Borrowers will find it harder than ever to get a mortgage this spring — here’s why
It’s a blatantly good news, bad news story. The Good: The lowest mortgage rates in recorded history are motivating many would-be homebuyers and refinance homeowners to take out a loan. The Bad: Amid the economic turmoil caused by the novel coronavirus, getting one of these loans has become significantly more difficult.
As more Americans are furloughed and given pink panties, lenders—keeping in mind the real estate bust more than a decade ago—are demanding higher credit ratings and bigger down payments. Some have stopped making loans they consider riskier, such as B. Loans for self-employed borrowers and real estate investors; those requiring lower credit scores and down payments; and those for larger amounts, such as B. Jumbo mortgages. Or they raise fees to make the loans unaffordable.
That means some people who still want to go ahead and use these record low mortgage rates won’t be able to. Interest rates on a 30-year fixed rate loan fell to just 3.23% for the week ended April 30, according to Freddie Mac.
That’s the lowest level since Freddie Mac began tracking interest rates in 1971.
Still, the availability of mortgage credit fell 16.1% in March — a clear indication that lending standards are tightening, according to the Mortgage Bankers Association’s Mortgage Credit Availability Index. This is the index’s lowest level since mid-2015.
Lenders have reason to be cautious. About 7% of mortgages were forborne as of April 19, according to MBA. Experts predict that as the downturn drags on, the number of homeowners unable to make loan payments due to economic difficulties will increase. Another wave of foreclosures may not be far behind when the forbearance periods end, usually in 12 months.
“The guidelines have tightened enormously, which is to be expected in times like these,” he says Matthew Graham, Chief Operating Officer of Mortgage News Daily. “While it’s definitely unfair to borrowers who would make all their payments on time, lenders are bracing themselves for the increased likelihood of forbearance.”
About 5% to 20% of potential borrowers could have trouble getting a mortgage because of the higher standards, he says Javier VivasHead of Economic Research for realtor.com®.
Those numbers are likely to rise as the recession deepens. Unemployment could top 20% in some worst-case scenarios, and even those who hold on to their jobs could see their salaries drop and lose bonuses, overtime and side jobs. Many of these people have already ruled out immediate plans to buy a home.
“In the short term, it will be challenging for buyers to qualify for a home mortgage,” says Vivas. “In the medium and longer term, the bigger concern will be whether they can carry that mortgage through the recession.”
Some lenders require higher credit scores
Many people with average credit, who may have even been pre-approved for credit earlier this year, may have trouble qualifying for credit in today’s environment.
Before most people heard about COVID-19, credit score requirements started at just 580 — or lower in some cases. These primarily involved government-backed loans such as mortgages from the Federal Housing Administration, the US Department of Veterans Affairs, and the US Department of Agriculture. Now most lenders issuing these loans require credit scores between 640 and 680.
“That’s a pretty substantial increase,” says the longtime mortgage broker Rock Andrews, who is based in Tucson, AZ. He is also President of the National Association of Mortgage Brokers. “It hurts a lot of first-time buyers.”
Most JPMorgan Chase borrowers require a credit score of at least 700 — and 20% lower — to qualify for a new loan. (There’s at least one exception, the DreaMaker program, which caters to low- and middle-income people and first-time homebuyers with lower credit scores and smaller down payments.) The bank was the fourth-largest mortgage lender in 2019, according to Inside Mortgage Finance.
“Due to the economic uncertainty, we are making temporary changes that will allow us to focus more on serving our existing customers,” a spokesman for Chase Home Lending said in a statement.
Flagstar Bank and Better.com are now also requiring borrowers to have higher credit ratings. Flagstar requires 660 points for FHA loans and 680 points for VA and US Department of Agriculture loans. Better.com requires a minimum of 680 points. Previously, the minimum lender score was 640.
During this crisis, Navy Federal and Better.com temporarily stopped offering FHA loans altogether.
“Credit policy is being tightened for everything. … We don’t want another crisis to happen when people get loans they can’t afford,” the spokeswoman for Better.com said Tanya Hayre. The online brokerage firm issued nearly 3,000 loans totaling about $1 billion in March. “Hopefully everything will go back to normal soon.”
Fewer jumbo mortgages are being offered
Fewer lenders are offering jumbo mortgages in this crisis. That’s because with these larger loans, there’s more money at stake if borrowers indulge in leniency or default on their payments. Jumbo loans typically start at around $510,000 and go up to just over $765,000 in some of the country’s most expensive real estate markets.
Banks don’t like to keep loans on their books because it ties up capital that they could use to make more loans. Therefore, they typically bundle mortgages together and sell them to investors in the secondary mortgage. But jumbo loans aren’t backed by Fannie Mae or Freddie Mac. So investors see them as risky, especially at a time when many people are indulgent and not making payments on them and not buying.
That means banks have to keep those loans if they can’t repay them, limiting the number of new loans they can make money from. Some lenders don’t, at least for now — or they charge fees to give themselves a financial cushion against a potential default and to discourage people from taking them.
“We’ve seen a really rapid slowdown in this market,” he says Joel Kan, MBA economist. “It’s harder to get a jumbo loan and the interest rates are higher.”
Wells Fargo will continue to offer the loans to buyers, but will only refinance jumbo loans for its customers with at least $250,000 in assets at a Wells Fargo bank.
“The jumbo market hasn’t entirely disappeared,” he says Matthew Gardner, Chief Economist of Windermere Real Estate. The Seattle-based brokerage firm has locations in 10 western states. But he adds that investors “turn their attention away from loans that aren’t guaranteed by government-sponsored entities,” like Fannie and Freddie.
The self-employed, gig workers and real estate investors may have a harder time
The self-employed, gig workers, and real estate investors may also struggle to obtain a mortgage. Many of them would typically apply for a nonqualifying mortgage because they need to verify their income using bank deposits instead of more traditional W-2 forms, payslips, and tax returns.
But these mortgages are considered riskier — and investors in the secondary mortgage market have little appetite for anything other than the safest assets. As a result, fewer lenders offer them — or they increase the cost of these loans to account for the risk.
Those extra fees, or charging extra points, are “a sneaky way to not make those loans,” says lender Andrews.
Also, some lenders discount self-employment income. That means they may only count a portion of what those borrowers did last year, maybe 70% or 80%, as qualifying for a mortgage. Some don’t account for bonuses and expect these people to make less money this year as the economy is in turmoil.
Discounting income also increases the debt-to-income ratio — another factor that affects whether someone gets a loan. Lenders traditionally like to see less debt and more cash in.
Lenders conduct additional income checks
With people losing their jobs or taking vacations every day, lenders are also waiting until the last minute to verify employment and income. So instead of contacting borrowers’ employers two weeks or 10 days before a deal, they do it a few days before or even that day.
“It can be catastrophic when someone loses their source of income just before buying a home,” says the longtime mortgage lender Jason Lerner. He is Vice President at George Mason Mortgage in Lutherville, MD, a suburb of Baltimore.
Erika and Ian Rasmussen A four-bedroom, two-bathroom home in the coastal Long Island town of Greenport, NY was scheduled to close. The couple, who live in nearby Port Washington, wanted to use the century-old home as a vacation home and short-term rental property.
But a few days before the closure, Erika, 38, was fired from her marketing job with an advertising association. This put the deal in jeopardy, despite her husband’s work as the owner of a construction consulting practice and the extra income they earn from a rental property.
Erika had planned to start her own business as a consultant and had landed a few clients, but the pandemic and layoff threw up her schedule. Her lender would not consider her consulting income because she hadn’t calculated that income for two years.
“We really messed up a lot to save the deal,” says Erika.
They ended up diving into their 401(k) accounts to make a larger down payment, about 40% of the purchase price, to satisfy their lender. They closed on the property last week. (Lawmakers recently allowed people to withdraw up to $100,000 from their 401(k) accounts due to the crisis. They have three years to pay it back before facing typical early withdrawal penalties.)
“The picture of unemployment has definitely deteriorated very quickly,” says MBA Kan. “This is one of those economic events where we really don’t know when it’s going to be over and when things will go back to normal. ”