August 26th, 2020 1:49 PM by Jackie A. Graves, President
The coronavirus pandemic has put many things on hold, but real estate continues to chug along. Sales and listings persist across the country, with some markets harder hit than others. And home prices are rising, throwing a wrench in the plans of those who thought they might be able to swoop in for a steal.
“Any thoughts of bargain-hunting in the aftermath of the coronavirus shutdown have proven to be a losing strategy,” said Forbes. “While it seemed likely that house prices would decline due to lack of sales activity, the opposite has occurred. According to recent statistics issued by Realtor.com, median listing prices are 5.6% higher than one year ago, and more than a full percentage point above the levels just before the COVID pandemic shut down the economy.”
But, interest rates are at historic lows, which stretches your buying power. “Buying now will give you an opportunity to lock-in the lowest mortgage rates in history,” they said. “Though it’s possible mortgage rates can fall even lower from here, there’s no way to know that will happen. But what we do know for certain is that interest rates are better now than they’ve ever been, making buying now more compelling than ever.”
If you’re considering buying your first home right now, here are the questions you’ll want to ask yourself.
Do you have job security?
For many of us right now, it’s hard to know what the future holds. But if you are in a profession that has some level of job security and you’re currently in a rental, you might want to consider making a move.
"If you're secure in your job and you've got some savings it's actually not a bad time to buy," said Consumer Reports. "There are going to be opportunities that probably didn't exist even just a few months ago."
Do the numbers make sense?
Your lender will establish if your debt-to-income (DTI) ratio meets the standard for mortgage qualification. “The 43% debt-to-income (DTI) ratio standard is generally used by the Federal Housing Administration (FHA) as a guideline for approving mortgages,” said Investopedia. “This ratio is used to determine if the borrower can make their payments each month. Some lenders may be more lenient or more rigid, depending on the real estate market and general economic conditions. A 43% DTI means all your regular debt payments, plus your housing-related expenses—mortgage, mortgage insurance, homeowner's association fees, property tax, homeowner's insurance, etc.—shouldn't equal more than 43% of your monthly gross income.”
Beyond your DTI, you also need to think about things like increased utility costs, landscaping, commute costs, repairs, renovations, and all that furniture you’ll want to buy to deck out your new place.
Do you have down payment funds?
Depending on your mortgage, your down payment could be 3% of your loan or 20%. That means coming up with thousands of dollars. If you don’t have the funds on your own, consider alternate means, like a family gift or an assistance program.
With mortgage rates so low, it may also make sense to dip into your retirement funds. “If you are a first-time homebuyer, you may be able to use some funds from retirement accounts (including IRAs and 401(k)s) for a down payment without incurring the typical early withdrawal penalties that come with taking money out of these accounts,” said Money Under 30.
How about those closing costs?
It’s easy to focus on down payment funds and forget about closing costs. But if you don’t weave this expense into your homebuying plan, you could end up with a big, expensive surprise at closing time. “Average closing costs for the buyer run between about 2% and 5% of the loan amount,” said NerdWallet. “That means, on a $300,000 home purchase, you would pay from $6,000 to $15,000 in closing costs.”
How’s your credit?
“The state of your credit is just as important as the state of your finances when it comes to deciding whether you are ready to buy a home,” said MoneyCrashers. “Your credit score determines whether a mortgage lender will give you a loan at all, as well as the rate. A low credit score can result in a significantly higher interest rate, which means that you will pay thousands (or hundreds of thousands) more over the life of the loan. Typically, you need a credit score above 720 in order to get the most advantageous rates.”
Do you have an emergency fund?
It’s always important to be prepared in case of emergency, but with so much uncertainty right now, it’s more crucial than ever. “You need to have a plan to pay your mortgage in the event that something does go wrong in the future, such as a layoff or a medical problem,” said MoneyCrashers. “Typically, this means you should have an emergency fund—at least a few months’ worths of living expenses—set aside before you buy a home. An emergency fund can also come in handy to help you to bear all of the unexpected costs that come along with being a homeowner. For instance, having cash set aside for repairs is essential, since you will not have a landlord to call when something goes wrong.”
Are you ready for the responsibility?
Let’s talk about those repairs. What are you going to do when the air conditioner breaks on the hottest day of the year? Or the roof leaks on the rainiest day of the year? Or your fence blows over in a storm or your toilet overflows in the middle of the night?
It can be a shock to the system to suddenly be in a position where anything that goes wrong is your responsibility to fix—or find someone to do it. If you’re not planning to learn a bunch of new skills, it’s a good idea to ask around in your neighborhood, or ask your real estate agent, for some local resources you can depend on.
Are you ready to make a long-term commitment?
Signing a lease for a year at a time means you can up and move pretty frequently. Want to move to the beach? The heart of the city? A whole new state? No problem! Buying a house—that’s more of a commitment.
Make you’re ready to settle down in one location and stay awhile. If you purchase in a place where homes are appreciating, you may be in a position to sell—and make money—in a matter of a few years. But going into a home purchase with that assumption may end up in disappointment.
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