10 New rules for buying a home during COVID-19
Fact-checked with HomeInsurance.com
Buying a home is a big decision anytime, but the COVID-19 crisis significantly raises the stakes. Becoming a homeowner is a significant investment, and the location you choose determines your community, options for transportation, shopping, recreation and where your children go to school.
While the U.S. economy is struggling, the good news is that the housing market remains strong. Whether you’re considering buying your first home, upgrading, or downgrading, it’s critical to prepare as far ahead as possible and understand the pros and cons of buying a home during the pandemic.
10 essential home-buying rules
Follow these ten rules to save money, stay safe, and make sure you’ll be a happy homeowner.
Rule #1: Review your credit early.
Building and maintaining excellent credit is always important, but it’s essential before buying a home. Whether you’re a first-timer or a seasoned homeowner, your credit is a primary factor that mortgage lenders consider.
Economic uncertainty due to the pandemic has caused some lenders to raise their requirements for borrowers’ credit scores. This higher standard is likely to remain in place until the unemployment rate drops.
If you have sub-par credit, you may not get approved for a home loan, or your mortgage could be more expensive than if you had excellent credit. For example, if you get a $200,000 fixed-rate mortgage with excellent credit, you could pay about $145,000 in interest on a 30-year loan.
But if you have average credit, you could pay close to $190,000 in interest for the same loan. That’s an additional cost of $45,000 in interest over the life of the loan that you could save by having more impressive credit.
The problem is that building credit takes time. Younger borrowers may have a short credit history or more student loan debt, which can lead to higher interest rates. Therefore, reviewing your credit reports and making financial adjustments as early as possible will pay off in the home buying process.
Due to the pandemic, consumers can get free credit reports at annualcreditreport.com weekly instead of annually. This additional online access extends through April 2021.
Rule #2: Know when you should stop renting.
Many people start out renting because it doesn’t require a significant upfront payment compared to the required down payment on a home. But the main financial downside is that paying rent doesn’t come with economic benefits.
When you own a home, you get:
- Amortization on a fixed-rate mortgage. A portion of every payment you make reduces your outstanding loan balance, helping you build home equity over time.
- Mortgage interest tax deduction. If you itemize deductions, you can include interest and points paid on the first $1 million (or $750,000 if you took out a mortgage after late 2017) of mortgage debt. These limits apply for joint tax returns; single filers can claim one-half of the amounts.
- Home equity loan interest deduction. You can deduct interest paid on home equity products, up to the above limits, when you spend it on home improvements and itemize deductions.
- Property tax deduction. You can deduct up to $10,000 (or $5,000 for singles) of property taxes, combined with state, local and sales taxes if you itemize deductions.
- Home appreciation. Depending on where you live, your property value may rise over time, allowing you to build equity.
Despite the financial advantages of homeownership, renting may be more affordable, depending on where you live. In large cities, such as New York and San Francisco, rent may be similar or less than purchasing a comparable home.
Since the coronavirus, there’s been more interest in moving out of cities and into the suburbs. Depending on the supply of rental housing and apartments in an area, renting may be more expensive than buying a home. So, evaluate what’s best for you, given your real estate market.
Rule #3: Consider your ideal lifestyle.
When you own a home, you can spread out, remodel as you wish, and express your style. Those upsides may mean more to you than before the pandemic.
However, renting has different benefits, especially if you don’t like having unexpected repair bills, handling ongoing maintenance, or doing yard work. It’s also convenient if you travel frequently or choose to live in different places during the year.
Rule #4: Estimate your down payment.
Before you qualify for a mortgage, you must have enough cash for a down payment. It’s the difference between a home’s purchase price and the mortgage amount you receive. Plus, there are additional closing costs that vary depending on your home’s location that you’ll need to pay.
Down payment funds can come from your savings, gifts from family, or profit from the sale of your current home. If you pay at least 20% down, you avoid paying private mortgage insurance; otherwise, this is an additional monthly expense required by lenders, even if you have excellent credit.
Exactly how much down payment you need depends on a home’s purchase price, the type of mortgage you get, and customary closing costs in your area. Loans designed for first-time buyers, such as an F.H.A. loan, may require as little as 3% down. But paying 5% to 10% down is a typical range for most buyers.
Rule #5: Save your down payment in the right account.
Once you begin saving money to buy a home, don’t get tempted to invest it. The financial markets are volatile in the short term, which means you could lose all or a significant portion of your money right before you need it.
Unless your goal is to buy a home in more than three to five years, keep your down payment in a high-yield, FDIC-insured savings account. This strategy keeps your money safe and earns a modest amount of interest.
Rule #6: Take advantage of first-time homebuyer programs.
Even if you previously owned a home, you may still qualify as a first-time homebuyer. Some programs consider you a first-timer if you haven’t owned a residence in the past three years.
Different programs offer help in mortgage interest subsidies, down payment assistance, or no credit checks. Ask potential lenders if you qualify for any programs that could save money. Or contact a H.U.D. housing counselor for free or low-cost advice about your home buying options.
Rule #7: Get preapproved for a mortgage before shopping.
Once you’re ready to buy a home and have good credit, steady income, and a down payment, it’s time to get preapproved for a mortgage. Due to the Fed’s interest rate cuts at the onset of the pandemic, mortgage rates are at historic lows. That means you may qualify for more home than you thought possible.
In addition to showing how much home you can afford, having a preapproval in hand demonstrates to real estate agents and sellers that you’re a serious buyer and could close quickly. That could give you a significant advantage. For instance, an owner could accept your offer instead of a higher one that would take longer to close.
However, just because you get preapproved for a certain amount doesn’t mean you should borrow the maximum. In addition to the mortgage, you’ll have other monthly costs, including property taxes and homeowners insurance. Don’t forget to factor in utilities, maintenance, furnishings and homeowner association dues.
Rule #8: Use technology to shop safely.
How you shop for a home will depend on coronavirus restrictions in your area and what a seller is comfortable allowing. Interview potential real estate agents over video calls and ask them to walk you through a home virtually. When possible, do a drive-by to explore a home’s neighborhood before asking to see the interior.
Make sure you, sellers, and real estate professionals wear face coverings and maintain physical distancing throughout the home buying process. Wearing gloves and shoe coverings are also wise and show respect for a seller’s property. In many states, you can do closings by mail, video or curbside, during the pandemic.
Rule #9: Be a savvy negotiator.
Some sellers may be motivated to make a deal due to the pandemic, so don’t assume you can’t get a lower purchase price. Take advice from local real estate pros who understand your market when making an offer.
Complete your due diligence carefully before moving forward with a real estate deal. Make your home offer contingent on a professional home inspection, a C.L.U.E. home insurance claim report, and additional evaluations customary in your area, such as a termite report.
Consider adding a COVID-19 addendum that permits you to cancel a contract or extend deadlines if your circumstances change. This could protect you from an unexpected loss of income before you close on a home.
Rule #10: Have patience.
The time it takes to complete necessary steps to buy a home–such as getting a mortgage preapproval, touring properties, getting inspections completed, finalizing a mortgage and closing—may take longer than before COVID. Many lenders are overwhelmed with customer requests related to managing financial hardship or refinancing to reduce monthly payments.
If your work or financial situation is uncertain due to the pandemic, or for any other reason, you might want to take a wait-and-see approach to buying real estate. Before getting swept up in the beauty of a home and a new lifestyle you envision, be sure it’s a wise investment that you can afford.