Are you ready to transition from a renter to a homeowner?
Congratulations! You're a homeowner now, or you’re thinking about becoming one. Gone are the days of dubious landlords who don't return your calls when something breaks.
But if you've rented for years and years, you might be wondering: What happens next? Here's how to transition from renter to homeowner with practical tips and a few expert insights.
First: Are you really ready?
When you buy a home, you'll need to have some money saved (but not necessarily 20 percent), good credit, and an idea of your budget and desired area. But you'll also need to be ready for responsibility—and have funds left over in case of a homeowner emergency.
According to Deb Tomaro, a broker associate in Bloomington, Indiana, who also hosts the REAL Real Estate Today podcast, the biggest difference is the responsibility.
"Everything is fine and dandy until the furnace goes out," she says. "Then it's a big dose of reality."
Tomaro says homeownership really is the American dream and also helps owners build equity, but she urges her clients—and our readers—to consider all factors before transitioning to home ownership. So, are you really ready? Great! Let's get into the specifics.
Know Your Lease—and When to Give Notice
Before you let your landlord know you're moving into a home, be sure you know the terms of your lease and have an action plan. Does your landlord allow for subleasing? You might do some initial research among friends and family to see if they know anyone who could take over your lease. Coming to your landlord with a backup plan in place helps sweeten the deal.
If there isn't a provision for subleasing, what does the lease say about moving out early? Will you be required to forfeit your security deposit? Are you still responsible for rent through the duration of your lease term? Having a clear picture of your legal responsibilities will help you decide the next move. Often, an individual landlord might have compassion for you—after all, they're homeowners themselves.
In my own case, my landlord only asked that I keep my apartment clean and available for showings; she allowed me to exit the lease early, even though she wasn't legally obligated to. However, if you live in a large apartment complex, the rules might be more rigid. You also might have the landlord from hell (so that's why you want to move!). If this is the case, you may want to acquaint yourself with landlord-tenant laws for your state.
Once you learn the terms of your lease, make a plan for when to give notice. Some landlords require 30 days, others 60, and others still don't require notice at all, although a couple weeks is usually a common courtesy. Work with your real estate agent to try to time closing with when your lease is up—but don't get too stressed if your closing gets pushed back.
If need be, you can stay with friends for a few days or get a hotel. Long term, the priority is getting out of the rent cycle and into a home you own, so it's OK if those days don't match up quite right; although, again, this is why it's always important to have an emergency fund as you transition into homeownership.
Know the Difference Between Rent Payments and Mortgage Payments
A big difference between renting and owning is that your monthly payment won't be "throwing money away"—a common refrain from renters. Instead, you'll be paying down the principal on your home and building equity. There are some other differences between rent payments and mortgage payments.
While rent payments are collected on the first of the month for the upcoming month, mortgage payments are collected in arrears. You'll still pay on or around the first (depending on your lender, you may have up until the 15th of any given month), but you'll be paying for the previous month's mortgage payment.
When you first move in, that means you'll have a reprieve before you're required to start making mortgage payments. For example, I closed on my home in early January, and my first mortgage payment—after paying closing costs—wasn't due until March 15.
Feel the Freedom...
This is where things really get fun. Want to paint your bedroom neon orange? Go for it. You don't even need to ask permission. Owning your own home means getting to make every last choice—from paint color to kitchen tiles to landscaping and everything in between—on your own terms. You can put your stamp on it, even if that stamp is neon orange.
…but Get Ready to Stay in One Spot for Awhile
"When you own, no one increases your rent, refuses to make repairs, or decides to not renew your lease," Tomaro says. "[That] kind of stability can really enable you to put down roots and create home as opposed to just having a place to live."
On the flip side, you won't have the same kind of flexibility you might have become accustomed to as a renter. While you can always sell your house if something big comes up—a job transfer, a new baby, etc.—you won't be able to jump from one neighborhood to another the way you could've when moving was as simple as giving notice and finding a new apartment. You'll also probably accumulate more furniture, yard accoutrements, and just plain stuff that makes it harder to move.
Think About the Big Picture
Even if your credit is perfect, your savings are stellar, and you're itching to decorate on your own terms, Tomaro suggests thinking about a three- to five-year vision of your life before you start the homebuying process.
"If it includes joining the Peace Corps or going back to school full time, continuing to rent may be a better idea," she says.
And if you're not sure about that vision just yet, Tomaro implores her own clients to give it time and not give notice to their landlords too quickly.
"I've seen buyers come to me and have less than 60 days before their lease ends to find and close on a home," she says. "That ends up being a rushed process that doesn't always allow you to make the best choices."