WHAT TO EXPECT WHEN BUYING A HOME DURING A PANDEMIC
At this point, we’re used to our everyday grocery shopping looking different thanks to the pandemic, but what about buying a home? Here’s a quick look at how making a real estate transaction may look different than usual.
→ While there are still plenty of great homes available on the market, it’s not quite as saturated as we’re used to at this time of year. With lots of buyers ready to make a purchase, you’ll want to do whatever you can to stand out as a more attractive offer - one easy way to do this is by getting pre-approved for a mortgage!
→ The process may take a little longer. With safety precautions in place during home showings, inspections, and appraisals; the whole process is made safer for everyone, but might add a few days to the transaction timeline. Additionally, legal processes and filing paperwork might be slightly delayed due to any social distancing protocols and staff shortages in the respective offices.
→ Get ready for great rates! During times of economic uncertainty, one thing you can count on is a sudden change in interest rates and loan availability. Continue reading to see what you could qualify for with your specific financial situation.
LOOKING TO BUY? HERE’S WHERE TO START
Obtaining pre-approval for a home loan is always a good idea, but it’s even more important now more than ever! Sellers are looking for signs of security when closing the deal on their home. Having a lender lined up with a pre-approved mortgage shows them that you’re serious about your offer and aren’t likely to drop out of the deal.
Identification: Lenders will just need to see your driver’s license, ID card, or passport to verify who is applying for the loan. They’ll also need your social security number to run a credit check.
Income Information: You’ll need to bring several documents that verify your employment and annual income. These include your two most recent pay stubs, your tax returns, and W-2 forms from the past two years. You’ll also need documents regarding any secondary income including bonuses, dividends, profits from rental properties, and child or spousal support.
Proof of Assets: Additional assets are a great way to qualify for a higher loan amount. Assets include any bank or investment account balances. You’ll need to bring in statements for these accounts for the past two months. Additionally, If you have friends or family making contributions to your home, you’ll just need to bring a gift letter from the contributor stating the amount of their gift. Be sure to wait until your lender instructs you to transfer the gift amount into your account.
Debt Documents: Lenders need a thorough look into your financial standing, including what you already owe. Make sure you bring documents for any debt payments you’re currently making including student loans, car loans, credit card debt, or another mortgage. They need to know the outstanding balances for each debt and the monthly payment amount to determine your debt-to-income ratio.
Other Housing Information: If you’ve been renting your home in the recent past, lenders will need to see your rent payments for the past year and contact information for your landlord.
If you’ve filed for bankruptcy or had a previous home foreclosed, you may need to wait a little longer before qualifying for a loan. Ask your lender about your specific details! If you don’t have a lender, I have several highly qualified lenders to use.
A CLOSER LOOK AT CREDIT SCORE + DOWN PAYMENT REQUIREMENTS
In the current market, we are seeing incredibly low mortgage rates. While this may seem like great news for all homebuyers, those great rates may only be available to those with higher credit scores.
Here’s a quick break down FICO Credit Ratings:
300-579: Very Poor
580-669: Fair
670-739: Good
740-799: Very Good
800-850: Excellent
Typically, the minimum credit score needed to secure a home loan is around 620, in the middle of the “fair credit” range. However most big banks are tightening their credit requirements during these uncertain times and requiring credit scores of 700+ from their borrowers and up to a 20% down payment. In fact, over 90% of home loans this April went to borrowers with credit scores above 700. This means those who have anything below “good credit” will need to work a little harder to obtain a mortgage at these rates.
How to Build Your Credit ASAP:
- Pay off all delinquent and past due accounts
- Stay on top of all accounts and pay BEFORE the due date
- Don’t close your accounts - leave them open to continue building credit life
- Avoid opening new accounts and getting new credit checks
- Monitor your credit with safe websites that don’t use a hard credit check to determine your score
Keep in mind, not all lenders are using these high requirements. While most of the big banks are using the same guidelines, smaller banks, credit unions and mortgage brokers may be able to offer you a better deal and work with your financial situation! Be sure to know your options, shop around, and get the best deal on your loan!
Other Home Loan Options:
If you’re just not able to bring your credit up and put 20% down for a traditional home loan, you can still qualify for other home loans! The interest rates might not be as low as the traditional options, but lenders will be able to work with your current financial situation.
FHA Loans are great for first time homebuyers with a challenging credit situation or who might not be able to make a large down payment. These loans are backed by the Federal Housing Administration which is why lenders are able to offer them under less desirable circumstances.
To require for these loans, you’ll need either:
- A credit score of 580+ and just a 3.5% down payment OR
- A credit score between 500-579 and a 10% down payment
Something to consider is that you’ll need to pay a Mortgage Insurance Premium when you take out an FHA Loan. If you make a down payment of 10% or higher, you’ll only need to pay the MIP for the first 10 years. However if the down payment is anything less, the MIP will last for the lifetime of the loan.
HOW TO DETERMINE WHAT YOU CAN AFFORD
Not sure how much you can afford to pay for home? If you’re able to take advantage of the low interest rates we’re currently seeing, you may be able to afford a more expensive home than you think! You’ll need to take multiple factors into consideration, but you can get a good estimate based on your current finances.
Here are three basic ways to give you an estimate on how much you can afford:
- Three Year’s Income: This is the easiest way to estimate the home value you can afford. Simply multiply your total household gross income by three to determine what home values you should be looking at
- 25% of Income: Another way to estimate how much you can afford is by looking at the down payment rather than the home value. For this method, you’ll need to take other factors into consideration like the interest rate you’ll receive, and if you plan on doing a 15 or 30-year loan. Simply, divide your monthly gross income by four to get your target monthly payment amount. From there, you can figure out how big of a loan you can take out, and when you plan to pay it off to stay at your target payment.
- The 28/36 Percent Rule: Using this rule will give you the closest estimate to how much you can afford, but may be a little tricky to calculate on your own. The 28/36 percent rule states that your monthly housing expenses (including homeowner’s insurance and property tax) should be less than 28% of your gross monthly income. On the other hand, it also states that the same housing expenses should be no more than 36% of your monthly debt payments (including car payments, student loans, and outstanding credit card payments).
While these are great tools to help you estimate how much you can afford, the only way you’ll know with certainty is by partnering with your lender and discussing your specific options. This is another reason why it’s important to get pre-approved for a loan first. That way, you’ll know exactly what homes you can afford when you're ready to start house hunting!
CURRENT MORTGAGE RATES
Traditional mortgage rates have never been better for buyers! There will always be multiple factors to consider and different lenders will offer different rates, but we are currently seeing interest rates around 3.5%! The year started off with rates closer to 4%, but once the pandemic started to escalate, rates dropped fast. While the market is known to change fast, we still believe these interest rates will stay in the 3.5-4% range for the rest of the year. For some, the rates can be much lower. Make sure you take advantage of them while you can!
However, with such high demand comes some limitations. Buyers who fall in the Very Good or Excellent Credit ranges should have no problem getting a loan at these great rates, but those with troubled credit will most likely be paying a little more in interest but there should be no reason not to jump in while the rates are so low overall.
TIME TO BUY
Ready to make the most of the current real estate market? Now more than ever, you’ll want a professional Realtor’s help to navigate the constantly changing real estate market. Let’s connect to discuss how I can help make the current market work for you!
As a RE/MAX Hall of Fame top-selling associate with 37 years of experience in the real estate business, I’ve seen the real estate market in every condition imaginable. I have been recognized as a Five Star Professional for 10 consecutive years for my excellent customer service, and take great pride in ensuring each and every one of my clients are completely satisfied with their real estate transaction. Especially in a rapidly changing market like the one we’re in now, I will guide you through the process every step of the way.
I believe that buying your dream home should be a truly exciting experience no matter what the current market looks like, and I’d love to help you with it. By finding the perfect community for you, safely showing you all your options, and negotiating to get you the best price; I’m here to make your home buying dreams come true!