White says she anticipates closing on a newly built single-family house in Worcester County, Md., at the end of May.
“My lender and I went over all the loan documents by phone and used a shared screen during video conferencing before I digitally signed everything,” says White.
White’s lender, Hope Morgan, branch manager of Mortgage Network in Salisbury, Md., rechecked White’s most recent pay stubs and asked White about the possibility of any layoffs or pay cuts due to the novel coronavirus.
Prospective home buyers and homeowners who want to refinance should anticipate more stringent documentation requirements, tighter credit standards and more limited choices for loans due to the quick financial downturn from the economic shutdown. Lenders who were already busy with refinance applications because of low mortgage rates and purchase applications from buyers during the active spring home-buying season now also need to help an influx of borrowers who can’t pay their mortgages.
“We hit a perfect storm in mid-March,” says Morgan. “We all started to work from home and were worried about how to deal with low rates. Then everything changed and new rules started to come out.”
New qualification standards
Mortgage Network raised its minimum required FICO credit score for a mortgage to 660 for most loans, with a 640 score allowed on some FHA loans, says Morgan.
“Our role is to put consumers in the best position to repay their loan and employment is critical to that,” says Jeff McGuiness, chief sales officer of Embrace Home Loans in St. Louis. “A leading indicator of someone who may have trouble keeping up with loan payments is their FICO credit score. Historically, we’ve approved loans for borrowers with a FICO score as low as 580, but now because of the economic instability most lenders are adjusting their minimum to a 640 score.”
Every lender has a different appetite for risk, says Josh Moffitt, president of Silverton Mortgage in Atlanta, and not all loan programs have changed.
“Consumers may need to talk to a few different lenders about their options,” says Moffitt. “One lender might be okay with a zero down payment loan and a 620 FICO score, but another might require a 640 score.”
Some lenders are eliminating their low down-payment programs. JP Morgan Chase, for example, now requires a down payment of 20 percent — up from 3 percent — and raised its minimum credit score for new mortgages to 700.
“Documentation standards are tightening, too, particularly for employment verification,” says McGuiness. “We’re looking at income and employment the day before a closing and sometimes on the closing day. We don’t want to put our customers in a position where they can’t repay the loan.”
A pay cut or elimination of a bonus or commission income won’t automatically disqualify borrowers if they have sufficient remaining income to make their payments, says McGuiness.
“We verify employment now at least three times throughout the process from an initial application to the closing,” says Nikolaos Athanasiou, chief operating officer of Guaranteed Rate, a Chicago-based lender. “We’re also requiring every borrower to sign a document that attests that they know of no indications that their compensation will change or that their job is in jeopardy. Basically, it’s just another way of certifying that everything is valid and truthful and that they are not experiencing financial hardship due to covid-19.”
That document is just kind of a pause so that borrowers will talk through their situation with their loan officer, says Athanasiou. Even if something has changed, it may not be significant enough to disqualify them from a loan.
Guaranteed Rate also raised its minimum credit score slightly to 640 and added a requirement for borrowers to have at least two and sometimes four months of mortgage payments, including principal, interest, taxes and insurance, in the bank.
“Typically we find that borrowers are in better shape if they have cash in the bank,” says Athanasiou. “That’s more important even than their credit score.”
The overriding issue, says Moffitt, is the uncertainty of how long the economic impact from the virus will last.
“Loan underwriting is based on risk and it’s hard to know whether this is short-term or we’re facing a longer period of unemployment,” says Moffitt. “If it lasts longer, we don’t know if housing will hold its value. And no one wants to make a loan to someone who might lose their job tomorrow.”
Most home buyers today get a mortgage preapproval before making an offer on a home to know their price range and be able to show the sellers that they have the ability to finance the purchase. Borrowers provide documentation of their income and assets and the lender verifies that information before providing a loan preapproval. Most preapprovals are good for 90 to 120 days, says Moffitt, but now borrowers should expect additional scrutiny before their final loan approval.
“While the preapproval is stronger than a prequalification and will set you apart from other buyers, there are a few additional steps once you find a property,” says Michelle McLellan, a senior vice president with Bank of America in Charlotte. “We would need to review the purchase contract and we would want to update and reverify that your financial situation hasn’t changed. Additionally, we will need to review the property value, condition and chain of title to ensure it meets lending guidelines.”
Employment verification is especially important given the massive wave of furloughs and layoffs of the past several weeks.
“If you have been furloughed, you’ll have to wait until you go back to work to have your loan approved,” says Morgan. “We can’t use unemployment benefits to qualify someone for a loan. We also need to look at your assets, especially because the stock market has been so volatile.”
It may still be possible to qualify for a loan depending on your debt-to-income ratio, which compares the minimum payments on all recurring bills with your gross monthly income, she says, although some lenders are lowering the maximum acceptable debt-to-income ratio.
“If there were two incomes in the household and one person lost their job, they still might qualify if the remaining income is enough,” says Morgan.
Borrowers with a preapproval may find that even if their circumstances haven’t changed, they could no longer qualify for a loan. For example, says McGuiness, if someone has a 630 credit score, they may have to shop around again for a lender if their preapproval was with a lender who has raised their minimum credit score to 640 or higher.
“Borrowers with bonus and commission income may find it harder to get approved,” says Moffitt. “We normally look at average income over 12 months, but if someone makes 90 percent of their income from commissions and there are no sales now, they need to talk to their lender. If they can show consistent commission income for three years and just the last two months are different, we would still need to calculate average income.”
At Guaranteed Rate, digital tools automatically update income and asset information from pay stubs and bank statements, says Athanasiou.
“For self-employed borrowers, it’s a little stickier because we’re looking at stale information,” says Athanasiou. “Most people haven’t filed their 2019 taxes because of the extension, so we’re looking at 2018 numbers. We’ll need proof that the business is operating in the form of contracts, deposits or some other documentation.”
Loan programs changing
Many home buyers, particularly first-time ones, rely on down payment assistance and other homeownership programs to make their purchase.
“Buyers can still find low down-payment options and use down payment assistance programs,” says McLellan. “This includes Bank of America's Community Homeownership Commitment, which provides mortgage options with as little as 3 percent down as well as our grant programs, which do not require repayment, that are designed to help home buyers with down payment and closing costs. These grants provide up to $17,500 to qualified buyers in select cities.”
Many down payment assistance programs are tied to state and local government budgets, while others are available directly from banks. Some of those programs may be less available because of financial pressure on governments and financial institutions, says McGuiness.
“Federally backed loan programs such as the FHA loan program are still in place,” he says. “But some banks are cutting back on their low down-payment options.”
White used the federal USDA Rural Development financing program, which doesn't require a down payment. Borrowers also must meet income requirements and purchase a home in a designated rural area. VA loans are also still available without a down payment for qualified veterans.
Home buyers and homeowners refinancing in high-cost housing markets may have a harder time finding a jumbo loan, which is a loan for an amount above the limits set for conventional loans backed by Fannie Mae and Freddie Mac. In a high-cost housing market such as the Washington region, the loan limit is $765,600.
“There are 50 to 60 percent fewer jumbo loans available right now,” says Moffitt.
Lenders have pulled back on those loans because most keep them on their books rather than sell them and they don't want that big liability during risky financial times. Moffitt says lenders are also more fearful of possible forbearance on these loans, which have larger monthly payments.
“Borrowers who need a jumbo loan will have fewer choices, so they're likely to see higher rates and need a bigger down payment and a higher FICO score,” says McGuiness.
Mortgage lenders have been overloaded with refinance and purchase applications and those that also service their loans rather than sell them to other companies are now assisting customers who need help with forbearance programs.
Mortgage forbearance is an option lenders offer to reduce loan payments or temporarily pause them for a specified time period. Borrowers will need to make up the payments at a later date in some way.
“Whether or not there are delays depends on each lender,” says McGuiness. “We're still keeping to 60-day closings, but every borrower should ask their lender what to expect for their closing.”
In addition to delays from lenders, some appraisals were slowed by social distancing measures. Now, Fannie Mae, Freddie Mac and the Federal Housing Administration have loosened restrictions and are allowing more “drive-by” and “desktop” appraisals that eliminate the need for an appraiser to enter a home, says Athanasiou.
“For refinance transactions, we have been and are currently offering longer rate locks of 90 days to give our customers peace of mind,” says McLellan. “This provides 30 days of extra rate protection at no cost to customers. For purchase transactions, we work to ensure that we close transactions in the time frames required by our customers give the details of their purchase contracts.”
Tips for borrowers
If you’re applying for a mortgage for a purchase or a refinance, here are some tips from lenders:
● Be completely honest about your financial situation to make sure you can truly afford the loan.
● Be prepared to fully document everything more than once, particularly income and employment information.
● Have contact information ready for lenders to verify employment, especially if your workplace is closed and people are working remotely.
● If you’re furloughed, keep up with all your paperwork so that you can jump back into the loan process once you are rehired.
● Ask about your loan lock options, how much they will cost and who will pay if an extension is required.
● Make sure purchase contracts include a financing contingency so you don’t lose your deposit if you run into financial problems.
● Sign a covid-19 addendum to protect yourself in case of delays.