Even during the COVID-19 pandemic, people want—and need—to buy homes. The housing market has been red-hot for a while, but the current market conditions make buying more of a challenge than ever.
“There is a shortage of houses in many markets. This is creating bidding wars, offers over asking, and appraisal gaps—houses are going quickly,” says Shanon Schinkel, branch manager and mortgage lender at HomeTown. “But there are still many great opportunities if you’re patient and have a great real estate agent and lender.”
If you’re tempted to jump in and buy a house, you will most likely need a mortgage, which means you will be dealing with banks, credit unions, or other financial institutions. Before taking the plunge, here are some things the experts want you to know.
Now may still be a good time to buy a home
“Regardless of the economic environment and uncertain times, consumers will always have a need or desire to buy a home,” says Ann Thompson, retail sales executive of the West with Bank of America. “The best time to buy is when it makes sense in your life.”
The changes in everyday life due to the pandemic have placed a greater emphasis on the value of a home, says Rick Rudman, CEO at Curbio, a home renovation technology company.
“A second bedroom that can be used as a home office, or an outdoor space, are now more desired, prompting many people to move or buy for the first time,” he says.
And while home prices may be high now, Schinkel points out that the market is continuing to appreciate.
“Next year, for example, the same house that cost $400,000 now could be selling for $440,000, so the buying power is smaller next year than now.”
And did we mention that economists expect mortgage rates to rise?
Get pre-approved ASAP
Before even thinking about making an offer, you want to have proof of your financial viability. Experts say potential buyers should make pre-approval their first step. That way, you know your loan will be sufficient before you fall in love with a house.
“These days, in some markets, you need a pre-approval just to start looking at homes,” says Thompson. She says having pre-approval shows that you’re serious about being a homeowner and have taken the necessary steps to get your finances and creditworthiness verified by a lender.
Prepare for bidding wars ahead of time
Buyers all over the country are facing bidding wars after making an offer. This can be attributed to low mortgage rates and low inventory creating strong demand from buyers. Some sellers are even receiving dozens of all-cash offers.
“Potential buyers now should prepare themselves by discussing, with their real estate agent, how much a home is worth beforehand, so that they can go into a bidding war with the strongest offer tactics, while also knowing when to back away if the price escalates,” says Thompson.
Understand appraisal gaps
An appraisal gap is a disparity between the offer you put on a property and what the property is deemed to be worth by a lender. If a home appraisal comes in low, you will have to decide if you want to cover the gap. If you’re willing to do this, that can be written into your offer and stating how high you’re willing to pay. This demonstrates to the seller that you want the home and are able to pay top dollar to get it.
“In this market, we are seeing a lot of appraisal gaps being written into contracts. Please be sure to understand how that works before agreeing to it,” says Schinkel. “Also, check with your lender before agreeing to it. Using that money for an appraisal gap can change your ability to qualify.”
Keep track of changing rates and terms
Mortgage rates were at historic lows for months, but they’re beginning to edge higher.
“Rates have crept up over the last six weeks, so make sure you know what your payment will be with the higher rate,” says Schinkel.
Schinkel says the government also recently announced it will insure fewer second-home purchases and investment home loans, so the terms for those loans have changed, too.
It’s important to be mindful of changing terms and to shop around for rates, which can change daily.
Research down payment assistance programs
Buying a house in a seller’s market is difficult, but it’s especially challenging if you’re a first-time home buyer. Enter: down payment assistance programs.