If you are in the market for a home purchase and are looking to take advantage of still low mortgage interest rates, a pre-approval is better than gold. While lenders have varying guidelines when it comes to evaluating potential borrowers and their risk, COVID-19 has changed the mortgage landscape. Guidelines can change from week to week, so speak with a loan officer early and often. Having a pre-approval will give you the extra luck you need to find your perfect home.
Typically your lender will ask for a letter of verification from your employer as well as several months of paystubs. If you have recently changed jobs or were furloughed, this will lead your lender to make a conservative estimate of your income. You might qualify for less of a mortgage than you expected but don’t be discouraged. Ask your lender about what your options might be, including a larger downpayment or non-traditional loan.
COVID-19 Health Risks
House hunting can be hectic even without a pandemic. Currently, sellers are wary of allowing people into their homes. Open houses are unlikely and many selling agents are showing only to serious buyers. The best way to prove you are seriously looking is to get a pre-approval from a lender. In a tight market like this, having a pre-approval ready before you are ready to make an offer is a must.
COVID-19 Financial Risks
While the economy is on the rebound, the global pandemic still poses some risks to your financial circumstances. Bond yields have started to recover and when bond yields go up, interest rates on fixed and variable term mortgages go up as well.
For example, if you choose a variable rate mortgage you definitely want to keep in mind that interest rates are practically guaranteed to go up in the next few years. Even 5-year fixed-term mortgages are going to see a rate increase soon.
Your monthly mortgage payment will rise along with the interest rate if it is variable, so make sure you budget accordingly and don’t stretch yourself too thin.
Additional Cash Reserves
The first thing you probably thought about when it comes to buying a home is the downpayment. While this might be the largest sum of cash you need throughout the process, your lender might recommend having additional cash set aside.
Often equal to a few months of mortgage payments, these funds can be in the form of checking, savings, or retirement funds. They are looking to make sure you have a rainy day fund if times got tough.
Additionally, many markets are seeing demand outstrip supply. New listings are trickling onto the market rather than flowing even though spring is around the corner. In this kind of market, sales are fast and buyers have little negotiating power. Having extra cash set aside can help you make an appealing offer in a short timeline.
Which Lender to Use
Your real estate agent might have a preferred lender but you aren’t required to use them. You should ask for a recommendation and do a little research of your own. You can use a mortgage broker or go through your primary bank for your mortgage pre-approval. The process and variety of options vary depending on where you go for a mortgage, so make sure you do some digging to ensure you have all the information before making a decision.
Lenders themselves are also being conservative during these uncertain times. Homebuyer demand remained high despite the pandemic and no lender wants to be caught in a housing bubble. Getting pre-approved will allow you and your lender to make a sound decision in a hot market.