit card, Department Charge Card, Gasoline Card or make any major purchases, like a auto, etc. This will pull your credit down.


Try to find someone (broker) that will pull your credit one time, and submit your loan application to company's that will go off his credit report. By the way, a loan application is called a 1003, and they will issue you a GFE (Good Faith estimate, with-in 3 days, that is per the RESPA laws, and the TIL (Truth in Lending). The GFE will tell you the up-front closing cost associated with your loan. The TIL will tell you the terms, rate associated with your loan. This is a estimate only - not the final - but it does help you figure things out.

Answer 4

Interesting question, I'll be interested to see the thoughts on this. I would be inclined to work on the credit score and rent for a year...clean things up and then go house hunting...you wont be building equity, but the money you save on a better percentage rate as a result of better credit score could largely offset that. I think housing prices will soften some too and you could get in at a better price waiting a bit.

Answer 5

Will you have to pay capital gains on the 100K if you don't reinvest it? Also note that interest rates on home equity lines of credit usually are higher those that you would get on a mortgage.

I really doubt that waiting for your credit score to improve, other than a few months (to allow for more foreclosures to occur) will help you much because buying is investing (or forced savings) which is always better than renting, which is just spending.

Answer 6

I agree, this is an interesting question. Given that most areas of the country are in a stagnant to moderately decling real estate market right now, I would be inclined to agree with the suggestion that you work on cleaning up the credit for 6 months to a year and then trying to buy something. In the current market, prices aren't increasing and, in some case they are declining. Thus, it is unlikely that you will be priced out of the market and you are not missing much in terms of appreciation. Cleaning up your credit may improve the interest rates you gett by as much as 2% to 3%. This will make a HUGE difference in you monthly payment.

Answer 7

It's complicated but you can figure it out yourself. You have to go out and see what kinds of % you are being offered for new housing loans, and what kinds of mortage payments you'll be making on the homes that are in your price range. Then find out how much you can expect your home to appreciate in value. Depends on what market you're in for sure.

So you then find out how much to rent a place, and what kind of % profit you can make by straight up investing your money in stocks or bonds or whatnot.

You balance the numbers on one side against the numbers on the other and one way is going to make you more money. It will have it's own risks and reqards which you will have personal desires to tolerate or not as well, so that's something to consider.

I'm no financial analyst but if you do the numbers diligently they will tell you which is the right way to go. Probably if I had 100K I would take it to a financial analyst and ask them what to do. They know better than anyone on Yahoo! LOL.

Answer 8

No. Buy now and then refinance when your credit score goes up. Property values in most areas rise on a continual basis. If you wait to buy till later, you're going to be paying more for the property, negating any savings you would receive from financing at a lower rate. However, if you buy now and refinance later, then you get the benefit of buying at today's prices, putting your monthly payments towards a home you own instead of a home you're renting and then you can refinance at a lower interest rate when rates drop and your credit improves.

Answer 9

Buying a home will improve your credit score as long as you pay it on time. Pay your house 1st before any other bill. If you miss a payment on your home it hurts your current bad. After you purchase the home wait one year worth of on time payments, then refinance with a much lower rate. Loan Officers will be begging you to refinance and do almost anything to get you refinanced.

Hope This Helps.

Answer 10

Lender will give you money for sure. Probably charge you a higher interests rate and extra insurance on the loan for not having the down payment or good credit.

Would you consider delaying your plan? As housing market continues to slump, it might save you 10% simply by waiting for a few months. Another way to look at it, you can increase profit by 10% when you are ready to sell it.

http://money.cnn.com/2006/09/08/real_estate/caught_in_the_bubble/index.htm?postversion=2006090814
http://money.cnn.com/2006/09/05/real_estate/Ofheo_home_prices/index.htm?postversion=2006090514

As housing market continues to slump, if you don't plan to delay your plan, please interview several and pick a good realtor or agent.

Bad ones will talk you into buying the largest property at your credit limit. Good ones will find you a good deal (Sellers are offering discount and incentives now).

Try to stay away from Adjustable Mortgage, because 30 year fix mortgage rate is very low right now. There is no reason to use Adjustable loans except fatter commission for loan agents.

Interests only loans are not good iether. Mortgage payment consists of two parts: interests and principal. Interests are like rent, which doesn't add to the equity to your house. It simply disappear as your pay it. If you want to use interests only loans, might as well rent, especially during market downturn, because housing price won't appreciate.

Finally, for tax benefits, talk to your CPA or tax accountant. Do not consult finance with realtors or agents. They get commissions when you sign the check!

Good luck!

Good article when you want to put in bid, negotiation.
http://biz.yahoo.com/brn/060909/19463.html

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Different perspective:

It is a myth that renting is always worst off than buying.

Rent vs. Buy as Housing Market Continues to Slump

As housing market slump, it is easier to calculate "Rent vs. Buy" scenario. Because "appreciation" is no longer a factor.

Mortgage payment consists of two parts: interests and principal. Interests are like rent, which doesn't add to the equity to your house. It simply disappear as your pay it.

If interests portion of the mortgage payment is roughly equal to rent of equivalent property, then it is a decent buy.

For example, let's buy a $500,000 condo with 0% down and apply interests only loan (just like renting a place). Mortgage payment would be $3250/month. It is a bad buy, because you can enjoy same property for $2000/month.

Please note that I assume the tax benefits from home cancel out fees from home association and property tax. For more accurate calculation, consult with your CPA or accountant. But NOT your realtor, whom will say anything to get the deal to go through.

And again, if you like a particular property, then paying more may be reasonable. You are the only person who can decide how much more premium you are willing to pay.