Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Camila in Detroit, MI: Hi Brian, I’m certainly not thrilled with the pandemic situation but I’m feeling that I now understand the risks better than I did a few months ago. I’m also at the point where I want to get on with my life as best as possible. I can meet the FHA requirements to buy a home costing about $240,000, which will allow me to buy in a pretty good suburb. What should I expect in this pandemic home buying process?
Answer: Hello Camila. It sounds like you have a plan and are prepared for things to be different. Right now, the two biggest opposing factors for buyers are that interest rates remain on a long run of historic lows and inventory remains very tight. The low-interest rates mean lower monthly payments but low inventory means higher selling prices. Still, the low-interest rates often have more bearing on your ability to buy a home in the immediate future. For example, the monthly payment on a $250K home at 3.2% would be about $1,045 (assuming 3.5% down and not including PMI, taxes, and insurance). At a 20% lower price of $200,000, but a higher interest rate of 5.5%, your payment would be about $1,095 (using the same assumptions). The low inventory is especially true in the suburbs, probably because the pandemic has shifted the preferred market out of crowded cities. The result is that you need to be prepared to offer top dollar and depending on the neighborhood where you are looking, possibly be prepared to offer above the asking price.
The good news is that you can make up for the higher price if you can qualify for the lowest interest rate. The bottom line is that you need to work with a loan officer to determine what you can afford before taking the next step of actually looking at houses. COVID-19 has reinforced the need to be a qualified buyer because sellers (and agents) don’t want to increase their exposure risk by working with people that will not be able to obtain a mortgage.
Expect everything to be done by appointment only. You might need to be prequalified for more than just the mortgage. Another prequalification could be judging your sincere interest in a particular home. That can mean doing plenty of online previewing to limit the number of houses that you visit.
Don’t be surprised if you are asked to limit the number of people that join you at appointments. COVID-19 means everyone in the process wants to reduce risk by reducing exposure. This includes when meeting with your real estate agent, viewing the homes of strangers, accompanying a home inspection, and sitting down at the closing table. Some of this is being done virtually.
When people do meet up, they want to minimize how many congregate together (a rule of thumb is only allowing four people to view a house at a time - three plus your agent). Of course, you can expect what has become common requirements - masks, hand sanitizer, booties, gloves, and for you to sign a waiver acknowledging the risks of COVID-19 as well as documenting any exposure you’ve had to the virus. This protects all parties from liability, including the seller and agent.
Also, people are doing things differently on the seller’s side of the transaction. They are using a lot of eye-catching videos to showcase houses and drones to video the property with an aerial view. Additionally, sellers are being asked to really prepare the house before it’s shown. They’re being asked to limit the need to touch surfaces by opening all of the blinds, turning on all of the lights, and opening doors and closets.
Camila, although the market has a limited number of houses for sale, don’t overcompensate by making an offer on the first house that you can qualify for. Take your time to be sure you will still want to be in the home five years from now. 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 in the first place. Personally, I think a seven-year plan should be the minimum. Five years is about breaking even but if you want the wealth-building benefits of homeownership, staying in the house longer usually works more to your advantage. The wealth-building comes from building equity. Equity comes from the combination of paying down a chunk of the mortgage and the home appreciating in value. That’s a good formula for being able to move up to a bigger and better home in 10 years without taking on a bigger monthly mortgage. In 10 years, your income will have probably increased and if your mortgage remains the same, you’ll have a bigger home and more discretionary income.
Please share your experiences in this new and ever-changing world of home buying.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].