Mortgage rates have cratered as the COVID-19 pandemic has gripped the nation, and a shocking 6.7% of the workforce lost their jobs in the last four weeks.
As of April 24, the 30-year-fixed-rate mortgage averaged just 3.33%. Wait, there’s more - a forecast issued by Fannie Mae this month predicts rates may drop to 3.1% in the third quarter, and to a stunning 2.9% by the end of the year.
Rates are rarely this low. So who’s ready to refinance or buy a home?
Not so fast.
Even with the rock-bottom interest rates, some borrowers and homeowners may hit the shoals when trying to qualify. Lenders are reconsidering who they will allow borrowing money during the coronavirus pandemic. Banks are announcing stricter underwriting requirements and eliminating some mortgage products entirely.
It would seem, in a way, that the mortgage market has caught the virus, as well. Homeowners and borrowers still get approved, but it’s a tougher path to the closing table right now, to be sure.
That’s a shame, because as nationally-syndicated real estate columnist Peter G. Miller states, “now is the time for cash-out refinancing’ as interest rates are so astronomically low. Buying a home has rarely been this inexpensive either. But qualifying? That’s another story for many strapped Americans.
Lenders Tighten Mortgage Approval Process
The median credit score for current purchase loans is about 40 points higher than the pre-COVID-19 pandemic level of 700. That means a 740 FICO score for the lowest rates.
JP Morgan, one of the biggest home lenders, has increased its requirements for most new mortgages. Reuters reported last week that borrowers applying for a new loan need a FICO score of at least 700 and a 20% down payment.
Flagstar, one of the largest lenders in the US by total volume in 2018, boosted the minimum credit score for VA, FHA and USDA loans to 680. If you want to pull out cash, you must have at least a 700 credit score.
Some other FHA-approved lenders want a 740 credit score, while others added a 15% increase for borrowers with scores between 600 and 619. Even some FHA in-process loans were dropped just days before closing because of tightened credit standards.
Stricter Job Verification Processes
Mortgage lenders are taking other steps to reduce the chance of underwriting risky home loans. As part of the standard underwriting process, all home lenders must verify’ the borrower’s employment. This is usually done about 10 days before the loan closes. Now some lenders are verifying employment on closing day because of the turmoil in the employment market.
People are losing jobs so quickly that some lenders, such as United Wholesale Mortgage, want to make sure the borrower is still collecting a paycheck on closing day.
Mortgage Credit Availability in March Dropped Like a Stone
Mortgage credit availability in March fell to its lowest point in more than five years, according to a survey by the Mortgage Bankers Association. Lenders stated there was a significant drop in liquidity as investors in jumbo mortgage-backed bonds are pulling out. Jumbo loans are valued above the conforming loan limit of $510,400.
According to MBA economist Joel Kan, there is less availability of home loans with lower FICO scores and higher loan-to-value (LTV) ratios. The biggest pullback in credit availability was in jumbo loans and non-qualified mortgage (QM) loans.
Non-QM loans are mortgages that are outside the standards for government purchases. Kan also noted lenders are tightening lending criteria to account for the higher chances of loan defaults and forbearance.
Increased Times for Mortgage Approvals, Too
The whole mortgage process is also taking longer, as title companies are shut down or working remotely. Notaries and appraisers cannot do their jobs in person, either, so the timelines for closing a mortgage has gotten longer.
After most natural disasters, lenders extend the time frame to six months before they have to re-verify the borrower’s assets and income. Now, many of the applications that were turned in two months ago will be rejected because of timing problems or because borrowers got pink slips.
Sub-Prime Borrowing Is Gone - Again
Back in 2005 through 2008, subprime borrowers could be approved with zero down, under 600 credit scores, and even no financial documentation. Then the crash happened, and sub-prime mortgages vanished.
But in 2014, a new type of subprime mortgages appeared in the US. They were called non-QM or non-qualified mortgages. A borrower could get a loan with 10% down, 12 months of bank statements instead of tax returns, and a 660 credit score.
Other loan programs allowed borrowers not to fill out the income and employment sections of the application. If you made a dollar more than the interest-only mortgage payment, you could be approved.
It took a week during the COVID-19 pandemic for these ‘new and improved’ subprime loans to vanish. By March 24, all types of non-QM loans were melting down. Banks stopped approving purchases and mortgage refinances that were in line. Millions of workers in the subprime market have been losing their jobs, with a staggering 26 million jobs lost in the last five weeks.
This time, it was the market that shut down the subprime market, not the Federal Reserve. Non-QM investors freaked out at the economic calamity caused by the virus. How likely is it that non-QM mortgages are reliable investments when the job market has been gutted in mere weeks?
Second Mortgages a Tough Go, As Well
Even homeowners with on-time mortgage payments who want a second mortgage are being eyed carefully. Here’s a quick rundown of lender rules for getting a second mortgage.
• Bank of America: Minimum credit score for home equity loan credit score raised from 660 to 720.
• Wells Fargo: Minimum credit score for a home equity line of credit raised from 680 to 720.
Banks also are reducing the amounts they are willing to lend in second mortgages. The previous high end was around $250,000. Now the ceiling is $150,000, $100,000, or even lower.
Lenders are even scaling back the percentage they are willing to lend. Eighty-percent LTV was the standard two months ago. Now some lenders are only allowing 70% or 75% LTV.
Thinking About Buying or Refinancing in This Uncertain Environment?
People who want to buy or refinance real estate during this economic crisis may need to rethink things to obtain mortgage approval:
• Have at least a 680 credit score, and 700 is better. 740 is best.
• Reduce debt as much as possible.
• Get out your latest months of bank, stock, and retirement statements to show how much cash you have.
• Think about how to talk to your boss about getting a letter stating that you are an essential employee. Or, have an excellent recent employee evaluation to show the lender.
• If you have been temporarily furloughed, you may get approved for a mortgage in some situations if you have an email from your employer, a year-to-date pay stub, or a bank statement showing a recent payroll deposit.
Silver Lining?
All is not lost, though. There still are mortgage options available for lower-income and less-than-stellar credit borrowers. They aren’t sub-prime loans, but the qualifying standards are looser, for now.
Fannie Mae, for example, still offers its HomeReady Mortgage with a 3% down payment, documented income and a minimum 620 credit score. JPMorgan still offers a ‘DreaMaker’ loan that requires a 3% down payment and a 620 credit score. But you can expect your work history and current employment to be carefully scrutinized on an application for any mortgage in 2020.
Forecast - Prepare for a Bumpy Path to Mortgage Approval in 2020
While hope exists for people with lower credit scores and down payments, there’s little doubt that participating in the American Dream of homeownership got tougher for the foreseeable future in the era of COVID-19.
