According to experts, the housing market is now a seller’s market because home prices continue to rise with the limited supply of houses available and the high demand from buyers. You must look at why there are so many buyers now competing for these houses despite the prices.
They are taking advantage of mortgage rates that slumped to record lows in 2020 because of the pandemic. While these rates are slowly rising and experts expect them to continue to rise in 2021, they are still currently considered to be a bargain.
If you want to benefit from this situation, you need to act quickly to pin down a price and mortgage rate before they increase. The longer you take to decide, the more money you lose for the long term.
Check Your Qualifications
Mortgage lenders look for several qualifications before approving a loan. First, you must have a stable income from gainful employment or a business for the last two years. Be prepared to show documents as proof of income, including pay stubs and tax returns, among others.
You must compare your income against all your current debt payments, including any current loan payments and credit card payments. This is called your debt-to-income ratio (DTI), and it must be at 50% or less.
The mortgage lender will require you to have a solid credit profile and a good credit score in the range of 670. With a higher score, you can get better terms on your loan. The computation covers your history of paying your debts on time, the length of your credit history, the amount of debt you have, the types of debt you have, and how often you apply for new credit. You can check your FICO or VantageScore credit scores for free online.
How Much Can You Afford?
You must also compare all your current monthly debt payments and other monthly expenses with your monthly income to determine how much you can afford to pay monthly for a mortgage. This will establish the home price that you can afford.
You will also need to have available cash to cover payments that are not included in the mortgage.
For instance, unless you put in a 20% down payment, your mortgage lender will require you to have private mortgage insurance (PMI) that at least covers the amount of the loan. This ensures that whatever happens to the house, the lender can recoup its investment.
Even after you pay off your mortgage, it is still prudent to keep your home covered so that you are financially protected in case of loss or damage such as from a fire. There are different types of homeowners insurance and you can opt for one that covers replacement cost for your personal belongings as well.
You can choose the type of loan to apply for, depending on how much down payment you can afford. You can also find a loan that does not require a down payment. You must consider how this will increase your monthly mortgage payments, though.
Before finalizing the loan, you will need to pay the mortgage lender closing costs that include appraisal fees and title insurance, among others. This can range from three to six percent of the price of the house you will be buying. You can negotiate to either include the closing costs in the mortgage or have the seller shoulder the closing costs.
Steps to Take
It is best to apply for and get pre-approval for a mortgage based on your budget before you find a house. You will receive a mortgage pre-approval letter that indicates the amount of the loan you can get. Showing this to a seller gives you an advantage over other buyers.
Find an experienced and trustworthy real estate agent to work with. Together, you can find the house that is right for your needs and your budget.
When you make an offer, make sure that it includes an appraisal contingency and inspection contingency that will protect your earnest money. This means that you will get back your earnest money if the home appraisal shows that the current value of the property is lower than your offer or if the house inspection shows that the house has major problems that will be expensive to repair. In either case, you can ask for a lower price or walk away.
Have Your Home and Enjoy It, Too
Unlike a cake which you can either keep or eat, you can keep your new home and continue to enjoy it for years to come. You can only do so if you decide at the right time when the mortgage rate has monthly payments that are affordable for you and you find a house that fits your budget.
Both factors are quickly changing by the day, and you must decide soon if you want to get a price and a mortgage rate that are both within your means.
It would be nice to get something good out of the Covid-19 crisis. This can be the silver lining behind this pandemic.