Sponsored by Veterans United
The novel coronavirus has impacted nearly every area of our lives. Many of us are working from makeshift home offices, school openings in the fall are uncertain, and face masks are a wardrobe staple.
Even Uncle Sam changed course, canceling all military travel and PCS orders for an extended period. If you’re like most Americans, your financial plans may have been impacted as well.
But what if you were hoping to purchase a new home? Is now a good time to buy a house, financially speaking? Here are four things to consider.
1. Mortgage Rates Just Hit a Record Low
One good reason to buy a home this year is that mortgage rates are at an all-time low.
“Mortgage rates have hit record lows just as prospective homebuyers are venturing out again,” says Greg McBride, CFA, Bankrate chief financial analyst.
The Federal Reserve has committed to keeping mortgage rates low to help Americans weather the current economic conditions, so we will not likely see a spike in rates in the foreseeable future.
Keep in mind that there are different types of mortgages, from VA loans designed for veterans to first-time homebuyers (FHA loans), to privately owned loans. Options for repayment can vary, with most requiring that the borrower pay off the loan within 30 years. Fifteen and 20-year options are also available. Typically, shorter-term loans offer the lowest interest rates but require a larger monthly payment.
Wondering how much you can borrow for a mortgage? If you’re serious about buying a home this year, start the process by securing a pre-approval letter from your lender. Sellers and their real estate agents expect a pre-approval letter because it shows the buyer’s power to make a strong offer and get to the closing table.
A pre-approval letter indicates that the lender has checked your credit and verified the documentation to approve a specific home loan amount (the approval usually lasts for a particular period, such as 60 to 90 days). The lender will determine the amount you may borrow depending on your credit score, income, existing debt (student loans, car expenses, credit card payments), and obtaining verifying documentation. Find out more about the pre-approval process.
2. The Housing Market Is Still Growing, but More Slowly
What does the housing market look like right now? Before the public health emergency quarantined Americans to their homes, home prices had hit an all-time high -- the highest in more than a decade! And although the coronavirus has caused some sellers to reevaluate or postpone listing their properties, home sales are still strong across the country.
Real estate agents have rapidly adapted to the current conditions and have shifted to virtual home tours and online home closings. Realtor.com’s economists predict, “Home sales will rebound in the late summer and fall, driven by millennials eager to own a home of their own.”
Most experts agree that home prices will continue to increase, but at a slower pace than we have seen over the past few years. The median price for an existing home is expected to remain steady, rising just 1.1% this year. Before the pandemic, home prices were predicted to increase by 2% to 4%.
Record low mortgage rates will offset this slight increase in home prices, making this an excellent time to consider buying a home. Keep in mind, however, that appraisals and inspections may take longer to complete while new safeguards and procedures are put in place. Due to staff shortages, legal processes and paperwork, including title searches, may require extra time and effort.
Some lenders have adopted stricter qualifying requirements, including excellent credit scores and large down payments. If you have a poor credit score or have a significant debt-income ratio, securing a pre-approval letter may present more of a challenge. If you are a veteran or are married to one, you have the option of obtaining a VA loan that requires no down payment.
While learning about the housing market is essential, predictions should not affect your decision to buy a home. Instead, you should make the decision to buy a home based on your personal financial condition.
3. Take a Look at Your Personal Finances
The most important financial consideration when purchasing a home is the state of your own finances.
- Consider Your Credit Score
Most lenders require a minimum FICO score of 620, but due to the coronavirus, some conventional lenders are increasing the minimum credit score to 700 and requiring a down payment of 20%. The better your credit score is, the more likely you are to be approved for the most competitive mortgage rate available.
If you are considering a government-backed mortgage, like a VA loan, credit score benchmarks are typically lower than those of traditional mortgages. Clean up any delinquency on your credit report, get current with payments on delinquent accounts, and settle the debts to improve your credit score. Because funding for VA Loans is backed by the government, your credit score will have less of an impact on your mortgage rate and approval for your home loan.
- Can You Afford the Mortgage?
Affordability is based on more than just the monthly mortgage costs. First, consider the down payment. A down payment is the upfront payment the buyer provides to lock in the home purchase. The remaining amount owed is the mortgage. Lenders view the down payment as proof of your commitment to ownership of the property. Coming up with the cash for a down payment is often the biggest hurdle for new buyers to overcome. Most lenders require between 3.5%-20% of the purchase price as a down payment. There are exceptions, however. VA Loans and USDA loans are backed by the government and usually allow a zero downpayment.
Calculate the closing costs. These add up fast. Closing costs can be between 2% and 5% of your home’s purchase price. The good news is that homebuyers do not necessarily have to pay these costs out of pocket at closing. Many buyers who use their VA Loan benefit do not. Sellers can pay all of a VA buyer’s loan-related closing costs and up to 4 percent in concessions. There are similar allowances for the other loan types. Buyers can also look at building their closing costs into their purchase offer.
- Figure Out Your Actual Budget
As you consider your budget, be sure to include additional line items besides the mortgage, such as utilities, yard maintenance, and regular upkeep. Plan to set aside 1% of the purchase price of the home for these items. Start building an emergency fund for unexpected significant repairs, like replacing the roof, HVAC unit, appliances, or flooring.
To prepare for your home purchase, it’s a good idea to try out these new expenses before moving forward with a home purchase. Look at your current budget, estimate your new monthly mortgage payment, and set aside the difference between your current housing payment and your new projected mortgage payment. Make sure you are comfortable living on your spending plan.
4. Is Your Employment Status Stable?
With 13% of Americans registering for unemployment, it is vital to take a hard look at the stability of your current job. Lenders want to know that you have a reliable, stable income that is likely to continue for several years.
During a process called verification of employment (VOE), your lender will contact your employer to confirm that your employment information is current and up to date. If you’ve been with your company for several years, are currently fully employed, and feel that your job is stable, this might be a good time to buy a home. If you’re worried about layoffs, your confidence in your current position is wavering, or you are expecting any significant changes to your income, take the time to regain solid financial footing before buying a home.
If you are furloughed or laid off before closing, your loan could be disqualified, or your costs could substantially increase because lenders see you as a higher risk.
Consider a VA Loan
For those who qualify because of their military service (or spouse’s military service), it is possible to get help buying a home with little or no money down through the VA loan program. A VA loan is a mortgage that is issued by private lenders and backed by the U.S. Department of Veterans Affairs. Because a government agency supports the loan, lenders feel more comfortable in offering these loans. The purpose of the VA loan program is to help U.S. veterans, active-duty service members, and widowed military spouses buy a home. VA loans are hugely beneficial to qualified veterans because they make it possible to get a loan without a down payment.
You may be eligible for a VA loan if one of these is true:
- You served 90 days on active duty during wartime.
- You served 181 days on active duty during peacetime.
- You served six years in the Reserves or National Guard.
- You are a surviving spouse of a service member who died in the line of duty or as a result of a service-related disability.
How Do VA Loans Work?
Prospective buyers don’t need to know if they’re eligible for a VA loan to get started. Veterans can talk with a trusted VA lender to assess their eligibility for this benefit program and work toward loan pre-approval. Because the loan is backed by a government agency, VA buyers do not have to pay mortgage insurance or PMI.
Veterans United helps veterans become homeowners with VA loans. See what your military service has earned you.