The COVID-19 pandemic has impacted our lives in countless ways. Shopping for a mortgage is one of them. With massive job losses and furloughs by employers, many lenders have taken a tougher stance towards prospective borrowers seeking a mortgage. Lenders are less willing to take risks on borrowers they may consider to be marginal or risky. The financial crisis of 2008 changed the financial landscape, mortgage lending was certainly affected by these changes. Given the impact that bad mortgages had on many financial institutions during this period it's not hard to understand why many lenders are becoming risk averse when it comes to granting loans during the current period.
A number of mortgage lenders have raised their minimum credit score as well as the down payment required to obtain a mortgage. These changes vary by lender. According to the Mortgage Bankers Association, their Mortgage Credit Availability Index decreased by 12.2% during the month of April. This is indicative of tightening credit standards for banks and other mortgage lenders.
A recent Fortune article cites some examples of major mortgage lenders tightening their credit standards for borrowers:
- JPM Chase increased its minimum credit score to 700 combined with a 20% down payment on most mortgages. This includes refinancing if the previous mortgage was not managed by the bank. The bank has also suspended new home-equity lines of credit.
- Wells Fargo increased the minimum borrower credit score on government loans they purchase from smaller banks and then bundle into mortgage bonds. The impact of this will likely tickle down to the smaller banks originating these loans and cause them to tighten their mortgage underwriting standards for borrowers.
Another change resulting from the current situation is a reverification of loan pre-approvals prior to actually granting the loan by some lenders. For example, Bank of America now reviews the purchase contract and reverifies the borrower’s income and employment situation prior to final loan approval.
Even FHA loans are impacted. While the official credit score minimums set by the Department of Housing and Urban Development remain at 580, and at 500 with a 10% down payment, these are the minimums to qualify for the FHA insurance. These loans are done through various lenders who participate in the program and they set their own minimums for credit scores based upon the level of credit risk they are willing and able to assume for a mortgage.
VA loans which also carry a government guarantee have also been impacted by higher borrower requirements among some lenders as well, in a similar fashion as with FHA loans.
Lenders offering more flexibility
While there are a bevy of lenders out there who are increasing their standards for borrowers, there are still a few lenders who offer flexibility on some or all of their loan programs.
Better.com has kept their minimum credit score for purchase loans and for rate-and-term refinances at 620.
Quicken Loans is a direct lender, but one who offers a wide range of loan options for new purchase as well as for refinances.
Another good option is to shop for a mortgage with aggregators and marketplaces. They are not direct lenders, but rather are sites that help match borrowers with the best lenders based on their situation. This is especially advantageous during a period like the one we are experiencing based on the COVID-19 pandemic.
Credible is a mortgage marketplace offering borrowers a variety of rates and terms from the lenders who are a part of this marketplace. This can be a plus for borrowers who might be frustrated by their dealings with a single lender during the current situation.
Other marketplace lenders include Refi Rate Guide, RateZip and AmeriValue. As mortgage marketplaces, they also offer access to a wide range of lenders with varying rates, terms and underwriting standards.
What can borrowers do during these unprecedented times?
If you are looking for a mortgage to finance the purchase of a new home, or to refinance your existing mortgage be prepared to shop around in today’s constantly changing environment. Looking at both direct lenders and sites that act as a mortgage marketplace can help you find the best lender for your needs and your situation.
Be flexible. While mortgage interest rates are at historically low levels, many lenders are making it tougher to qualify due to the more stringent requirements many of them are imposing upon borrowers as discussed above. While in the past you might only have been open to working with your bank or with a credit union, looking at several types of lenders might be required to find the best option for your needs.
Be organized. Make it easier for a lender to approve your loan. Be sure you understand what types of documentation they are looking for and gather all of this information prior to applying. Missing information leads to delays. Delays can subject you to changes in lending requirements that the lender may enact while your loan is in process. If you are a marginal candidate for a loan already, these changes could knock you out of the running to obtain the loan from this lender even though things are in process.
Get your financial house in order. Before you apply for a mortgage check your credit report to ensure that there is no false information on the report that might prove detrimental to your chances of obtaining a mortgage, especially under the current conditions that include more stringent requirements for borrowers. You would also be wise to try to understand how prospective lenders review borrower’s applications. For example what is your debt-to-income ratio and how does this compare to what the lenders you are considering view as acceptable? If you have the ability to do so, you might consider paying down some of your debt such as credit card or installment debt.
In just a few short weeks the landscape has changed dramatically for those seeking a mortgage for a home purchase and those looking to refinance an existing mortgage. Qualifying for a new loan has gotten tougher as many lenders have tightened their lending standards. Those borrowers who take an organized and active approach to finding the right lender for their situation are more likely to find a situation that meets their needs.