by Maurie Backman | Feb. 4, 2021
Buyers are still clamoring for home loans. Should you get one, too?
Home loan applications slowed down a little at the start of the year, when mortgage rates began to creep upward. But that trend seems to have reversed, at least for now. Mortgage applications rose 8.15% for the week ending Jan. 29 after two straight weeks when volume decreased, according to the Mortgage Bankers Association. With applications rising and rates still low, you may be thinking about getting a mortgage yourself.
Buying a home in today's market may prove challenging. For one thing, there's a very limited number of homes for sale, so you might struggle to find one that meets your needs. Also, housing prices have soared during the pandemic. You may find that even a starter home comes dangerously close to busting your budget.
Still, if you do find a suitable and affordably priced home, you may be tempted to apply for a mortgage to capitalize on today's competitive rates. So how do you know if you're ready? To find out, ask yourself these questions.
You'll need a minimum credit score of 620 for a conventional mortgage, though some lenders impose stricter requirements. But if you want to snag the great rates you keep reading about, you generally need a credit score in the mid-700s or higher. If you're not there, you may want to hold off on a home loan and work on boosting your credit score.
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If you're loaded with debt, you may not get approved for a home loan. Mortgage lenders look closely at your debt-to-income ratio, which measures your existing monthly debt obligations relative to your earnings. Too high a ratio could land you in a lender's rejection pile. But even if you get approved for a mortgage when there's a lot of debt in your name, adding another monthly bill to the mix could result in a true cash crunch. You may be better off delaying your home loan application and chipping away at the debt you already have.
You may be gainfully employed right now -- but do you expect to stay that way? If you're in an industry impacted by the pandemic, you may not want to take on the expense of a home. Even if you're not in a particularly vulnerable industry, ask yourself how your company is doing. Are there rumors of layoffs? Have colleagues been let go recently? The last thing you want is to sign a mortgage only to lose your job shortly thereafter, so assess how likely that is to happen.
Chances are, mortgage rates will stay competitive all year, and mortgage application volume will remain healthy. If you're thinking of getting a mortgage, make sure the timing is right. Don't assume you'll lose out on a great deal if you wait six months to apply. You're better off buying a home when you're truly ready than pushing yourself when you're not there yet.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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