Guide to Buying Your First Home During a Pandemic

The impact of the coronavirus on the housing market

The Coronavirus pandemic has dramatically impacted the global economy in a matter of just months. While economists were already projecting a 2020/2021 recession back in 2019, COVID-19 appears to have pushed us all into that recession earlier than expected. Between the increase in unemployment, the volatility of the stock market, and the U.S. recession model sitting at 100%, all signs indicate that the 2020 recession has already begun. 

But what does this mean for the housing market? The Great Recession of 2008 was characterized by the near-collapse of the housing market. But housing markets have actually fared rather well in previous recessions, often continuing to grow in value even as stock market prices fell. Unlike previous recessions, today’s situation isn’t just financial. We’re all adjusting to life under social distancing standards, changing the way we live, work and buy real estate. The real estate industry has been quick to adapt, with agents offering virtual home tours and states authorizing remote online notaries to remove the face-to-face aspect of closings.

Ultimately, none of us know at this point exactly how the coronavirus recession will impact the housing market. The U.S., as a whole, has enjoyed hot seller’s markets for the past several years, and this recession could simply provide a small “correction” to bring markets to a more balanced state. Markets hardest hit by today’s unemployment could see a shift into buyer’s markets as demand declines and home prices dip despite lower mortgage rates. This could give first-time homebuyers an advantage. 

Even though showings and closings have decreased due to stay-at-home orders, many buyers are still in the market for a new home. For people fortunate enough to have strong finances and job security, 2020 could be a smart time to buy a home. 

As the world around us is quickly evolving, so is the home buying process. This guide will give you the information you need to navigate today’s buying process as a first-time homebuyer.

Benefits of being a first-time homebuyer

Being a first-time homebuyer comes with a few advantages. Homeownership is generally good for the country, because it brings stability to the economy and a sense of community to neighborhoods. So there are federal, state and local programs available to help first-time homebuyers. We’ll discuss specific programs later in this guide, but let’s quickly touch on a few benefits for first-time homebuyers.

Depending on certain factors, like your income level or credit score, you may qualify for some, or all, of these five first-time homebuyer benefits:

  1. Access to financing: There are special loan programs available specifically to help first-time buyers become homeowners.
  2. Down payment assistance: You may be able to qualify for a low down payment or even get a grant to help cover the cost of your down payment.
  3. Relaxed credit standard: Some loan programs allow first-time homeowners to buy with less-than-stellar credit. Lenders typically tighten their credit requirements under a recession, but first-time buyers may have more leeway than the average buyer. 
  4. Grants for closing costs: State and local programs may offer grants you can apply toward closing costs. These grants don’t need to be repaid as long as you meet the requirements for the grant.
  5. Federal tax credits: All homeowners receive some federal tax breaks, but during a recession, the federal government may incentivize first-time buyers further. During the 2008 recession, for example, the IRS offered a first-time homebuyer credit of 10% of the purchase price (up to a certain amount, depending on the timing of the purchase).  

While there are several benefits to being a first-time homebuyer, the process can still be difficult to navigate, particularly during a recession. The rest of this guide will give you more insight into the process.

Who qualifies as a first-time homebuyer?

We tend to think of first-time homebuyers as people who have never before owned real estate, but that’s not always the case. You may qualify for first-time homebuyer benefits more than once. 

According to the U.S. Department of Housing and Urban Development (HUD), you can be a first-time homebuyer if you meet any of the following criteria:

  • You have had no ownership in a principal residence during the three-year period leading up to the purchase of your new home.
  • You’re a single parent who has only owned property while married to a former spouse.
  • You’re a displaced homemaker and have only owned property with a spouse.
  • You have only owned a principal residence that wasn’t permanently affixed to a permanent foundation in accordance with applicable regulations (i.e. a mobile home). 
  • You have only owned a property that was not in compliance with building codes and would have cost more to make compliant than to rebuild.

Are you ready to be a homeowner?

Owning a home is an exciting milestone in people’s lives. However, it comes with great commitment and responsibility. Do you think you are ready to be a homeowner? Take this quiz and find out!

What are the steps to take before you buy?

Even before you start browsing home listings, there are a few steps required to prepare you for the home buying process.

Step 1: Get your finances in order 

Buying a home during a recession typically means better interest rates and lower home prices. But to take advantage of these financial perks, you need to go into the transaction with your finances in order.

Having some money in savings is critical. Not only to help with the down payment and closing costs, but also to take care of any immediate repairs or renovations needed, as well as having money set aside for when an appliance inevitably needs replacing.

Financial planners often recommend you keep enough money in your savings account to cover three to six months’ worth of living expenses. However, with a period of economic uncertainty, it’s wise to have even more. The idea is that you’ll have cash available to cover your expenses for a few months if you were to lose your job and need some time to get back on your feet.

Make a list of all your expenses, tracking your current spending to make sure your estimates are as accurate as possible, and do your best to plan for any life changes that will affect your expenses. You need to know where your money is coming from and where it’s going. 

Now is also a good time to babysit your credit score. Lenders rely heavily on your credit score to decide how much they’re willing to lend you and at what interest rate, so now is not the time to apply for new loans, miss any payments or ignore any questionable activity on your credit report.

With your finances in order, now is a good time to decide how much you’re comfortable spending on a down payment. Some of the next steps will try to get you close to that number.

Step 2: Compare your needs and wants

What kind of home is going to best suit your lifestyle? A single-family home, townhome, condo or duplex? Would you rather have a fixer-upper or something move-in ready? During a recession, you may be able to get an especially good deal on older homes that have been sitting on the market for a while, because they require a little extra TLC.

Buyers in a recession can also often take advantage of short sales and foreclosures. Short sales are homes that are being sold for less than the amount the current owners owe on their mortgage. And foreclosures are homes that have reverted back to the bank, because the previous owner defaulted on the mortgage. Since banks are in the lending business, not the property management business, they typically want to get these properties off their books, so they may be willing to let them go for an amount less than the market value. But be warned, these homes can take longer to close on because the banks can take some time to process and approve these transactions. And these homes are usually sold in as-is condition, because the banks are unwilling to invest money in renovations or repairs.  

Once you know what kind of home you’re looking for, you can spend some time daydreaming about your ideal neighborhood, square footage, outdoor space and in-home features. Make a list with one column for your needs (all the non-negotiables) and one for your wants (the things that would be nice, but you could live without) to help you prioritize. 

Step 3: Interview real estate agents

While a real estate agent isn’t required to buy a home, getting an agent to represent you in your purchase is always a good decision. As the buyer, you don’t have to pay for your agent; the seller pays the fees for both their agent and yours. So there’s really no reason not to have an agent. 

While you may only complete a handful of real estate transactions in your entire life, real estate agents deal with these transactions every day. They know the local market and they can guide you through the process from start to finish.

Take a little time to interview multiple agents to find one you’re comfortable with. Agents are happy to do consultations via phone or video conferencing, so you can line up your agent and work with sellers virtually to tour homes even during the pandemic. Ask for testimonials from other satisfied clients and ask if your agent knows of any “coming soon” listings that haven’t hit the market yet. 

Step 4: Get preapproved

In your interviews with real estate agents, the term “preapproved” will likely come up several times. Being preapproved means a lender has looked over your financials (including your credit score, income and savings for the down payment) and has agreed to loan you a certain amount of money.

Savvy buyers get preapproved on or before Day One of their home search. Here’s why:

  • During a recession, lenders tighten their qualification requirements. They’re taking more of a risk lending money to buyers in uncertain economic conditions, so they need to make sure you are well-qualified. Getting preapproved confirms that you qualify for a home loan under today’s strict requirements.
  • A preapproval tells you how much of a loan you can qualify for, which gives you your maximum spending limit. Figure out how much you qualify for before you start looking at homes that may be outside your price range.
  • A lender’s preapproval gives your offer extra weight when you’re ready to make an offer on a home. The preapproval shows the sellers you qualify for financing so they don’t have to worry so much about the deal falling through because of funding.

One key benefit of buying during a recession is that you generally get an interest rate that’s lower than normal. The lower the interest rate, the less money you pay over the term of your loan. In fact, a 1% drop in interest rates can add $30,000 to your purchasing power

It’s important to shop around to find the best possible terms. You can start here.

Step 5: Set your budget

One of the most common mistakes first-time homebuyers make is accepting the amount on their preapproval as their budget. Just because you’re approved for a specific amount doesn’t mean you have to spend that much. Hitting your maximum limit can leave you with a lovely home that you can’t afford to enjoy. Being “house poor” means you don’t have enough money left over after paying your mortgage to comfortably cover costs of things like maintenance, utilities or entertainment.

This is why you need to set your own budget for how much house you can afford, independent of the preapproval. In addition to upfront costs, like your down payment and closing costs, consider your monthly payment amounts, which include not just principal loan repayment and interest, but also property taxes and homeowners insurance. 

Your down payment can vary greatly (anywhere from 0% to 30% of the purchase price depending on your loan program and creditworthiness), and your closing costs will vary by location (typically coming in at 2% to 5% of the purchase price). Property taxes and homeowners insurance also vary by state. You can contact your County Tax Assessor for information on property taxes and get quotes from homeowners insurance companies for your area.

Don’t forget to account for regular maintenance, like deep cleaning, landscaping and servicing the heating system, as well as for periodic expenses, like replacing appliances, roofing and fixtures as needed.

Step 6: Research first-time homebuyer programs

As previously mentioned, there are federal, state and local programs available to qualified first-time homebuyers, including access to financing, down payment assistance and grants for closing costs. Invest a little time in researching first-time homebuyer programs to make your money go further.

ProgramHow they help
FHA LoansA popular option for first-time homebuyers, FHA loans are federally insured, which gives lenders the flexibility to work with buyers who have lower credit scores and less money available for a down payment.
Fannie Mae and Freddie Mac LoansIf you have good credit, you may qualify for a 3% down conventional loan backed by federal agencies Fannie Mae and Freddie Mac.
VA LoansVA loans are backed by the U.S. Department of Veteran’s Affairs, and they allow military members (active or veteran) and their families to get home loans with 0% down.
USDA LoansTo help low-income homebuyers specifically in rural areas, the U.S. Department of Agriculture offers 0% down payment loans with low interest rates.
FHA Section 203(k) LoansThis specialty FHA loan allows homebuyers of fixer-uppers to roll their renovation costs into their mortgages. 
Native American Direct LoansA special VA program for families who are both military and Native American, Native American direct loans offer 0% down with no mortgage insurance for properties in federal trust land.
Energy-Efficient MortgagesIdeal for homebuyers of older homes who want to improve the home’s energy efficiency, energy-efficient mortgages allow buyers to roll the cost of energy-efficient upgrades into their mortgages.
Good Neighbor Next Door ProgramPolice officers, firefighters, teachers and EMTs can get a discount of up to 50% off the listing price of a home by buying a qualified home in a “revitalization area” and living there for three years.
HomePath ReadyBuyer ProgramFannie Mae offers up to 3% in closing cost assistance for buyers who complete a homeownership education course and buy a “Homepath Property” (a foreclosure owned by Fannie Mae).
Local Programs and GrantsIn addition to federal assistance, many states and cities offer additional programs and grants for first-time homebuyers. Check the HUD website for your state and ask your real estate agent if they know of any local programs. 

You’ve found a home. Now what are the next steps in the home buying process?

When you find a home that meets all of your needs and some of your wants and falls within your budget, it’s time to get serious. 

Here are the home buying steps to take once you find a home you can see yourself living in. 

Step 1: Secure financing

You’re already preapproved for a home loan, but there’s still work to be done on the financing side.

First, you need to decide how you’re going to cover the down payment and closing costs. If you qualify for federal, state and local programs available to first-time homebuyers, take advantage of them. You can also use your existing savings, withdraw up to $10,000 from an IRA and check out HUD’s resource list.

The traditional down payment amount is 20% of the purchase price. However, some first-time homebuyer programs require as little as 3% down. Just know that if you choose a program that offers less than 20% down, you could be subject to an additional monthly expense in the form of mortgage insurance. Mortgage insurance protects the lender in the event that you default on the loan. Be sure to ask your lender if mortgage insurance will be necessary and how much the mortgage insurance will cost.  

When your questions are answered, it’s time to apply for your mortgage loan. Applying is fairly quick and easy, but gathering all the required documents for your lender can take time. In addition to the basic financial account statements and proof of income you provided in order to be preapproved, at this point you’ll need to provide:

  • New account statements and pay stubs as they’re issued
  • Letters explaining any anomalies (gaps in employment, excessive expenses on your bank statements, address discrepancies from prior residences, etc.)
  • Perhaps a letter from your employer confirming employment and job title
  • And anything else your lender requests

Securing financing takes time, but the earlier you start the process, the smoother your home buying experience will be.

Step 2: Make an offer

Don’t hesitate to make an offer when you find a home that works for you. There are still a lot of buyers in the market, and you don’t want to lose your home to a competing buyer. The moment you’re reasonably certain the financing will work (it won’t be officially secured for several weeks), you can make an offer on the home. 

The best advice for first-time homebuyers making an offer is to leverage your real estate agent’s expertise. Your agent can research comparable properties to determine whether the asking price is fair. He or she can advise you on how much to offer, and whether it makes sense for you to make specific requests of the seller. 

During a recession, you may have some room to negotiate if the seller is anxious to sell. However, you may be competing with real estate investors who are looking to get a good deal as well. As a general rule, it makes sense to come in with your “highest and best” offer so the seller has every reason to accept. There’s no need to waste anyone’s time or risk a rejected offer if you want the home. 

You should also ask your real estate agent about whether or not it makes sense to include a “corona clause” to the real estate contract. This clause may give you a way out of the contract, or a way to extend the contract, if your personal or financial circumstances suddenly change to due unforeseen disruptions by the virus. 

Once your offer is accepted, you’re officially in escrow. Escrow is the period of processing your real estate transaction. In most cases, escrow takes 30 to 60 days, but this period could be longer if you’re dealing with a short sale, foreclosure or a “corona clause” extension. 

Step 3: Have the home inspected

A home inspection will cost you a few hundred dollars, but it is well worth the expense. A certified home inspector will review the home and provide a detailed report of the condition of all visible parts of the structure. While the inspection may not uncover every defect, it gives you a solid idea of what work may need to be done to the home for your safety and comfort.

Step 4: Close on the home

Closing day is a big deal. All your paperwork has been signed, your loan has funded, the escrow company has distributed funds and you get your keys. This is the day you officially become a homeowner!

You’ve bought a home — now what? 

Being a homeowner isn’t a one-time event; it’s a lifestyle. Here are a few to-dos for new homeowners.

Keep contributing to your savings account

Seeing your savings account depleted can be scary for new homeowners. Make sure you contribute to your savings regularly so you’ll be prepared for the unexpected expenses that come with homeownership. You’ll want to have a cushion for when you need to call a plumber, replace an appliance or repair the roof.

If you don’t already have auto-transfers set up, now’s a good time. You can have your checking account automatically transfer a specified dollar amount to your savings account on a specified schedule. You’ll never have to remember to transfer money or risk spending the money you intended to save.  

Ignore the housing market for a while

If you’re buying a home during a recession, there’s a good chance you’re not buying on the exact date your local housing market hits its low point. You might see values continue to decline for a while. And that’s perfectly fine. 

The important thing to remember is that housing always rebounds. It doesn’t matter if the value dips for a little while, because it will come back up. Buying a home is a long-term investment. By the time you’re ready to sell years, or even decades, from now, values will have gone up. 

But if you’re a worrier, it might just be easier for you to ignore housing market news for a year or two.

Perform regular maintenance checks

Maintaining your new home is one of the responsibilities of homeownership. And because your home is an investment, maintaining the home will pay off when you’re ready to sell it.

The trick to maintaining your home is to follow a schedule. Having a checklist of weekly, monthly and annual maintenance tasks will keep you organized and keep your home in good condition. 

Plan ahead for big projects

Aside from routine maintenance, you’ll likely tackle several big projects in your time as a homeowner. For example, repaving the driveway, renovating the kitchen and baths or adding an outbuilding to the back yard are projects that take some money, time and planning. 

It’s never too early to start thinking about ways you can improve your home. Set your big project goals now so you can start saving and preparing.

Tips from the experts

Here are a few quick tips from the experts on navigating the home buying process during COVID-19:

  • Take full advantage of online listing information. Sam Pompeo of Compass Real Estate in Los Angeles recommends viewing the virtual home tours agents have started posting online, choosing the few select properties you like most and making appointments to see only those homes in person. Limiting your in-person tours limits your exposure to the virus, and with so much information available online, you can get a good idea of whether a home will work for you or not without physically visiting the home. 
  • Think long-term. Pompeo also notes that you can’t assume prices will automatically drop because of this temporary shutdown. “The real estate market is unlike the stock market; it does not swing wildly day by day, and it is not driven by panic buying or selling. A home is not a short-term investment.” While Pompeo agrees that your home is an investment, he points out that it’s so much more than that. “A home is where you and your loved ones live. It’s where you will build a lifetime of memories. Now more than ever that concept should resonate with buyers.”    
  • Act quickly when you find a home that works for you. According to Bill Gassett of RE/MAX Executive Realty, serving the Boston area, “We have not seen any direct evidence that [the pandemic] has caused any pricing weakness. While this could change in the months ahead, buyers need to be cognizant of the fact it is still a seller’s market. If a buyer finds a home they love, it’s still advisable to act quickly and come in with a solid offer. If not, they could risk the chance of losing out to another buyer.”
  • Choose your real estate agent wisely. Lynn Pineda of EXP Realty emphasizes that now is not the time to venture out with an inexperienced agent. “You’ll have extra concerns in navigating a home purchase during any real estate market experiencing the effects of a pandemic. You’ll want to ensure your agent is well versed in selling homes when the stressors of the pandemic are added to the mix.” 

The bottom line

The home buying process is naturally intimidating, especially for first-time homebuyers. There are a lot of moving parts, new terminology to learn and some hurdles to jump. 

And if you’re taking the leap to homeowner during a recession, you have a unique set of obstacles, given the stricter lending requirements and economic uncertainty.

But a recession also provides unique opportunities to first-time homebuyers. You’ll benefit from excessively low interest rates, multiple government assistance programs and lower-than-normal home prices. By preparing your finances, carefully evaluating your housing needs and doing a little research, you can get through this complicated home buying process and take advantage of today’s market conditions to get favorable terms on your first home. 

And there are professionals to help first-time homebuyers through each step of the process. Lean on the experience of your knowledgeable real estate agent and lender to make your first real estate purchase as smooth, satisfying and profitable as possible.

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Michelle Clardie

Personal Finance Writer

With an MBA in Management and Strategy and a professional background in real estate, Michelle Clardie loves to write about all things business, real estate, and finance. She has been featured on sites like Yahoo! News and Inman. And she recently traded in her corporate career in Los Angeles for a life abroad as a writer, consultant, and coffee connoisseur.