People are spending a lot of time at home these days, so it's no wonder many are taking a long and hard look at their living situations.
For some people, that means obsessively browsing Zillow for hours on end. For others, it means actually buying their first piece of property.
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Ready to become a homeowner? Here's what you need to know first.
1. Interest rates on mortgage loans are lower than ever
Low mortgage interest rates are a huge plus for buyers who plan to finance. In July, the average rate on a 30-year fixed mortgage dropped below 3% for the first time ever.
"That means for any given purchase price, your monthly payments are going to be lower than they would have been had you bought that same house a year or two ago," said Jeff Tucker, an economist for Zillow. "Or, say you have a monthly budget of $1,500. That would cover a bigger mortgage loan than it would have previously."
2. But the downside is low inventory
While interest rates may be drawing buyers, they may find there aren't that many houses out there.
"A really extraordinary consequence of the pandemic is that the inventory of the homes on the market is unusually low," Tucker said. "We usually see a lot more homes that the buyer could choose from, but nationwide inventory is down 20%, and in some markets, it's 30%. So as a buyer, you may have a harder time finding the right fit."
There are multiple reasons for that. For starters, in many markets — think suburbs surrounding cities — there are just more buyers than there are houses. Real estate has proven to be the one bright spot in a dismal economy. In June, existing home sales spiked by a record 20.7%, according to NBC News.
Cara Ameer, a real estate agent for Coldwell Banker Realty who works in both Florida and California, said homes are getting multiple offers these days — and often above the asking price.
"You have a lot of buyers out there motivated by the ability to work remotely or buy more flexible working arrangements," she said, pointing to how the pandemic has shifted many businesses to a work-from-home model.
Ameer said other buyers are looking for a second home to serve as a "getaway," since the pandemic has also impacted the ability to travel and take vacations.
For first-time homebuyers, competition can be particularly fierce, especially since those buyers often have stricter budgets.
Sellers may be holding off on listing their homes due to safety concerns surrounding the coronavirus pandemic. Tucker also points to the fact that millions of Americans lost their jobs in recent months. If some of them were planning to sell their homes, they may be waiting until they’re financially stable again, since they'd be unlikely to get a new mortgage loan for another home.
3. You’ll need to get preapproved for a mortgage loan
About half of people start their home search without calling a lender to get preapproved for a mortgage, according to new data about homebuying myths from Realtor.com. But as they quickly learn, it’s not as simple as contacting a realtor and setting up a showing. In many markets today, real estate agents won’t even show prospective buyers a property until they have their mortgage preapproval letter (or proof of funds, in the event that the buyer is making a cash purchase) in hand.
Getting a preapproval letter is as simple as calling the bank and answering a few questions about your finances. However, it’s smart to shop around for a mortgage by calling various banks, credit unions and mortgage companies, since different lenders have different fees and may offer different rates.
A call to the bank is a good place to start, and getting preapproved will also help prospective buyers figure out how much they can afford.
4. How to find a real estate agent
Once you’re preapproved and have a better idea of what your budget will be, it’s time to find a real estate agent. Start with recommendations. Have any friends or family members bought a house in the area where you’re looking? Ask them for referrals.
Otherwise, Ameer recommends searching online and reading profiles of agents on LinkedIn or their websites.
“A robust profile gives you a window into, ‘Who is that agent? Do I have anything in common with them? Does anything about their experience speak to me?’” she said. “Work with an agent you really enjoy, because it’s a journey. And it’s not just transactional. It’s emotional.”
Mark Chin, CEO of Keller Williams New York City, suggests calling brokerages directly.
“Say, ‘I’d like to talk to somebody on the agent leadership counsel,’” he said. “That means they’re in the top 20% of sellers in that office and that they’re also teachers in the business.”
If they can’t help, they should be able to point you to someone who can, he said.
5. You don’t have to put 20% down — but you’ll pay an extra fee if you don’t
Many first-time homebuyers are shocked by the costs that go into buying a house. The one that’s no surprise to anyone? The down payment.
But buyers don’t necessarily have to come up with 20% of the home’s purchase price for a down payment.
“Less than half of buyers are putting 20% down,” Tucker said, adding that the lowest amount someone could put down on a house would be around 3%, although that’s not necessarily something he recommends. It’s also something prospective buyers should discuss with their mortgage lender, since some banks may require buyers to put down a certain percentage for a down payment in order to get a loan.
There’s a catch, though. People who don’t put 20% down will have to pay private mortgage insurance, which is essentially a monthly fee added to your mortgage premium.
“It’s a program that protects (the lender) from the risk of the loan,” Tucker said. “The idea is that, basically, the industry has settled on 20% as a big enough down payment to cover a range of foreseeable losses.”
The good news is that most lenders will remove the fee once 20% of the house is paid off.
There are other costs buyers should keep in mind, too: closing costs, which include attorney fees, cost of appraisal and inspection, title-related fees and more usually cost between 3-5% of the home’s purchase price. So, for a $250,000 home, buyers should expect to spend $7,500 to $12,500, although the costs vary widely from state to state, and depending on the lender.
6. Be sure you've really found “the one”
When it comes to finding the perfect home, Tucker recommends looking for one you can see yourself living in for at least five years. That’s typically the rule of thumb for how long someone has to live in a home for the benefits and savings to outweigh the initial costs of buying property in the first place.
Chin encourages buyers to make an effort to look past a home’s initial presentation.
First-time homebuyers are often seduced by staging. Professional buyers are looking for structural details and assets that cannot be taken away — views, high ceilings, noise.
Mark Chin, realtor
“First-time homebuyers are often seduced by staging,” he said. “Professional buyers are looking for structural details and assets that cannot be taken away — views, high ceilings, noise.”
And when they’ve found the one and decide to put in an offer, Chin’s No. 1 piece of advice is to be present for the inspection, instead of getting a report on the phone afterward.
“I can’t tell you how much personally I have learned from my inspector,” he said. “He will walk you through every single room and point out every little thing and why it’s important and the risk for not repairing it. As a first-time homebuyer, you have no idea how to inspect a house. The right inspector will help you know exactly what you’re walking into.”
And if that house doesn't work out? Well, you’ll be all the more knowledgeable going into the next one.