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- A financial planner who recently bought his first home during the coronavirus pandemic says that many things about homebuying are still the same, but buyers should consider doing three things differently.
- First, make sure your emergency fund is topped off — in a time of economic uncertainty, keeping a full emergency fund is more important than ever.
- And, if necessary, make a smaller down payment to prioritize keeping cash on hand.
- Increasing your credit score by paying down debt could also be helpful, as many lenders are requiring higher credit scores to qualify.
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Homebuying is having a moment right now, and mortgage applications have skyrocketed during the coronavirus pandemic. Coupled with a need for more space and low interest rates on home loans, moving is on many potential buyers’ minds.
But, it’s a major decision, and in a time of economic uncertainty, everything from financing to home shopping has changed.
Financial planner Mark Reyes, of money management and investing app Albert, recently bought his first home in the Los Angeles area. While he found that the process was different than he expected, he learned a few things about the process of buying a home during a pandemic firsthand.
Her are the four things things he says he’d tell any of his clients considering a home purchase right now.
Have a full emergency fund before you even consider a home purchase
This piece of advice almost always applies, pandemic or not: Anyone considering buying a home should have a full emergency fund. But, Reyes emphasises this piece of advice with all of the economic uncertainty happening due to the pandemic.
“In an emergency fund, you should have at least three to six months’ worth of your essential spending and bills,” he says. If there’s ever a time to have an emergency fund, it’s now — and saving more might even be a smart move.
“If you’re buying a house, I strongly lean towards at least six to nine months [worth of expenses], because it’s a bigger commitment,” he says. Not only will you have to protect yourself against things like income loss, but you’ll also have to make sure you’re prepared for any major repair or emergency expenses for your home.
Do your research, and know your limits in advance
During the pandemic, homes are flying off the market almost as fast as they’re going on sale in some markets. As a result, inventories are smaller than usual, and median prices are rising, reports Business Insider’s Libertina Brandt.
In this market, having a good understanding of your budget and the real estate market where you’re looking to buy will allow you to act quickly.
“Do your homework,” Reyes says. “Understand what the prices are for that specific neighborhood, like the price per square foot, and set alerts for homes in that neighborhood.”
And sticking to a budget in a market that encourages bidding wars and fast purchases is critical. “What we recommend here at Albert is that the price of your house should be about three times your annual salary,” he says.
Prioritize keeping cash over having a large down payment
In uncertain economic times, cash is king, and making a smaller down payment to keep cash on hand may be a smart move right now.
Making a full 20% down payment may not be the most important thing right now. While having a 20% down payment has always been preferred, it’s become less common recently, and it’s not a hard-and-fast rule. However, mortgage lenders make loans more expensive for those not putting down 20% by adding private mortgage insurance each month, generally between $50 and $100 per month until the mortgage reaches 20% in equity.
In times like these, Reyes says keeping the liquid cash you have and paying the extra PMI charge each month may be smarter.
“With the pandemic raging and a lot of uncertainty about jobs and employment, for me, I’m from the camp where I wouldn’t want to put as much cash down if I can afford not to,” Reyes says.
“If you’re a first-time home buyer, I’d recommend putting at least 5% down,” he says. While some lenders require a 20% down payment, some types of federal mortgage loans programs allow you to make a smaller down payment, like FHA or VA loans. “If you do an FHA loan, it’s a 3.5% minimum down payment,” Reyes says.
Make sure that your credit score is prepared for homebuying, and get rid of any high-interest debt
Many mortgage lenders have tightened their lending standards, and are looking at potential buyers more critically. Earlier this year, Chase tightened its mortgage lending standards, only offering loans to with those with credit scores above 700. So, you may need to raise your credit score to qualify for a mortgage right now.
Reyes suggest that anyone with high-interest debt, like credit card debt, make paying that off a priority before considering homebuying right now. “Get rid of those debts as fast as you can,” he says. “Paying off that toxic debt will help your credit score and your credit report, so you can qualify for a better mortgage.”
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