A lot of people bought houses in the middle of the pandemic due to low mortgage rates. This huge demand and low supply of houses eventually led to an increase in prices a year into the pandemic. In January 2021, home prices went up by over 10 percent compared to a year before. But Fitch Ratings say the national home prices are overvalued by over 5.5 percent. Despite this, people might still be thinking about buying a home, especially with the economy gradually picking up.
Stable Employment History
The pandemic resulted in the closure of many businesses around the country. The business closures even continued a year after the start of the pandemic, which left a lot of people without jobs. On the other hand, other people continued to have jobs, which is a big plus for them if they plan to buy a house.
Lenders normally want reassurance that the homebuyer has the funds to cover mortgage costs before they approve a home loan. In these instances, people who have worked for the same company for at least two years will have better chances of getting a home loan since it shows that they have a stable employment history.
Lenders normally ask for the last two years of the W-2 of the homebuyer to verify their employment history. For self-employed individuals, the lender will ask for the tax returns from the last two years. They’ll also need the 1099s that the homebuyer received during the two years.
Besides stable employment, homebuyers need to have a debt-to-income ratio or DTI of 43 percent or lower. A low DTI means the homebuyer can afford to get another loan in case he already has one. Lenders take this into account before they approve a mortgage application from the homebuyer.
To get the DTI, homebuyers should add their recurrent monthly debt ad divide it by their monthly income. Then, they should multiply the figure by 100 to get the percentage. The lower the percentage, the bigger chance the homebuyer can have his mortgage application approved. But if the DTI is high, the homebuyer should focus on handling his debt better before thinking about buying a house.
Even if the homebuyer’s income can cover the monthly mortgage payments, lenders also want to make sure that they have enough available savings to pay for the upfront cost. Normally, homebuyers with savings that equal more than five percent of the average cost show that they are ready to buy a new house.
But some lenders may need the homebuyer to have enough funds to cover the down payment, which can reach up to 20 percent of the full price. But this amount can be lower in some cases. Lenders will also favor homebuyers who have funds to cover any fees necessary to close the deal. Moreover, reserve funds equivalent to at least two mortgage payments are also preferred by some lenders.
Lenders always prefer a good credit score. Lenders typically look at the credit score of homebuyers before they move forward with a mortgage pre-approval. The type of loan determines the credit score that a homebuyer should have before the loan gets approved. A standard loan normally requires a credit score of no less than 620.
But first-time homebuyers normally get an HFA loan, which requires a credit score of around 500. With this, homebuyers with a credit score that is higher than 500 are looked upon with favor by lenders. A better credit score also gets better interest rates, while people with low credit scores have to deal with higher interest rates.
When the pandemic initially started, many people bought homes since the market conditions were just right. The lower interest rates enticed many to buy their first homes. The 15-year and 30-year fixed rates went down to less than three percent at the height of the pandemic.
Even as the 30-year fixed-rate breached the three percent mark, the 15-year fixed-rate maintained its sub-three percent level. With this in mind, homebuyers can take advantage of these lower interest rates to buy their first home if all the other factors are favorable for them.
Additionally, they can check if the area is a seller’s market or a buyer’s market. They should look for a buyer’s market since sellers are willing to negotiate with them on the price.
Since buying a home is a major decision, people should carefully go through the different factors before finalizing their decision.