Landlords Charging More Than Lenders?
Through most of history, it has cost more upfront to buy than to rent.
There’s the initial downpayment, and closing costs can be expensive, too.
But a reversal is underway.
Rents and move-in charges are rising, while downpayments are dropping.
Today, your landlord may charge you more to move in than your lender.
Move-In Costs Skyrocket
If you’ve looked for an apartment lately, you may have noticed something.
The rental market is strong, and the competition fierce.
In a “down” market, you can find landlords that don’t require last month’s rent, and accept a minimal security deposit. They’ll do anything to keep units from going empty.
But the economy is getting healthy, and young workers sidelined by the recent recession have found jobs. They want their own place to live.
Unemployment is around 5% and worker’s wages are increasing. There’s little incentive for today’s workers to continue living with their parents or in a friend’s basement.
A recent Census Bureau report backs that up. About 1.1 million new households formed in the third quarter of 2016, up 16% from the quarter prior.
The demand is straining the rental market.
Now, landlords can charge a premium not only in monthly rent, but in move-in charges too.
In fact, in Seattle, new legislation is being proposed that would limit upfront fees landlords can charge, and create payment plans for last month’s rent. The upfront cost of renting is getting out of control.
These charges are often based on the apartment or home’s monthly rent, so rising rents don’t help.
According to ApartmentList.com, a two-bedroom home had a nationwide median price of $1,270 per month in November 2016, two percent higher than the year before.
Based on that price, here’s what you can expect to pay to move into an apartment:
- First and last month’s rent: $2,540
- Security deposit (equal to one month rent): $1,270
- Application/credit check/background check fees: $50-100
- Pet deposit: $200
The total cash needed to move into an apartment could be up to $4,100. Not cheap by any measure.
Renting In Expensive Cities
Keep in mind that these number are based on the national median price.
If you plan to rent in an expensive city, such as Seattle, Miami, Boston, or Washington, DC, you could pay a lot more to move in.
Prices are higher, yes, but competition is tougher, too.
Landlords are unlikely to give you any breaks on upfront fees.
Let’s look at an example of estimated cost of moving into an apartment in Seattle, Washington.
Per ApartmentList.com, a two-bedroom will run $2,350 per month. Move in costs would add up as follows, assuming no pets.
- First and last month’s rent: $4,600
- Security deposit (equal to one month rent): $2,300
- Application/credit check/background check fees: $50-100
Upfront cost would ring in at about $7,000.
Surprisingly, you may be able to buy a home near Seattle — or your city of choice — for less out of pocket.
Upfront Costs Of Buying A Home
Thanks to zero-down loan options, out-of-pocket expenses are low in today’s market.
The USDA home loan is one such option. It is a 100% financing home loan for which credit and income requirements are lenient.
For eligible U.S. military member, the VA home loan is a good option. Like USDA, it requires no downpayment and comes with some of the lowest rates of any loan product.
You can even use FHA as a zero-down loan, if you receive a financial gift for the required 3.5% downpayment.
To move into a home, assuming a zero-down loan, you would need cash for the following items.
- Lender closing cost
- Third-party closing costs
- Prepaid taxes and insurance
According to a recent Bankrate study, lender and third-party closing costs averaged around 1% of the loan amount each.
So, how much is the loan amount?
A search on Realtor.com shows USDA-eligible properties near Seattle for $425,000. The USDA loan finances 100% of the purchase price, so the loan amount would approximately equal the price.
Beyond closing costs, add on “prepaid items” — property taxes and homeowner’s insurance — that the lender requires you to deposit at loan closing.
Based on averages, then, a homebuyer purchasing in a USDA-eligible area near Seattle could expect to pay the following costs out-of-pocket.
- Lender closing costs: $4,250
- Third-party closing costs: $4,250
- Prepaid items: $3,000 (six months’ taxes and fourteen months’ homeowners insurance)
That’s $11,500 — more than it costs to move into a rental.
But, unlike landlord costs, you can reduce your out-of-pocket fees when buying a home.
Ways To Reduce Upfront Home Buying Costs
You can request a lender credit. In this arrangement, the lender pays all or part of your closing costs for you. The lender raises your rate slightly above market rates, and credits you the extra profit generated from doing so.
Even with a higher-than-market rate, you still end up with a very affordable home loan. Mortgage rates are currently very low.
A lender credit could bring your upfront costs down by about 1% of the loan amount, or $4,000. That brings costs of ownership within the range of upfront rental costs.
But there are ways to reduce costs even further.
- Request a seller credit for closing costs
- Get a gift from a family member
- Finance closing costs, if using USDA, and appraised value is higher than the purchase price
Get creative. There is a good chance you could own a home for less money out-of-pocket than it takes to rent.
Here’s an example.
- Closing costs: $11,500
- Lender credit: -$4,000
- Seller credit: -$1,000
- Gift from family: -$1,000
- Total out-of-pocket cost: $5,500
That’s $1,500 less than it would take to start renting, taking the example of the Seattle renter.
If the down-payment and closing costs are all that are keeping you from buying a home, compare real upfront costs.
Owning a home may not be as expensive as you think.