Research by Zillow, an online real estate company, found that most Americans who are currently renting either do not have the financial means or a high enough credit score for home ownership.
As home ownership approaches a 50-year low, what will the housing market look like in the future, and what does this mean for the average American trying to reach the dream of owning a home?
Read more: 15 ways to shop for the lowest mortgage rate
Gone are the days when one income was more than enough for a mortgage, bills and other expenses. Monthly rent has increased 7% over the last several years, while household income dropped 9% over the same time period, according to Yahoo finance. Also, many rental complexes increase the rent once your lease is up.
So the hurdle to home ownership has gotten higher.
In addition to the financial obstacles to home ownership, much has changed in the economy. Jobs are much more transient, meaning many people move to different locations to find a good paying job, and most of us don’t stay at companies 20 and 30 years like we used to. So, renting has become the alternative.
But according to economists at the Urban Institute, fairly soon we’ll be facing a rental housing shortage, which will drive prices up. In fact, the Urban Institute predicts that 59% of all households formed between 2010 and 2030 will rent, causing an “affordability crisis.”
Preparing to buy a home
When renting starts to become less affordable, what can you do? It may be time to look at ways to prepare for home ownership, as well as considering alternative options for home ownership.
1. Improve your credit score.
Your credit score plays a big part in getting approved for a home, and getting an affordable mortgage. But even if your credit is low, there are things you can do to increase it. (If you don’t know what your credit score is, here’s how to check it free!)
First, pay your bills on time. This is a big part of increasing your credit score, since 35% of your credit score is based on your credit history. Then, try to pay down balances as much as you can. Amounts owed in relation to how much credit you have comprises 30% of your credit score. So it’s better to keep your balances low — and most importantly, paid in full each month whenever possible — this is crucial for increasing your score, as well as maintaining a good score.
2. Create a plan to save more and spend less.
One big key to moving toward home ownership is to have enough money saved to afford a down payment — on top of the extra cash you should have set aside in case of an emergency. But if you don’t have the money now, what other things can you do to earn more income, or spend less money? Some ideas include cutting costs, working a second job, or finding easy ways to make extra cash on the side.
If your job is relatively stable and you plan to stay in the same geographic location, saving for a home might be a smart move, especially since prices for rentals are expected to go up. Remember, as long as you buy a house you can afford, every payment you make will be increasing the equity in your home, but with renting, it’s assured you’ll never see the money you pay in rent ever again.
Read more: 26 ways to make extra cash each month
3. Check out alternative loan options.
Though many loan programs require a down payment of 10% or more, there are other loan programs that do not. For example, Bank of America has a loan program that requires just 3% down. Though there are some income restrictions, this program allows buyers to bypass private mortgage insurance (PMI), which can cost several thousand dollars over the life of the loan, in addition to the low down payment. An FHA loan can also get you in the door with a 3.5% down payment, but you’ll have to pay PMI for the life of the loan, unless you’re able to refinance or unless you were able to put at least 20% down at closing.
4. Discover alternative means of home ownership.
The tiny house movement has become a big thing, with regular folks opting to live in small 100-600 square foot dwellings costing a fraction of the price of a traditional home. Millennials and baby boomers alike are attracted to the idea for simplicity’s sake and the biggest reason: saving a big chunk of change. In fact, developers are now creating tiny house communities!
But tiny homes are not the only kinds of dwellings offering people lots of savings. Shipping container homes, as they are called, are cutting costs of building by using materials such as shipping crates and pallets that cannot be recycled easily. In fact, you can even buy them on eBay!
Another trend when it comes to efficiency is self-sustaining solar homes, which cut electricity costs completely out of the equation. Innovations like this can save you big money over the long-term.
Read more: 5 reasons to join the small house movement
5. See if ‘rent-to-own’ might work for you.
Though they might be difficult to find, if you’ll already be renting, why not try to find a rent-to-own property?
These function like a traditional rental property, but at the end of the lease term, the renter has the option to purchase the home. Depending on the terms, this situation can be ideal for those with less-than-perfect credit or who do not have enough money for a down payment.
But, when considering this alternative, you’ll want to have a legal professional look over your lease before you sign it. Sometimes the agreements, called “lease purchase” agreements are an obligation to purchase the home once the lease expires, versus just the option.