TD's Scott Lindner on what prospective buyers should know right now
Homebuying is a complicated process in any environment. When you factor in how much COVID-19 has reshaped how we all live and work, and may do so for years to come, buying a home becomes that much more daunting to those unfamiliar with the process.
We spoke with Scott Lindner, National Sales Director for TD Bank Mortgage, to dispel some of the myths and misnomers about buying a home in the current housing market.
Are homes selling now? Has COVID-19 completely changed everything? We do our best to answers these burning questions and more!
Obviously, we are living in unprecedented times amid COVID-19 – how has that changed the landscape of homebuying? Or is that a myth?
That is definitely not a myth. There have been major changes in recent months. Most notably, COVID has created a very low inventory environment in some markets. Homeowners who are comfortable – especially in the suburbs – are staying put right now. They're waiting to see what happens with COVID and the economy, especially longer-term. The housing supply is primarily driven by people who have an immediate need to move, because of a job change or something else that's occurred in their life.
Meanwhile, there's a decent number of people looking to purchase a home right now, partly due to low interest rates and partly due to the fact that they may be in an urban center and looking for more space to live and work. Thus, it's a seller's market.
In some cases, we've seen buyers involved in bidding wars and making offers at the sale price or even above. I happened to speak with realtor recently who said she's heard of people looking at homes online, and the listings are disappearing in real time in front of their eyes. Some buyers are making offers sight unseen – just based on pictures online.
These low mortgage rates seem like a once-in-a-lifetime opportunity. Should homebuyers stretch their budget to get their dream home while they have the chance, or is that a mistake?
I would not tell anybody to stretch their budget. Homebuyers need to feel comfortable with their home purchase and know that it's relatively easy to make their mortgage payment on a monthly basis. They should buy a home that's well within their means.
Is there a general safety zone for what's in your means?
Yes, and it's not about the down payment, it's the monthly payment. Most mortgages out there require a 43% debt-to-income ratio. So, what a borrower should be saying is, "Here's my income, divided by 12," then take their new mortgage payment, including taxes and fees, their credit card payments, their car payments and other debts, and see how close it gets to 43%. The closer you get to 43%, the more difficult it is to repay.
What are some myths about price range? What are some people not taking into account in addition to mortgage?
I'm of the mind that a buyer should always attend the home inspection. Inspectors will show the buyer where repairs will be needed and can give them cost estimates for those.
If the inspector says the roof is good for another five years, it's good to know how much it'll cost and making a note of that. That can also help with negotiating the purchase price of the home. Or at the very least, the buyer will understand how much future repairs may cost and mentally account for it. If the buyer knows they'll need to spend $10,000 on a new roof, they can create a plan for that, such as putting money aside on a monthly basis.
With that in mind, are there any misconceptions about getting approved for a mortgage? How has the pandemic affected that in any way?
For the typical homebuyer who works at a major company or small business and gets compensated through their W-2s, nothing has really changed. They may just experience additional employment checks closer to closing, as the lender ensures they haven't been impacted by COVID.
However, it's gotten a little more challenging for self-employed borrowers. Lenders not only want the past year's tax returns for 2019 and 2018, but they also want an updated P&L (profits and losses) for the year to date. And they want confirmation that the business has not been negatively impacted by COVID. So for example, for a restaurant owner who is trying to get a mortgage right now, there's going to be a significant interest in understanding what the impact of COVID has been on their business. That makes it even more important for those homebuyers to work with a lender with a lot of experience and expertise in serving self-employed borrowers.
Homebuying, especially mortgage interest, can be a benefit to a person at tax time. What are some other benefits that the average prospective homebuyer may not know about owning your own home?
Yes, most homebuyers get to write off mortgage interest that was paid on their first $1 million in mortgage debt on their primary or second home.
I would also say that people need to consider this an investment. When someone owns a home and pays down their mortgage, they build equity over time. In the future, if they have other needs or perhaps they have a lift in the value of your house, they can tap that equity to cover things like home renovations or sending kids to college. Building up equity will also help them buy their next house.
What advice would you give first-time buyers to help them avoid making risky decisions they'll regret later?
First-time homebuyers shouldn't get fooled by the furnishings. Homes are staged for sale with great furniture, nice artwork and more. All that stuff may look good, but it's important to pay attention to the home inspection and understand what is really underneath it all.
And conversely, when someone is looking at a house and the carpet is horrible or they don't like the color of the place, they need to be able to look beyond that. It may actually create more of a buying opportunity, because the five people behind them may have felt the same way. Things like paint and carpet can all be replaced. See if the house has good bones. It could be a gem.
How important is credit to the homebuying journey?
Credit is incredibly important. Someone with a low credit score is going to have a harder time getting a mortgage – and if they do, the price will be higher. But with a score in the high 700s, a borrower will get the best terms from an interest rate perspective, because lenders perceive them as having lower risk.
Anyone thinking about purchasing a home needs to get a copy of their credit report. It allows people the opportunity to contest things that may not be accurate and or bring any accounts current before applying for a mortgage. It's hard to get that fixed in the middle of the process because it can take months to get things cleaned up off a credit report.
How important is it to have professional advice? Lots of buyers are turning to online and digital means and think everything can be done by themselves or without sitting down with an expert.
I'm glad you asked that. I always tell homebuyers to meet with a knowledgeable mortgage loan officer at the very start of their homebuying process – for two reasons.
One, a loan officer can give a homebuyer a good idea of how much of a mortgage they qualify for, so that they'll have a budget in mind when shopping for a home. They'll look at their financial situation and ask the right questions – how long they expect to stay in this house, what their job situation is, and more. They can help to identify what the objective is for this home and can run loan scenarios to recommend options that would be the best fit.
And two, a loan officer can help a homebuyer get pre-qualified for a mortgage, which is an important step and even more critical during COVID, as many sellers are only showing their homes to serious buyers. Additionally, realtors are going to ask for a prequalification letter anyway, because they're not going to start showing people houses they can't qualify for.
Are there any other tips for homebuyers or products they should be aware of?
Yes, a couple things. First, homebuyers frequently ask for a 30-year mortgage with no points. And while that can be a great mortgage, it may not be the best one for a buyer who is moving every five or seven years, or for someone who plans to retire soon. It may be better to look at adjustable-rate mortgage (ARM), which locks the interest rate for several years – typically 5, 7 or 10 years – and then becomes variable. In normal market conditions, ARMs usually offer lower much interest rates than 30-year loans. During COVID, rates are at historic lows across the board, so the benefit isn't as much. Borrowers should also run scenarios to see if buying down their interest rate with mortgage points makes sense. (Mortgage points are basically an upfront fee to secure a lower interest rate.) If a borrower is purchasing their forever home, paying a point or so upfront will reduce the amount of interest they are paying and save them money over time.
Additionally, if homeowners have a little extra income, they may want to think about how they're paying their mortgage. Typically, borrowers pay their mortgage on a monthly basis – but some mortgage companies offer a bi-weekly mortgage plan, whereby borrowers make a payment every two weeks. It gives borrowers the ability to make one extra payment per year, which saves significant interest over the time of that mortgage and cuts time off the life of the loan. Borrowers can do this manually, of course – by dividing the amount their monthly mortgage payment by 12, and adding that amount to each payment throughout the year.