Borrowers Will Find It Harder Than Ever to Get a Mortgage This Spring—Here's Why

Originally Published on realtor.com by Clare Trapasso

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% on a 30-year fixed-rate loan for the week ending April 30, according to Freddie Mac.

That's the lowest it's been since Freddie Mac began tracking rates in 1971.

Yet the availability of mortgage credit dropped 16.1% 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% 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," 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 adjusting for the higher probability of forbearance."

About 5% to 20% of prospective borrowers could have trouble getting a mortgage due to the higher standards, says Javier Vivas, realtor.com®'s director of economic research.

Those numbers will likely rise as the recession worsens. Unemployment could top 20% 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," says Vivas. "In the mid- and longer term, the bigger concern will be whether they can carry that mortgage through the recession."

Some lenders are requiring higher credit scores

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. These were primarily for government-backed loans, such as Federal Housing Administration, U.S. Department of Veterans Affairs, and U.S. Department of Agriculture mortgages. Now, most lenders issuing those loans are asking for credit scores starting between 640 and 680.

"It's a fairly substantial increase," says longtime mortgage broker Rocke Andrews, who's based in Tucson, AZ. He's also the 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% 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.

“Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers," a Chase Home Lending spokesperson said in a statement.

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," says Better.com spokeswoman Tanya Hayre. The online brokerage made nearly 3,000 loans totaling about $1 billion in March. "Hopefully, this will all go back to normal soon."

Fewer jumbo mortgages are being offered

Fewer lenders are offering jumbo mortgages during this crisis. That's because for these larger loans, there's more money on the line if the 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, especially in a time when many folks are going into forbearance and not making payments on them, and aren't buying.

That means banks will have to hold on to those loans if they can't unload them, which limits how many new loans they can make money from. So some lenders aren't doing them at least for now—or they're raising fees to give themselves a financial cushion against a potential default and discourage folks from taking them.

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

Wells Fargo is still offering the loans to buyers, but will refinance jumbo loans only for its customers with at least $250,000 in assets at a Wells Fargo bank.

"The jumbo market hasn't disappeared entirely," says Matthew Gardner, chief economist of Windermere Real Estate. The Seattle-based brokerage has locations in 10 Western states. However, he adds, investors "are turning their attention away from loans that are not guaranteed by the government-sponsored entities" such as Fannie and Freddie.

Self-employed, gig workers and real estate investors may have a harder time

Self-employed, gig workers and real estate investors may also struggle to obtain a mortgage. Many of these are the folks who would 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. So fewer lenders are offering them—or they're upping the cost of these loans to account for the risk.

Those extra fees or charging additional points are "a backhand way of not doing those loans," says lender Andrews.

Plus, some lenders are discounting self-employed income. That means they might count only a portion of what these borrowers made last year, perhaps 70% or 80%, 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—another factor that goes into whether someone gets a loan. Lenders traditionally like to see less debt and more money coming in.

Lenders are doing additional income verifications

With folks losing their jobs or getting furloughed every day, lenders are also waiting until the last minute to verify employment and income. So instead of checking in with borrowers' employers two weeks or 10 days before a closing, they're doing it a few days before, or even on that day.

“It can be catastrophic if someone loses their source of income right before buying a house,” says longtime mortgage lender Jason Lerner. He's a vice president at George Mason Mortgage in the Baltimore suburb of Lutherville, MD.

Erika and Ian Rasmussen were set to close on a four-bedroom, two-bathroom home in the seaside town of Greenport, NY, on Long Island. 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 closing, Erika, 38, was laid off from her marketing job at an advertising association. This threw the deal into jeopardy, despite her husband's work as the owner of a zoning consultancy practice and the extra income they earn from a rental property.

Erika had been planning on striking out on her own as a consultant and had picked up a few clients, but the pandemic and layoff threw off her timetable. Her lender wouldn't factor in her consulting income as she hadn't yet established those earnings for two years.

"We really scrambled a lot to try to save the deal," says Erika.

They wound up dipping into their 401(k) accounts to come up with a larger down payment, about 40% of the purchase price, to satisfy their lender. Last week they closed on the property. (Lawmakers recently allowed folks to take out up to $100,000 from their 401(k) accounts due to the crisis. They have three years to repay it before facing the typical early-withdrawal penalties.)

"The unemployment picture has definitely gotten a lot worse and quickly," says MBA's Kan. "This is one of those economic events where we really don’t know when it’s going to be over and when things are going to go back to normal.”

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