Real estate agent with house key

It’s a stark good news, bad news story. The good: The lowest mortgage rates in recorded history are motivating many would-be home buyers and refinancing homeowners to seek out a loan. The bad: Amid the economic upheaval caused by the novel coronavirus, it’s become significantly more difficult to get one of those loans.

As more Americans are getting furloughed and pink-slipped, lenders – ever mindful of the housing bust of more than a decade ago – are requiring higher credit scores and larger down payments. 

Some have ceased making loans they consider riskier, such as those for self-employed borrowers and real estate investors; those that require lower credit scores and down payments; and those for larger amounts, such as jumbo mortgages. 

Or they may be jacking up fees to make the loans prohibitively expensive.

That will mean that some folks who still want to go ahead and take advantage of those record-low mortgage interest rates won’t be able to do so. Rates fell to just 3.23 percent on a 30-year fixed-rate loan for the week ending April 30, according to Freddie Mac.

Yet the availability of mortgage credit dropped 16.1 percent in March—a clear indication that lending standards are tightening up, according to the Mortgage Bankers Association’s Mortgage Credit Availability Index. That’s the lowest level of the index since mid-2015.

Lenders have reasons to be cautious. Roughly 7 percent of mortgages were in forbearance as of April 19, according to the MBA. Experts predict the number of homeowners unable to make loan payments due to economic hardship will rise as the downturn drags on. 

Another wave of foreclosures may not be far behind when forbearance periods end, typically in 12 months.

“Guidelines have tightened up immensely, which is to be expected at times like this,” said 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 adjusting for the higher probability of forbearance.”

About 5-20 percent of prospective borrowers could have trouble getting a mortgage due to the higher standards, said Javier Vivas, Realtor.com’s director of economic research.

Those numbers will likely rise as the recession worsens. Unemployment could top 20 percent in some worst-case scenarios, and even those who hold on to their jobs could see their salaries fall and lose bonuses, overtime pay, and side gigs. Many of these folks have already ruled out immediate plans to buy a home.

“In the short term it will be a challenge for buyers to qualify for a home mortgage,” said Vivas. “In the mid- and longer term, the bigger concern will be whether they can carry that mortgage through the recession.”

Many folks with average credit scores, who may have even been pre-approved for a loan at the beginning of the year, may have trouble qualifying for a loan in today’s environment.

Before most folks had heard of COVID-19, credit score requirements started at just 580—or lower in some cases, primarily for government-backed loans. Now, most lenders issuing those loans are asking for credit scores starting between 640 and 680.

“It’s a fairly substantial increase,” said Arizona mortgage broker Rocke Andrews, president of the National Association of Mortgage Brokers. “It hurts a lot of the first-time home buyers.”

Most JPMorgan Chase borrowers will need a minimum 700 credit score and 20 percent down to qualify for a new loan. (There is at least one exception, the DreaMaker program targeted toward low- and moderate-income and first-time home buyers with lower credit scores and down payments. The bank was the fourth-biggest mortgage lender in 2019, according to Inside Mortgage Finance.

Flagstar Bank and Better.com are also now requiring borrowers to have higher credit scores. Flagstar is asking for 660 scores for FHA loans and 680 for VA and U.S. Department of Agriculture loans. Better.com is asking for minimum 680 scores. Previously, lenders’ minimum scores were 640.

During this crisis, Navy Federal and Better.com have temporarily stopped offering FHA loans altogether.

“Credit policies are tightening for everything... We don’t want to see another crisis happen when people are getting loans they can’t afford,” said Better.com spokeswoman Tanya Hayre. 

Fewer lenders are offering jumbo mortgages during this crisis because more money is on the line if the large borrowers go into forbearance or default on their payments. Jumbo loans typically start around $510,000 and go up to just over $765,000 in some of the nation’s most expensive real estate markets.

Banks don’t like to keep loans on their books, because it ties up capital they could be using to make more loans. So, they typically bundle up mortgages and sell them to investors in the secondary mortgage. 

But jumbo loans aren’t backed by Fannie Mae or Freddie Mac. So investors consider them risky.

“We did see a really rapid slowdown in that market,” said Joel Kan, an economist at the MBA. “It’s harder to get a jumbo loan, and rates are higher.”

Self-employed, gig workers and real estate investors may also struggle to obtain a mortgage. 

Many of them normally apply for a non-qualified mortgage because they need to verify their income with bank deposits instead of more traditional W-2 forms, pay stubs, and tax returns.

But these mortgages are deemed riskier and investors in the secondary mortgage market have little appetite for anything but the safest investments. 

Lenders are upping the cost of these loans to account for the risk.

Plus, some lenders are discounting self-employed income. That means they might count only a portion of what these borrowers made last year as qualification for a mortgage. Some aren’t factoring in bonuses, expecting that these folks will earn less money this year with the economy in turmoil.

The discounting of earnings also boosts debt-to-income ratios – and lenders traditionally like to see less debt and more money coming in.

With folks losing their jobs or getting furloughed every day, lenders are also waiting until the last minute to verify employment and income. 

“The unemployment picture has definitely gotten a lot worse and quickly,” said Kan.

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