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Course: Financial Literacy > Unit 14
Lesson 1: Renting vs homeownership- Renting versus buying a home
- Advantages and disadvantages of owning vs renting
- Owning vs renting
- The true cost of renting a place
- Requirements for renting or buying a home
- Things to consider when renting a home
- Renting requirements
- Things to know before buying a home
- Buying requirements
- Requirements for renting and buying a home
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Requirements for renting or buying a home
Figuring out how much you can afford to spend on housing can be a bit confusing. People often say you should spend around $30\%$ of your income on housing costs, but some landlords ask for your income to be three times the rent. Let's break down these ideas and what they mean for you.
Using the 30% rule for housing costs
The rule is a common one for both people looking to rent and people looking to buy a home. According to this rule, your housing costs should not exceed of your monthly income before taxes. For example, if you're bringing in a month, try to limit your housing costs to around .
"Housing costs" include not just your rent or mortgage payments, but also homeowners or renters insurance, property taxes, utility bills, and any maintenance or repair costs. So, when thinking about the rule, you should think about all your housing expenses together, not just rent or mortgage.
So, back to the housing budget. This means you might need to look for a home or apartment that costs less than to rent or buy, leaving wiggle room for other housing expenses that you'll need to cover. This practical approach will help you find a home that truly fits within your budget.
The 3x rent rule
When renting, landlords often use the 'triple rent' rule. It's very similar to the rule - it is just worded differently. If an apartment rents for , the landlord might want to see that you earn at least ( times the rent) a month before taxes. This rule is also geared towards ensuring that you are left with plenty of money for groceries, phone bills, car payments, and other living expenses.
Why credit scores matter
The rule is a good starting point to see what you can afford for housing. But, being able to pay for rent or a mortgage is just one part of the picture. Your credit score is another big piece.
Your credit score is like a report card of how you've used money in the past. It shows if you've paid your bills on time or if you've had any big money problems. Landlords and lenders check your credit score to see if you're a safe bet.
Let's say you make a month. Using the rule, you could afford to spend a month on housing. It might seem like finding a home for a month means you're all set. But if your credit score is low, you could hit a snag. A bank might see this low credit score and become wary. They might think it's risky to lend to you, fearing that you might not be able to make the mortgage payments on time. As a result, even though you can afford the mortgage payments, you might not get approved for a mortgage.
The same applies to renting. A landlord may hesitate to rent you an apartment or home if your credit score signals that you might struggle with making timely rent payments.
The final takeaway
When it comes to determining what you can afford, the rule and the triple rent rule are just guidelines designed to give you a rough idea. They are starting points that can help prevent you from stretching your budget too thin.
However, budgets are personal and flexible. Every person has different income sources, monthly expenses, and lifestyle needs. For example, if you're living in a city with good public transport and you don't have a car, your transportation budget might be much smaller. This saving could allow you to allocate more of your income to rent.
Ultimately, the goal is to find a balance where you're comfortable with your living situation and can manage all your expenses without financial stress. Understanding rental requirements is a key part of this personal finance journey. It's all about making informed decisions that best fit your financial situation and lifestyle.