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Renting...for now

While more people are opting to rent instead of own, they still plan to buy eventually

Since the housing downturn, the ranks of renters have swelled. Now, slightly more than half of Americans who plan to move in the next two years say they intend to rent, according to a study by the Demand Institute, a nonprofit consumer research organization.
Some are renting because it is the smart thing to do. "If you're uncertain about your job security, it's better to rent," says Barry Zigas, housing expert with the Consumer Federation of America, a consumer-interest group.
Other renters can't qualify for financing to buy a home, according to the Demand Institute report. But the renting revival looks to be temporary, since some 70 percent of those surveyed who plan to move three to five years from now say they hope to buy a home then.
It's fortunate that buying is still favored over renting, since middle class households have traditionally accumulated most of their wealth by building home equity, Zigas says.
That equity wealth is created when owners diligently pay down their mortgages while watching the value of their homes rise. This strategy will still work in years ahead, says Barbara Butrica of The Urban Institute, a nonpartisan research group. Butrica warns that homeowners shouldn't expect home prices to make great leaps, but they will keep pace with inflation.
In fact, diligence and patience are what many renters need if they are ever to become homeowners.
Here, a look at what renters can do to prepare for buying later:
Concentrate on Credit
The Demand Institute study predicts that today's stringent lending standards will relax somewhat by 2015.
Right now, most borrowers need at least 10 percent of the purchase price as a down payment to get a conventional mortgage, and a FICO credit score above 700, says Keith Gumbinger of HSH Associates, a mortgage research firm.
If standards relax — and Gumbinger isn't sure they will by 2015 — borrowers may be able to make just a 5 percent down payment, but unless they have a credit score over 700, they probably won't qualify for a competitive rate offer.
Today, 47 percent of the population has a FICO score under 700, says John Ulzheimer, president of consumer education at SmartCredit.com. The full range of FICO scores is 300 to 800.
For some individuals, boosting a score by 50 points might take less than a month; they could simply pay off a credit card balance and see an increased credit score. For those who have a score battered by late or missing payments, it could take years of faithful on-time payments to repair it, Ulzheimer says.
Set Up Savings
Renters trying to accumulate a down payment for a future purchase could be undermined by more immediate spending temptations.
Keep your eye on the prize by attending home-buying classes, suggests Heather Blankenship, program coordinator with Neighborhood Housing Services of Chicago. "At the website, www.hud.gov, there's a list of certified counseling agencies that offer seminars. Most are free, and you can attend as many as you want," she says.
Analyze the Offers
Contracts known as "lease to own" or "rent with option to buy" are gaining popularity, given the number of renters with buying aspirations, notes Chris Kukla, senior counsel for government affairs at the nonprofit Center For Responsible Lending.
He strongly advises renters to take these contracts to an attorney, since some contain significant problems.
For instance, these contracts may require the renter to pay a higher monthly rent, with the extra money going into a fund towards a later purchase. Among potential pitfalls, the home to be purchased may not have clear title or the renter doesn't have a realistic chance of getting a mortgage at the end of the option period.

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