Invest Real Estate

How To Buy A House Right Now: Everything You Need To Prepare

Pam Krueger  |  August 18, 2020

Ready for a move, and a super low mortgage rate? Here's everything you need to know to compete in a hot real estate market and buy a house right now.

There’s nothing like spending a lot more time at home to get you thinking about all the reasons to consider moving. Thanks to the coronavirus pandemic, lots of people are discovering that their homes have to serve a whole new set of different needs than in the past — now it’s about finding space to work, where to get the kids ready for school (or where they may be going to school for at least the next several weeks), where to exercise or just how to find space and privacy for some solace. A small house or apartment in a bustling city that served everyone’s needs may now feel too tight to serve all these new purposes — plus all the downtown entertainment, culture, restaurants and social opportunities that attracted you to the area in the first place are much smaller now. People are on the move from the city out to the suburbs or even rural areas where they can find a back yard and also save money. Maybe you’re wondering if it’s time to buy a house right now.

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In a late July survey by real estate site Redfin, three-quarters of home buyers said the coronavirus pandemic has impacted their home-buying plans, and one-quarter of homebuyers said it caused them to move and/or speed up their moving timeline. What they’re looking for in a new home has changed, too. When Redfin asked what impact the coronavirus pandemic had on their home-buying preferences: 21% of those who want to buy a home right now said they want designated space to work from home, 21% want more outdoor or recreational space, 13% want a bigger yard, and another 13% want to search for a home in a different area. And other people want to move because of financial challenges from the pandemic – 17% of the homebuyers surveyed want a less-expensive home. If you’re working remotely now or lost your job and need to start over, you may have more flexibility to move to a less-expensive area without having to worry about a long commute.

If you’re thinking about buying a new home now, it’s important to consider how your needs may change again over time, and carefully think about what you can really afford, especially during a time of economic upheaval. Since there is more demand for property outside of larger cities, it’s most important to get your financial house in order so you can move when the opportunity presents itself and take full advantage of these super low mortgage rates. In other words, get yourself ready to compete in a hot real estate market.

It’s a long term proposition; Think beyond this moment

Will your employer eventually expect you to go back to the office everyday? Where will your kids go to school when in-person learning resumes? Consider these longer-term issues before making such a big change in your location and having to pay the extra costs   to actually move. Financing a home is a huge financial commitment. You’ll want to know that it will be attractive both over the short-term as well as in a post-COVID world. You won’t want to get stuck with an unbearable commute if your office opens back up again.

Get clear on what you can afford

Realtors may show you houses beyond your budget, but they aren’t the ones making the payments. Shop for homes that are under your budget. Lenders generally look for a debt-to-income ratio of 43% or less. To calculate that number, add up your monthly debt payments and divide them by your gross income (your income before taxes and other deductions). Again, just because a lender may let you borrow that much doesn’t mean you should. Think carefully about how the mortgage, taxes and insurance all fit within your cash flow, and what would happen if you or your spouse lost your job. In a period of financial uncertainty, there’s no reason to create unnecessary financial stress. If your aim is to buy a house right now, it pays to be conservative with how much you borrow, even though mortgage rates are so low.

But also keep in mind that if you’re having financial trouble now, moving to a smaller house in a less-expensive area can be one way to help get your finances back on track. You may want to downsize, or ‘rightsize’, put the profits toward your savings, and have smaller payments every month, too.

Start meeting with a qualified real estate agent well before you plan to buy a new home so you can start to assess what you can afford and have the time you’ll need to save for a down payment, and to get pre-approved for financing. If you’re in a particularly hot real estate market, find out what you can do ahead of time to make your offers stand out.

Don’t forget the other costs of homeownership

When considering the cost of moving to a new area, the extra expenses beyond your mortgage payments add up fast. Property taxes, homeowners insurance, upgrades and a never-ending list of ongoing landscape and routine maintenance costs. And you may have some other new expenses, too – your car insurance rates may rise or drop depending on where you’re moving, and you may have new commuting costs if you move far out and return to the office. An inexpensive home at the time of purchase could end up costing a lot more money every month.

Build up extra cash

COVID-19 taught us an important lesson about having enough emergency cash on hand in case you lose your job and need money to cover your living expenses. Unless you’re selling a home with a lot of equity, in addition to your other savings, you’ll need to start socking away money for a down payment. Lenders still look for you to have a 20% down payment to avoid having to pay private mortgage insurance. And on top of that, you’ll need to set aside extra money to help cover the cost of repairs and other unexpected expenses that inevitably come with homeownership. It’s generally a good idea to keep at least six months’ worth of expenses in an emergency fund. During a recession like the one we’re in right now, you can sleep at night knowing your monthly bills can be paid should your income drop.

Protect your good credit

So many people are struggling with financial difficulties because of the coronavirus pandemic – they may have lost their jobs, were furloughed, have to live on reduced income, or have new child-care expenses and other extra bills they hadn’t anticipated. Don’t let those changes damage your credit score. If you have trouble paying your bills, reach out to all your creditors before you’re late or miss any payments, so you can protect your credit record — which will be important to help you qualify for better mortgage rates whether you buy a house right now or down the road. If you haven’t already, now’s the time to read your credit report to see what’s being written about you. It’s good to check your credit score but also important to read the narrative that has all the details.  This is how you can spot any suspicious activity such as inquiries and get ahead of them.  Identity thieves have been out in full force during the pandemic. There’s also no downside to contacting the three main credit bureaus (Experian, Equifax and TransUnion) and asking to place a freeze on your credit until you’re ready to apply for a loan. It’s free and doesn’t hurt your credit score and will prevent anyone from accessing your credit. You can usually get a free copy of your credit report from each of the three credit bureaus every 12 months at www.annualcreditreport.com. Because of the coronavirus pandemic, you can now get a free copy as often as once a week until April 2021.

Improve your credit score

Your credit score makes a huge difference in your mortgage rate. There are several kinds of credit scores, but the most common one was created by FICO and ranges from 300 to 850. You usually need a score of 740 or better to qualify for the best rates. Even if your credit report looks good, find out how that information translates into your credit score. You can get a free copy of your score at websites such as CreditKarma.com, CreditSesame.com and from credit-card companies and banks. These scores may be different from the FICO score mortgage lenders use, but it can still give you a good idea of where you stand and what you can do to improve.

Paying your bills on time, over time, is the most-important part of your score, and the amount of available credit you’ve used (called your “credit utilization ratio”) also is a major factor. It’s generally a good idea to keep your credit-card balances to 30% or less of your credit limit, and you may want to reduce the level even further right before you apply for a mortgage. You can find out more about the factors that affect your credit score at www.myfico.com/credit-education.

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