Buying a Home During the Pandemic: Points to Ponder

Friday, February 5, 2021

The COVID-19 pandemic did a number on the global economy. As a result, low rates prevailed to encourage people to invest and remortgage. This might be one of the few silver linings we have in the past few months. For those saving up for a home, now seems as good a time as any to jump in.

But before you hop on the home buying bandwagon, consider this. Are your finances prepared for the costs of home ownership? While it might seem like a better use of your money on the surface, look again. After all, paying rent doesn't build you equity.

There's more to buying a home than meets the eye. With a little forward planning, you can save thousands of dollars on your home.

A Wild Market describes the housing market as a wildcard in 2021. Low interest rates spurred greater demand for houses. But while more people wanted to buy houses, there weren't a lot of houses on sale. By 2020, home prices in Canada rose even faster than those in the United States. You might expect to pay a higher price for a home just to seal the deal. 

One of the biggest changes in the 2020 housing market was where people were looking. Before the pandemic, people turned toward major cities. For most of these people, this was a practical consideration. People needed to live closer to work. COVID-19 upended that old view. Social distancing favored people who lived in less dense areas. And companies switching to remote work meant that a lot of employees no longer needed to commute. 

Thus, people can now afford to look further away from cities for their new homes. This brings prospective homeowners to rural towns where properties are more affordable. Here, a family can afford a roomier home in a more secluded location. And with home prices in major cities skyrocketing, the small town life is also easier on the pocket.

But First, A Reality Check

Before you approach a lender for pre-approval, ask yourself this serious question: “Can I really afford a mortgage right now?” Just because rent is high, doesn't mean a mortgage will be cheaper. And even if you could afford it, your lender may not agree. It takes more than savings on hand to win the confidence of lenders.

Consider the full costs of buying a home. Your mortgage's principal and interest costs are just part of your monthly home expenses. Examine the property taxes and home insurance costs of the places you plan to move in. And don't just focus on your monthly bills. Make a budget for your expected maintenance costs. As a homeowner, you will be solely responsible for all the repairs and upkeep of your home.

Calculate how much of your budget can go toward all your home payments. This way, you'll know exactly what kind of house you can afford to pay for.

Bolster Your Qualifications

Fitting all that in your budget, even if you can save, is no easy task. But an honest review of your financial situation can help you plan and make room for these expenses. The changes you make can also improve your chances of securing a mortgage with good terms.

The first thing you need to look at is your total debt service (TDS) ratio. This figure measures how much of your income goes toward your monthly debt payments. Add all your minimum debt payments each month and divide them by your gross monthly income before taxes. Let's look at one example. Your total monthly debt payments equal $1,100. Meanwhile, your monthly gross is $5,000:

TDS = $1,100 / $5,000
TDS = 0.22
TDS = 22%

In this situation, you would have a 22 percent total debt service ratio. Adding more debts to the pile could make it hard for you to keep up payments. In 2020, the average Canadian debt service ratio was 14.67. This was down from 14.81 percent from the previous year. The reduced average TDS was due in part to payment deferrals and lower rates.

Your TDS ratio is a vital part of assessing your creditworthiness for a mortgage. Lenders prefer people with lower TDS ratios. They presume that people with too many debts may not have much room for a mortgage payment in their budgets. Lenders will usually approve of your mortgage if it comprises no more than 35 percent of your TDS ratio. You might still get approved, though, even if your TDS ratio was somewhat higher.

Before applying for a mortgage, it's often better to wait until you've cleared most of your debts. This rings true even if you already make a surplus. Your extra money is better spent making additional debt payments and saving for a down payment. 

Build Your Credit

Order your credit report and examine it closely. A credit report is a reflection of your creditworthiness. The records show exactly how punctual you've been with your debt repayments. If you find any errors in your report, inform your creditors immediately. Lenders will scrutinize this document to determine if you're worth lending money to.

Based on this information, credit reporting bureaus will assign you a credit score. Lenders save the best offers for people with excellent credit scores. Credit scores are one of the few times when being debt-free is a problem. Without any outstanding debts, you have no credit record and no credit score. 

This is easy to rectify if you have a lot of financial discipline. A good way to build a credit score fast is by “playing the float.” Get a credit card and use it for small transactions. Each month, pay off your entire balance before the bill is due. This way, you avoid paying interest at all! Make sure to charge only what you can afford to pay it off by the due date.

Save for Out-of-Pocket Expenses

While you improve your cash flow and credit score, save up for expenses you must pay out of pocket. Foremost among these is your down payment. It represents the part of your home's value that you must pay outright.

Down payments are an essential part of the home buying process. You must pay a minimum down payment of 5 percent to buy a home worth $500,000 and below. The bigger your down payment, the better. A down payment of 20 percent lets you bypass mortgage default insurance. Despite its name, this coverage doesn't benefit you at all! It's meant to protect your lender. That's a sum better spent on a bigger down payment.

Don't forget your other expenses like closing costs. While you can finance the closing costs into your mortgage, it will only add to the monthly payments. In general, it's better to pay for all these costs up front.

Get Your Paperwork Ready

Prepare your paperwork before you go house hunting. Your seller will be more receptive to offers if you have a mortgage pre-approved. During the qualification and pre-approval process, your lender will examine your ability to pay. Factors affecting your likelihood of approval include your income, assets, and debt level.

Your pre-approved mortgage represents the highest loan amount you can qualify for. But note that your lender may not approve this exact amount for the mortgage itself. The amount they approve will depend on the price of the property and the size of your down payment. In this case, be prepared to bargain for a smaller mortgage loan amount. To guarantee approval, choose properties from a much lower price range. 

Remember, pre-approvals have a time limit. You have until then to find a house and seal the deal. Don't forget to ask your lender how long your pre-approval will last and if you can extend it. 

Figure Out Your Housing Needs

Once you've gotten your finances sorted, it's time to set your housing budget. Stick as close to your budget as you can. Focus on meeting what you need from a home before moving on to what you want. If you have a growing family, for instance, you need ample room to accommodate the little ones as they grow up. In the wake of the COVID-19 pandemic, many people found home offices are indispensable.

Choose a home that strikes a balance between cost, comfort, and location. A lot of people want a roomier house, but not everyone can afford the maintenance costs of a home that's too large.

Begin the process of house hunting by examining entire neighbourhoods. Look for the places where you'd like to live. Are the low home prices in this neighborhood justified? Is it close to schools, shops, and hospitals? If you work from home, you're in luck. You don't need to stay so close to the big city!  The home of your dreams may be a bargain in places you wouldn't have considered before.

Hunt for the Right House

House hunting can be a challenge during the pandemic. The need to social distance puts a damper on anyone's plans to make door-to-door walkthroughs. Fortunately, house seekers can take their hunts online. But the number of choices available can be overwhelming. To make the job easier, keep the process organized.

There are few alternatives to seeing the property itself in person. With that being risky, many house hunters rely on pictures. These don't always reveal everything, but they do give a first impression. A few sellers sometimes offer a video tour of the property. If a house fails to impress you on video, it's often not worth checking in real life. That said, try to attend the home inspection if you are allowed. This way, you can spot potential problem areas before you commit to buying the house.

Working with an agent might be expensive, but it can be worth it in the long run. It's important to get an agent you trust. You need someone who understands your needs and financial pressure. Don't be afraid to change agents if your current one isn't working well with you.

Finally, don't neglect your personal safety. During any trip you make to view a home, wear a mask at all times.

Moving Forward

The housing market can get really competitive when it's hot. While bidding wars are natural, they can drive up the price of a property too much. But outbidding someone can be a challenge. You don't want to be straddled with a home you paid too much for. 

Be prepared to engage in one if you can afford it, but know your limits. This way, you can still compete but won't go over your budget. Don't be afraid to walk away. You'll likely find a better, cheaper offer somewhere else.

Much like other debts, you can save on interest costs by making extra payments toward your principal. You can do this as a lump sum or in monthly increments. But before you do, be sure to know about possible prepayment privileges and penalties. The cost of going over the limit can get pretty steep.

Examine the prepayment privileges of each potential lender. Some mortgages offer more prepayment privileges in exchange for higher rates and vice versa. Choose the mortgage option that matches how often you can pay extra. There's no point in paying more interest if you can't make consistent extra payments.

It can be tempting to jump into the housing market right now. You might fear that prices can only go higher soon. Be patient. Focus on saving up for down payment and other housing costs. Be sure to shop around for different mortgage offers. A little forward planning can help you save money in the future.

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