You’ve been saving for a house by paying down your debt, working on improving your credit score, and cutting back on spending. For many of us, buying a home will be the single biggest financial milestone we hit. Owning a home can drastically improve your quality of life, and it can seem especially appealing now that many of us are working from home and expanding our families.
But now, the world as we know it has drastically changed. The coronavirus pandemic is making a lot of dreams feel out of reach, but if you’re wondering if you should put your goal of buying a home on hold, here are some things to consider:
Low interest rates encourage home buying
The real estate market hasn’t taken the hit that some were expecting considering the last recession — in fact, homes are selling faster than ever. With interest rates teetering near historic lows, this could be an advantageous time to buy. Low rates mean owning a home is in reach for many.
Expect increased competition and higher home prices
While real estate is still in hot demand for buyers, sellers are hesitant to put their homes on the market during a global pandemic. This translates to increased buyer competition. With demand now exceeding supply, the pandemic has resulted in an unexpected seller’s market. So while you could take advantage of low interest rates, you may pay a premium for your ideal home.
Unlike the last recession when savvy buyers were able to take advantage of rock bottom prices, the housing market isn’t slowing down during the current recession. In fact, according to Business Insider, in June 2020, lenders saw the highest number of mortgage applications in 11 years, and home prices are climbing. The hike in housing prices can be attributed to a few different factors:
- Low interest rates are driving consumers to the housing market.
- Buyers who were searching for homes in March when the pandemic hit put their home search on hold.
- At the same time, sellers are hesitant to put their homes on the market.
- Now, on top of normal seasonal demand, buyers who had put their search on hold are back on the prowl, along with new buyers who are feeling the need to have a bigger home for growing families and home offices.
With demand now exceeding supply, competition is high, resulting in higher prices.
Mortgage lenders may ask for larger down payments
One financial side effect of the pandemic is that it may be harder to secure a loan, and you may need to be prepared to put more money down. With the economic uncertainty and record unemployment rates, banks are looking for ways to manage risk, and one way to do that is to increase down payments. But having cash on hand is only one piece of the puzzle. Here are some things that lenders look at when reviewing applications for loans that you may want to consider:
- Low debt-to-income ratio – Borrowers with low debt-to-income ratios have a better chance of qualifying for a mortgage and lower rates (most lenders look for a ratio of 36% or less, although there are exceptions when the ratio can be higher).
- A large down payment – The more money you put down, the less of a risk you are to the lender and the less loan principal you need to borrow.
- Your credit score – Lenders evaluate your creditworthiness to determine your loan terms and interest rates, and your score plays a big role in whether you qualify.
With low interest rates in buyers’ favor, but increased competition driving up prices, how do you know if buying now is the right financial move for you?
Take into account your overall financial health
That final piece of the puzzle is your financial health, and what your overall financial portfolio looks like. While it is possible to buy a home right now, you might be better off waiting until you have a really solid financial portfolio and the competition in the marketplace dies down. You should be aware of your debt, have a plan to pay off your debt, and have even analyzed your spending habits.
So now, it’s really up to you and your personal priorities. It’s entirely possible that the best physical, emotional and financial decision for your family is to purchase a home now. But if you realize you have too much debt or have goals that would be set back if you buy a home now, you may want to wait.
Buying a home is a big decision in any market. Check out these tips on buying your first home.