The pandemic created a wave of consumer issues, including record-high home prices. This left many potential home buyers without a way to find a home they could afford at a time when the supply of available homes listed for sale hit a five-year low. Data showed that if all of the available homes were sold, there would be no supply within a month.
The Feds had lowered the interest rates on home loans but is now planning to raise its record-low rates several times this year. So it seems it will be even more challenging for consumers to get a home loan they can afford, as much of what’s available for sale are more expensive homes. Coupled with more expensive financing, it paints a bleak outlook.
According to a recent Fannie Mae National Housing Survey, 26 percent of consumers think it’s a good time to buy a home. This is the lowest representation of Americans in history to have confidence in purchasing a home.
But, even with the bad news, there are some things a consumer can do to secure a home mortgage without paying mortgage interest rates that are through the roof.
First, a recap of how things got to where they are.
When the pandemic ushered into the U.S. in early 2020, it set the stage for an economic shutdown. The Federal Reserve quickly dropped interest rates to near zero, from February 2020’s rate of 1.5 percent to 0.05 percent a couple of months later.
This triggered a decline in mortgage interest rates, and an average 30-year mortgage rate hit a record low of 2.65 percent by January 2021. Since then, the rate climbed to a 22-month high of 3.56 percent as of this past week and mirrored rates seen before the first shutdown.
Meanwhile, the Fed says they forecast three interest rate increases to fight against the record-high inflation that hasn’t seen current levels in 40 years.
Interest rates set by the Feds and mortgage rates tend to parallel each other. If the Feds cut or raise interest rates, mortgage rates typically do the same. Moreover, when the 10-year Treasury yield goes up, rates tend to rise as well, and the yield is getting close to their pre-pandemic levels.
The good news is that individual lenders can offer various rates to customers based on risk levels and other metrics. So far, though, banks are increasing their rates in anticipation of Fed increases.
While it’s been cheaper to buy a home throughout the pandemic, home prices have gone up because there’s been a lower supply of available homes. For instance, the average home price during the first quarter of 2020 was $329,000. During the third quarter of 2021, the median home price had gone up to $404,700, a higher-than-average inflation increase for homes.
While some economic factors are out of the hands of consumers, there is hope that consumers can lock in a lower interest rate as those interest rates still depend somewhat on down payment and credit score.
This means that a consumer will want to save as much money as possible for a down payment while still improving their credit score.
One thing a consumer can do is pay down their revolving debt to no more than 30 percent of the credit limit while avoiding opening and closing any credit accounts. A consumer’s credit utilization ratio should be low.
In essence, a potential home-buying consumer needs to be proactive and take action now to prepare for buying a home.
Another thing consumers can do is not jump into buying a home without shopping around for the best rate possible. Ask around and get referrals for lenders from trusted people and research all angles, from online mortgage lenders to traditional banks.
While some of the suggestions will take a bit of time to work on, consumers can do a few things now.
First, they should examine their credit score and record from a bureau like Experian while also understanding the factors that will affect that score. The consumer should look for any red flags or errors on their record and dispute anything that seems out of place or incorrect. The creditor will have 30 days to respond, and if they don’t, the item has to be removed from the consumer’s credit record.
In the meantime, save, save, save by putting money for a down payment away in a higher-yield savings account. Some advisors also recommend creating a lower-risk investment portfolio.
The final thing a potential home consumer should consider is creating a budget. This can help put more money away for a down payment while helping to forecast when there will be enough available funds for the down payment.
It also pays to watch market trends closely and understand the factors at play while the consumer puts themselves in the best financial position to get more favorable home mortgage terms.