Buying a home is a major endeavor, no matter when you do it. For those hoping to buy in 2021, an ongoing recession and global pandemic only add to the headwinds.
More than 1 in 10 Americans (11%) say they plan on buying a house in the next 12 months, according to NerdWallet’s 2021 Home Buyer Report. Some could be among the 39% who intended to buy in 2020 but postponed or canceled those plans due to the pandemic. Still others may be newly attracted to the market amid record low interest rates. No matter who they are, they’ll need to be strategic while navigating a home purchase during these tumultuous times.
Prices are high, inventory is scarce, and mortgage lenders have raised standards for qualifying applications. Buying a home in 2021 won’t come easy, but millions of Americans will manage it in the end.
A successful 2021 home purchase will require the following.
An attractive mortgage application
Given the current economic instability, mortgage lenders have raised the bar on what makes a loan application acceptable, both on conventional loans and government-backed loans, such as those insured by the Federal Housing Administration. Borrowers hoping to qualify for the best interest rates will need to have a stable income, healthy down payment, strong credit and a modest amount of debt.
Conventional borrowers in 2020 had FICO scores over 750, on average, according to mortgage data provider Ellie Mae. Prospective borrowers who fall a bit short of this can do several things to build up their score, including continuing on-time payments, paying down credit card debt and limiting new applications for credit until it’s time to apply for a mortgage.
That same data indicates that borrowers last year were putting about 20% down on conventional loans. So while a 20% down payment isn’t required — and there are low-down-payment programs available — borrowers hoping for a conventional loan will have the best odds of approval with a larger down payment.
Finally, strive to keep your debt-to-income ratio at 30% or lower, if possible. This ratio captures the amount of your monthly debt obligations compared with your monthly income. Lower is better, but average DTI for conventional loans in 2020 was about 35%.
A flexible mindset
Having a long list of must-haves may make your home search futile. Average monthly inventory was down 28% in 2020 compared with 2019 — and much lower in some places — and there are no signs it will soon change. Because there are so few homes to choose from, the pickier you are, the more difficult it will be to find a home that rises to your expectations.
If homeownership, rather than owning your dream home, is your primary objective, get real about what you need versus what you want, and what you’re willing to go without. For example, you might need three bedrooms to accommodate your family but be able to compromise on things like flooring materials, kitchen fixtures and whether the garage is attached.
Home features aren’t the only place flexibility will pay off. Forty-four percent of Americans have worked remotely at some point since March 1, 2020, according to the NerdWallet Home Buyer Report. And if you’re one of them, you may be able to consider new neighborhoods, a new town or even a new state for your home purchase. While inventory is scarce across the nation, not being tied to a 20-mile radius from the office opens up your options considerably.
A particularly competitive offer
Buyers are competing for a limited number of homes, so sellers have the upper hand. Being competitive in 2021 will most often mean making an offer at or above listing price and, in many cases, not having much negotiating power to ask for concessions or repairs later in the process. From a seller’s perspective, if things don’t work out with the first buyer, there are many more where that one came from.
A local real estate agent will have firsthand knowledge of how homes are selling in your area and can help you write an offer with the best chance of acceptance. Steer clear of personality-based appeals, such as buyer love letters, in favor of making the offer itself as attractive as possible. Make the proposed transaction look easy to the seller with a favorable price, a preapproval letter showing you can obtain financing, being amenable to the seller’s preferred closing date and requesting few (if any) contingencies.