The season is beginning. If you’re looking for the right place to put down roots, mental preparation will help you dig into the market. It’s all about knowing what you’re looking for, being conscious of your buying power, and having the right people in your corner.
In this article, we’ll note the special circumstances in the market of 2021. Then, we’ll lay out your general home buyers’ readiness plan.
If you’re attracted to the city vibe, 2021 could be an especially good time to buy your new property. On the other hand, house-hunting is getting more competitive in the suburbs. Here are some considerations to keep in mind as you meet the challenges of this market.
1. Anticipate the Industry’s Current Public Health Customs.
It’s a new world out there. For one, showings have changed. House-hunters are signing waivers and best-practices guides when they visit homes. With appointment-only showings now normal, open houses require extra steps. Expect rules. Tours might allow only two people from a single household through the home at a time.
The upside to all this? Buyers can see a lot more from the comfort of their home offices, thanks to the 3D video technology now being put to good use. Agents are filming homes with everything from phones to drones to showcase properties for sale.
Once you find a home you’d like, expect strict rules for attending the inspection. Home inspectors have to follow the state and county requirements. Your movers, too, will be following health and safety guidance in your jurisdiction.
☛ Learn more. Take an online course on Covid-prevention practices for inspectors and contractors; it’s free and open to the public.
Note that Covid precautions are expected to remain in place for at least the first half of 2021, and likely longer.
2. Check Your Credit and Get Your Income Documents Ready
Your lender, through your mortgage consultant, will request a history of your income to discern if income sources are stable and reliable. Have the right documentation to show steady employment. Gather your pay stubs and your most recent W-2. If you are in business for yourself, line up your tax returns and all available income records.
What if the coronavirus economy has set your income back? What if you have pivoted from your previous job to start up an independent business? Expect lenders to ask for specific documentation showing your income will continue. This includes recent contracts or sales receipts, current business licensing, and statements that detail your 2021 income so far. You may be asked to provide your own written statement explaining how your current work continues the trajectory of your experience over at least the past two years, and how your earning capacity will continue into the future.
Pro tip: If you’re a renter thinking about buying, plan your estimated moving date while in the process of gathering income documents. In 2021, property owners may balk at requests to leave before the term of their leases. But some may allow month-to-month extensions to help you get ready to move when you close, so it’s best to communicate ahead of time.
3. Be Clear on Your Home-Buying Budget.
The key for every buyer is the debt-to-income ratio. From your gross income, how much of your monthly inflow do you spend each month? The lender will give this factor a hard look to decide what kind of mortgage loan to extend.
Cash reserves are important as well, so be aware of what will deplete them. As you plan financially, jot down rough expenses you’ll be making as a homeowner:
- Property taxes. You’ll pay them at closing; and you’ll likely be funding an escrow account, to be used by your mortgage company to remit your future property tax payments. Check the current property tax in the home’s online listing.
- A homeowner’s insurance policy. Let your current insurer know you’re moving to a new home. Get an estimate on the policy from your agent, and tips for saving anything you can.
- Owner’s title insurance. Especially if you buy a detached, single home, you’ll want an owner’s policy. This is in addition to the title insurance policy you’ll have to pay for, to protect your mortgage lender. The cost of an owner’s policy is a flat, one-time premium at closing. It covers the title as long as you (or even your heirs) have the home.
- Association fees. If you’re going for a condo unit, know the monthly fees. You find them in the home’s online listing.
- The costs of buying. Write down the lender’s fees. Budget several hundred dollars for the costs of an appraisal and a home inspection, and several thousand dollars to cover a down payment, earnest money, and closing costs (which could add up to 5-6% of the home’s purchase price). If you’re in the position to do so, put 20% down. Remember, private mortgage insurance may be a necessary element of your investment if your down payment is under 20%.
You’ll typically pay your closing costs through a wire transfer from your account as you’re headed to the closing table.
Pro tip: Even if you are buying a newly constructed home, you could find faulty wiring or piping, unfinished work, or defects of various kinds. Always budget for an inspection.
4. Find a Mortgage Lender and Real Estate Agent
It takes a team to buy a home. The right mortgage specialist and the best real estate agent are people who know the local market. They grasp your goal, they know how to get you there, and they’re ready to become your trusted advisers for the next few weeks or months — whatever it takes.
Pick a real estate agent who’ll work hard for you. Your agent will represent you through the full journey, from budgeting and browsing to settlement. To find the right person, your best bet is to ask local co-workers and friends: Who did a great job for them? Then call the person you’d like to hire, to get a sense of whether you’ll work well together.
What kind of home are you seeking? Make a list of your top priorities and find an example of an appealing house for sale to help guide your agent. As both of you look for the best overall combination of attractive elements, you’ll work as a team to find the right home.
5. Get a Pre-Approval Letter.
Start this ball rolling, if you can, before you go house-hunting. Especially in this fired-up market, you’ll need to show you’re ready to buy. Your mortgage consultant will use your credit profile, your income documentation, assets, and your price range to pre-approve your loan.
Monitor your credit score early in the game. In 2020, lenders started raising eligible credit scores (even though the FHA has not). All the way to final approval, it’s critical to keep your accounts healthy and not make significant changes to your credit profile. That means avoiding any major purchases. It means paying loan or card balances off regularly, and steering clear of any new credit card offers — unless you’re getting one of the major credit cards, and your mortgage rep suggests applying for it.
Expect to be asked repeatedly for updated account statements and continuing evidence of income. Daily patience is what you need, even if your transaction moves relatively quickly. The picky habits of underwriters are magnified since 2020.
When you finally get your loan approval, borrow conservatively if you qualify for a higher loan amount than you expected. Don’t assume the HVAC system in your new house has been meticulously maintained or that the roof is in pristine condition. The sewer pipes might not be root-free, and there could be tree work waiting for you. Keep a strong cash reserve for big repairs.
Here’s to You, Your New Home, and a Great 2021.
With interest rates so low, if you’ve been thinking of buying, 2021 may be your year. Homes are recommended as great investments over the long run. If you get a low interest rate on the mortgage loan, you boost your prospects of that advice bearing out.
And speaking of loan interest, when you do find a great house for sale, it’s best not to sweat the rate peaks and dips. The rate may rise a little before you lock it in. In a competitive market, the focus should be on making an offer that fits your budget, yet committing to a quick closing with your buyer.
The philosopher Seneca said luck happens when preparation meets opportunity. Good luck to you, and happy home buying in 2021!
Photo credits: Filip Urban, Alex Mecl, and freestocks, via Unsplash.