The coronavirus outbreak is challenging the real estate market at a time that’s traditionally the height of the homebuying season. But you can still buy a home.
The biggest changes to the homebuying landscape:
- Credit score requirements are rising among some lenders. You’ll want to know your score is the best it can be right now.
- Minimum down payments are also increasing. Be prepared to have extra money in savings.
- Some lenders are slowing or completely pausing the issuance of loans. That’s one good reason to shop more than one lender.
- A growing number of sellers are taking their homes off the market, which means fewer houses to choose from in an already tight inventory market.
- Increasingly, buyers are putting their home searches on hold, at least temporarily.
Here’s what you need to know about buying a house through it all.
» MORE: Tips for first-time home buyers
What may slow you down
Real estate agents, for the most part, are still working, yet 57% say they’ve seen sellers delay putting their homes on the market, according to an April survey of agents by the National Association of Realtors.
In the same survey, 59% of agents said they have seen buyers suspend home purchases.
Naturally, such reactions are going to vary by the local market, and if you’ve already prequalified for a mortgage, you might not be inclined to wait. In that case, you’ll likely see fewer, if any, open houses. You’ll also likely tour homes virtually rather than with a walk-through, according to an April 1 survey of agents by HomeLight, a real estate agent referral company.
The mechanics of the mortgage process are also being affected:
- Home inspections and appraisals may take longer to complete as new safeguards and procedures are implemented.
- Legal and mortgage loan processes, including paperwork and title searches, may take extra effort and time due to staffing shortages, backlogs and social distancing.
- Remote closings are an option but not available in all states. Ask your lender how they are handling loan settlement these days.
What hasn’t changed
With so much uncertainty in the real estate market, getting a preapproval for a home loan is more important than ever.
With a lender lined up and a preapproval letter in your pocket, sellers know you’re serious.
“With a preapproval, [sellers] feel comfortable that, ‘Hey, this guy is a legit person who is going to buy and close,’” says Mat Ishbia, CEO of United Wholesale Mortgage in Pontiac, Michigan.
“[Prospective buyers] need to immediately start with the lender,” agrees Patti Michels, a real estate agent in Hinsdale, Illinois, a suburb of Chicago. “See what you can afford and see what your hurdles are going to be.”
Michels says shopping for homes before gaining a loan preapproval is a big home buyer mistake. “[Some buyers] don’t realize how many underwriting deal breakers there are” that can hijack — or significantly delay — getting a mortgage.
What credit score and down payment is needed now?
A FICO of 620 is typically the minimum credit score needed to buy a house, Ishbia says, though some lenders will go down to 580 or below.
“What I would consider is average credit is 620 to 680,” Ishbia says. “Very good credit is 680 to 740, and if you’re over 740, you’re spotless.”
Some lenders are raising the required minimum credit score for new borrowers.
However, during the coronavirus crisis, some lenders, including JPMorgan Chase, are raising the required minimum credit score for new borrowers. The lender is now looking for at least a 700 credit score — and a down payment of 20%.
With borrowing rules rapidly changing, shopping with multiple lenders is an important factor in finding a path to mortgage success.
» MORE: Check your credit score for free
How much house can I afford?
“How much house can I afford?” is the first-time home buyer question Ishbia says he is asked most often. He offers a rule-of-thumb to help.
“Instead of telling them about debt-to-income ratios,” Ishbia says, he tells first-time buyers to consider three times their income as a starting point.
So, if you and your spouse have a combined annual income of $110,000, “most likely $330,000 is your price range, plus or minus a couple of percent,” he says.
But rather than guessing, you can simply take the first step — talking to a lender.
“That’s why you get the mortgage first,” Ishbia adds.
What to expect with mortgage rates
Mortgage rates began 2020 a little under 4%. Then they plunged in February as COVID-19 became an epidemic in the United States, settling below 3.5% by the end of March.
“It doesn’t seem like mortgage rates will fall below 3% — that’s where the floor appears to be,” says Holden Lewis, who produces NerdWallet’s mortgage interest rates forecast. “We probably saw the highest rates of 2020 back in early January.”
Turmoil in the mortgage industry has affected which types of loans are most available. Borrowers with excellent credit have no trouble finding plain-vanilla mortgages for less than the jumbo limit.
But amid the COVID-19 disruptions, it’s not easy to find a mortgage when you have a low credit score, you’re self-employed or you need a jumbo loan (a mortgage for more than $510,400 in most counties), Lewis adds.
In your hunt for a lender to work with, search for one among the nominees that is offering a mortgage rate close to what you’re looking for. Then talk about rate lock strategies with the lender. Having a reasonable mortgage rate target in mind, with a rate lock poised to snag something close to it, can relieve a substantial amount of stress during the mortgage process.