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Guide to buying a home:
Is now the best time?

Fact-checked with HomeInsurance.com

Table of contents

COVID-19 has fundamentally changed the way we live. And with Centers for Disease Control and Prevention (CDC) Director Robert Redfield warning of possible seasonal recurrences of the virus, social distancing may be our new normal. 

So what does this mean for the state of the housing market? 

With stay-at-home orders preventing real estate agents in some states from showing homes and the high demand for refinancing overwhelming lenders, the real estate industry has slowed substantially.

But that doesn’t mean people are uninterested in buying new homes. After spending so much more time at home than usual, many families find their current homes don’t suit their needs. As veteran Realtor® Pascale Nejaime, of Coldwell Banker Realty in Avon, CT, noted, “People are starting to rethink the functionality of their homes. If this virus, or any other virus, forces another quarantine, will I be OK being confined in my house for a couple of months?” Nejaime is already seeing an influx of buyers in Connecticut and predicts city dwellers will be relocating to larger homes with outdoor spaces in the suburbs, or buying second homes in the country

Certainly, the financial impact of job losses and reduced work hours due to government-imposed business regulations has made it impossible for many people to buy a home in the near future. But for those who are fortunate enough to retain their employment: Is now a good time to buy a home?

Buying at the right time

Pandemic or not, the decision to buy a home depends largely on your circumstances. To determine if the time is right for you to buy a new home, first consider your budget and your location, then considering your general timing.  

Your budget

The down payment will likely be your biggest upfront home buying expense. Saving 20% of the purchase price has long been the industry standard for down payments, but you may be able to buy with much less. Mortgage programs are always changing, but qualified buyers might be able to get a conventional loan with as little as 5% down

In addition to the down payment, you’ll need to pay upfront closing costs to cover the many fees that accompany a real estate transaction. Closing costs vary by location but average somewhere around 2% to 5% of the purchase price.

Then there’s the recurring costs of homeownership. Your monthly mortgage expense typically includes:

  • Principle. This is the amount of your home loan you must repay each month. The more you borrow, the higher your monthly payment will be.
  • Interest. Your interest rate heavily depends on your credit score. The better the score, the lower the interest rate. And the lower the interest rate, the lower your mortgage payment. 2020 base rates for 30-year mortgages are at historic lows, providing an additional incentive for buyers.   
  • Taxes. Property taxes vary by location, but are generally tied to the value of the property; the greater the property value, the higher the taxes.
  • Homeowners insurance. Homeowners insurance costs vary greatly depending on factors like the value of the home, geographic dangers (tornadoes, floods and hurricanes) and attractive nuisances on the property (pools, trampolines, fire pits and treehouses). The greater the risk of damage to the property, or to children on the property, the more your homeowners insurance will be.
  • Mortgage insurance (under certain circumstances). If your down payment is less than 20% of the purchase price, your lender will likely require mortgage insurance. With your lender investing so much in helping you purchase the property, this additional insurance policy provides additional financial protection for them in the event you fail to repay your home loan.  

And don’t forget to budget for things like home maintenance, utilities and savings for when an appliance inevitably needs replacing. 

Location

Property taxes aren’t the only location-specific expense to consider. Homeowners Association (HOA) fees are another common ongoing expense for homeowners. HOAs are governing bodies for specific neighborhoods. HOAs uphold neighborhood maintenance standards and often provide services to residents, such as landscaping, road paving and amenities. 

HOA fees can be under $100 per month in some neighborhoods where few amenities are offered. They can also exceed $1,000 per month when they include pools, tennis courts or boat slips.  

Aside from the budgetary considerations of your location, there are a few additional factors to keep in mind:

  • How are the local schools?
  • Is the neighborhood “walkable” enough for your lifestyle?
  • Will your commute to work be manageable?
  • Are emergency services like fire stations and hospitals nearby?
  • Is the neighborhood safe and maintained to your preferred standards?

Timing

The general timing of the market is another possible consideration. While perfectly timing the market has as much to do with luck as with planning, there are certain times when real estate is less expensive than normal. 

In winter, for example, homes are generally less expensive because there are fewer buyers in the market due to the holidays and kids being in school. However, there aren’t as many options because fewer sellers want to sell at low prices. For the best mix of home inventory and reduced prices, Realtor.com found autumn to be your best bet

More broadly, a recession can be a great time to buy, because property values are down compared to their strong market peaks. 

Buying a home and insurance

The real estate industry has been quick to respond to the COVID-19 pandemic. The U.S. Department of Homeland Security has deemed real estate an essential service, allowing real estate agents, lenders, title representatives and escrow officers to continue working. But due to state and local regulations, real estate professionals have had to adapt.

If you’re in the market to buy a home, you may have already noticed a few of the operational changes made in the real estate industry. For example, agents in most states are not permitted to host open houses, so tech-savvy agents have moved to virtual open houses. And in some states, such as Pennsylvania, where only “life-sustaining” workers are permitted to work with people face to face, agents have moved all showings online. In fact, due to social distancing concerns, cautious buyers are proactively requesting video tours. Redfin recently reported a 500% surge in the request for video home tours in a single week.  

Utilizing eClosings is another example of industry adaptations. With about half of U.S. states requiring notaries to be done in-person before COVID-19, remote closings were not permitted in many parts of the country. However, since the outbreak, an additional 17 states have issued emergency orders to allow remote online notaries, paving the way for electronic closings. 

Let’s look at some of the more subtle changes and adaptations in the real estate industry since COVID-19:

Volatile mortgage rates

The initial panic caused by COVID-19, followed by the reassurance of a federal stimulus and longer-than-anticipated stay-at-home orders, has left mortgage rates reeling. Whether you opt for a conventional loan (in which the government does not offer the lender any guarantee of payment) or a Federal Housing Administration (FHA) loan (which is insured by the federal government), rates are historically favorable despite the volatility.  

As of mid-April, 2020, interest rates for 30-year fixed conventional loans were sitting at 3.33%, and rates for FHA loans were at 2.86%, down .87% and .78% respectively from one year ago. Compared to the 7% to 9% rates of the 1990s, today’s buyers are getting a good deal, even with rates fluctuating a full percentage point. 

Loan qualifications may change

More market uncertainty means a greater risk for lenders. So naturally, many lenders are tightening their loan requirements, making it harder for buyers to qualify for a loan. This means you may need a higher credit score and a lower debt-to-income ratio.

A higher credit score is an indication of financial responsibility. In times of economic uncertainty, lenders want to see higher credit scores. Exact scores vary by lender and loan program, but if the recession of 2008 is an indication of what’s to come, be prepared for minimum credit score requirements to increase from around 580 to at least 620.  

Mortgage lenders also want to see lower debt-to-income ratios. As the name implies, your debt-to-income ratio is the amount of money you owe compared to the amount of money you make. How much of your paycheck is already going toward debt payments each month? With expansive job loss due to business closures, lenders want to see people making far more money than they owe. Generally speaking, you want your debt to be 36% or less than your income. 

Debt to income calculator

? Debt that occurs periodically, including such obligations as credit card payments, child support, car loans, and others that will not be paid off within a relatively short period of time (6-10 months).
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? This is all the money, goods and property you receive during the year before you reduce it by using adjustments, deductions or exemptions. People who use the barter system have to include the value of whatever they have received in exchange for services as part of their gross income.
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? The percentage of before-tax earnings that are spent to pay off loans for obligations such as auto loans, student loans and credit card balances. Lenders look at two ratios. The front-end ratio is the percentage of monthly before-tax earnings that are spent on house payments (including principal, interest, taxes and insurance). In the back-end ratio, the other debts of the borrower are factored in.
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Homeowners insurance

Homeowners insurance is included in your monthly mortgage payment, but COVID-19 is changing the rules a bit. Many lenders now want a substantial chunk of the insurance premium paid upfront when closing a deal. This is because the lender wants assurance that the property will remain insured even if you come upon financial hardships that would prevent you from making your mortgage payments in full. Remember, the lender is heavily invested in the property since they could become the reluctant owner if you default. So, they need to make sure an insurance policy covers the property at all times. Homeowners insurance rates vary from state-to-state, but you should plan for closing costs on the high end of the 2% to 5% of the purchase price range to account for this additional requirement.

If we enter a recession

While some analysts debate whether it’s too early to confirm a recession, economists have been predicting one for late 2020 or 2021 based on the cyclical nature of economic markets. And considering the number of layoffs and furloughs due to the virus, as well as the way the stock market is responding to lack of consumer confidence, it’s no wonder we’re likely already in a recession.

But it’s not all bad news. Recessions provide opportunities for buyers to purchase homes at lower-than-normal prices. 

Take advantage of a buyer’s market

Unlike the strong seller’s market experienced in the last several years, a recession brings power back to the buyers. In times of economic uncertainty, human nature tells us to be more cautious, to spend less and save more. So people naturally feel more nervous about the prospect of buying a home. This lack of demand drives values down. And that’s when you find incredible real estate deals.

People still need to move during a recession, so there will still be homes for sale. And these sellers may be more willing to work with you on price and terms to ensure a quick sale. Those sellers can’t afford to keep their house sitting on the market for too long, so buyers have more leverage as they’re competing with fewer other buyers. You may even be able to find a distressed property (perhaps a short sale or foreclosure) that you can purchase under market value.

Not only is a recession a good time for people to get on the property ladder, but it’s also a good time to upgrade or even add an investment property. If you already own a home, you may be hesitant to sell for less than your house was worth a year ago, but if you’re able to buy a bigger, better home at the recession’s discounted rates, you can more-than-cover the “loss” from the sale of your current home. Low home values are also a solid way for real estate investors to get a good deal on a long-term rental property.  

Construction on new homes

A recession generally puts a pause on new construction. It’s simply too risky for builders to construct new homes when there are fewer buyers in the market than usual. Yet, the COVID-19 recession is very different from the recession of 2008, which originated in the housing market with questionable mortgage practices. Because this new recession is unrelated to housing, economists are optimistic the real estate market won’t be as severely impacted this time around, so new construction may continue as planned.  

Pros and cons of buying a home right now

Before you jump into the housing market, here’s a snapshot of the pros and cons of buying a home under today’s market conditions.

PROSCONS
Possible lower purchase prices  Economic uncertainty
Lower interest rates Lower inventory
Less buyer competition More stringent loan qualification requirements
Lower property taxes (especially if your state limits the amount by which taxes can increase annually) Foreclosures and short sales can take more processing time

Financial resources

New home buyers can seek financial assistance from:

  1. The Department of Housing and Urban Development: HUD oversees all housing in the United States.
  2. The Department of Veteran’s Affairs: The VA offers mortgages and housing assistance for military veterans.
  3. Fannie Mae: Fannie Mae is the leading source of financing for mortgage lenders.
  4. Freddie Mac: A mortgage loan company specializing in affordable home loans. 
  5. Gennie Mae: The government agency that manages mortgage risk on behalf of American taxpayers.
  6. The Department of Agriculture: The USDA offers home loans specifically for rural properties.
  7. The Fair Housing Administration: The FHA offers FHA loans to help buyers with questionable credit or low down payments. This department also ensures fair housing practices in the real estate industry.

The bottom line

We’re living in uncertain times. The COVID-19 pandemic has upended our economy and likely started a new recession. Real estate is an essential business, but it’s far from business as usual. The home-buying process is adapting to meet the needs of buyers and sellers in the coronavirus era.

Rather than worrying about whether or not now is a good time to buy a home, ask yourself if it’s a good time for you to buy a home. Can you afford the upfront and ongoing expenses? Can you qualify for a home loan under the tightening qualifications? And are you comfortable making a big decision during a period of such economic uncertainty?

If you’re ready and able to buy a home, you could benefit from lower prices, lower interest rates and less competition. You may not be able to measure the market perfectly, but given today’s historically low- interest rates and the power of real estate, now’s as good a time as any to buy a home.