Can You Get a Mortgage During the Coronavirus Pandemic?
Some mortgage lenders have tightened credit standards as they brace for a surge of delinquencies, defaults and forbearance requests due to the COVID-19 economic slowdown.
Lenders are less willing to take on risk, in general, even if you have a steady income and a strong credit record. You'll face more scrutiny if you applied for a mortgage, but your hours were cut and your credit is weak.
Here's how the coronavirus pandemic has changed getting a mortgage and what you need to know to improve your chances of approval.
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Has the Coronavirus Changed Mortgage Lending?
Trying to protect against losses, some mortgage lenders have raised minimum credit score and down payment requirements and stepped up income verification processes.
JPMorgan Chase, for instance, now requires a credit score of at least 700 and a down payment of 20% for new mortgages. Before the changes, borrowers might qualify with a FICO credit score in the fair range and a down payment as low as 3%.
Other lenders, such as Wells Fargo, demand 20% down on jumbo loans and home equity lines of credit more than $500,000. Online lender Better.com now has a minimum FICO score of 680 for borrowers and asks for three months of escrow payments for new loans.
"This should mitigate some anticipated repayment issues for the riskier loans, which comprise less than 15% of the loans Better.com usually funds," says Sarah Pierce, head of sales at Better.com. "Enacting these protections and being well capitalized are protecting Better in the current economically uncertain environment."
Lenders are taking these steps because millions have lost jobs or hours, making missed mortgage payments more likely, as well as defaults on other loans or credit cards.
A delayed mortgage payment directly affects the lender, whether that's a bank or another company that bought the loan after it closed. That's why both banks and companies that purchase mortgages are boosting their risk prevention strategies.
Are Mortgages Too Risky for Lenders Now?
Mortgage lenders are still making loans, but many have adjusted their lending standards because of market uncertainty.
"There is a lot of financial stress on many borrowers and the overall economy," says Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications. "They need to toughen underwriting to address those economic concerns."
A rapid rise in unemployment has caused risk for both borrower and lender. Lenders can make a loan, and then the borrower could unexpectedly become unemployed the next day, says Ron Haynie, senior vice president for mortgage finance policy at the Independent Community Bankers of America. "You just don't know -- that's the biggest issue," he says.
When borrowers don't make mortgage payments, investors lose money, adds John Ulzheimer, a credit expert who previously worked at Equifax and FICO.
"Mortgage loans are an investment," he says. "It's not giving out candy at Halloween."
But as traditional banks are tightening mortgage lending standards, Haynie says, community banks are applying the same credit standards they always have for mortgages.
By comparison, credit unions are doing everything they can to avoid imposing stricter lending requirements, says Mike Schenk, deputy chief advocacy officer for policy analysis and chief economist at the Credit Union National Association. Generally, they are well capitalized, he says.
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Who Is Affected by Coronavirus Mortgage Changes?
These types of borrowers are most likely to be affected by tougher mortgage lending standards:
Consumers with low credit scores. Government guarantees have allowed looser lending requirements for certain mortgage programs compared with conventional mortgages, but that is changing. Consumers who were hoping to use Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture loans will have to meet stricter eligibility criteria.
The FHA notes on its website that its minimum credit score of 500 is the same, but some lenders are "substantially raising FICO score requirements during the coronavirus crisis." Borrowers with a credit score that low might struggle to find a mortgage today.
Lenders are also increasing their minimum credit scores for USDA and VA loans. Traditionally, consumers with credit scores as low as 620 could get mortgages, but now many will face borrowing difficulties, such as restrictions on using gift funds for closing costs.
Buyers seeking jumbo mortgages. "We've seen perhaps the most tightening going on in the jumbo space," Cecala says. Banks often keep jumbo mortgages instead of selling them on the secondary loan market, so "they tend to be much more conservative with them."
A jumbo mortgage, or jumbo loan, has a loan value higher than the limits set by the Federal Housing Finance Agency. Any loans under that limit could be covered by a government-sponsored program or enterprise, such as Fannie Mae, Freddie Mac or FHA.
Limits vary by area, but a typical limit for a one-unit dwelling is $510,400, and a loan for more than that amount would be considered a jumbo mortgage.
Interest rates are rising on these loans, which "clearly reflects the fact that lenders are not anxious to make these mortgages, at least for the time being," Cecala says. "If they do, they really want to be compensated for it."
Self-employed applicants. Independent contractors and self-employed workers may face more lender scrutiny because their paychecks often aren't as steady, Cecala says. "That's an increasing number of people, from consultants to people working in the gig economy," he says.
Plus, proof of income requirements for many mortgages are more rigid. Fannie Mae and Freddie Mac, which operate under congressional charter and help back about half of all mortgages, now require income and asset documentation to be more up to date.
Verification for a self-employed borrower used to be 120 days before mortgage closing, but it is now just 10 days. This guidance is in place for mortgages with application dates on or before May 17.
Applicants with low down payments. Lenders, including Chase, are likely to expect bigger down payments from homebuyers.
First-time homebuyers in recent years were able to put down less than 20%, but that is changing. Lenders may require more substantial down payments in today's economy.
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What Should You Consider Before Applying for a Mortgage?
Here are a few scenarios that mortgage applicants might find themselves in during the COVID-19 financial crisis and some advice on how best to deal with them.
If you have good credit scores: The mortgage market is still good for those who have adequate income and strong credit because interest rates have been low for quite a while. While applicants might get tripped up by a rule from one lender, they can always go to others.
"Despite things feeling so different, the basic rules of applying for a mortgage haven't changed," says Tom Parrish, head of retail lending product management at BMO Harris Bank.
If you are hoping to apply for a mortgage soon, organize your income and asset information, such as tax returns, pay stubs and investment statements, because you'll need them to qualify, Parrish says. Mortgage volumes are high because of low interest rates, so "the quicker that you submit the required documentation, the faster the process will likely be."
Before applying, make sure you know how much house you can afford.
"A common rule of thumb is the 28/36 rule: Monthly payments on your new mortgage should be no more than 28% of your gross monthly income, and your total debt -- including your new mortgage, auto loans and credit card payments -- should not exceed 36% of your gross monthly income," Parrish says. "Some lenders may be more or less strict than the 28/36 rule."
If you have borderline credit scores: Homebuyers with FICO credit scores around 680 are below the national average of about 700, Ulzheimer says. "It shouldn't be a surprise to you if your credit scores are still too low," he adds, to qualify for a mortgage.
In the short term, the best step consumers can take to raise their credit scores is to pay off debts. Focus on cutting credit card balances, and avoid opening credit accounts or loans.
If your credit score is too low to get a mortgage from a conventional bank, try checking with a mortgage broker or an online lender.
If you've lost income: If you have lost your job or had your hours cut, you probably won't be able to get a mortgage, even if you have started the process.
Lenders will verify your employment, which is why you should cancel your application if you are certain you will lose your job, Haynie says. "They have to check right before closing to make sure you're still employed," he says.
Adds Ulzheimer: Lenders will also review your credit just before closing.
"They're looking for any material changes in your risk between time applied and time you close," he says. "That's why people advise not to seek out any new credit" during the loan underwriting process.
If you find out just before closing that you're about to be laid off after closing, you should cancel.
"You don't want to go down that path," Haynie says. "The best thing you can do is cancel it and put it on hold right now. Wait until we get on the other side of this."
If you are furloughed, Haynie also recommends telling the lender as soon as possible. If the loss of income is small, it might not matter. "But if your income is cut in half, it can impact your ability to pay for the loan," he says.
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