Getting over increasingly high hurdles to achieve homeownership.
With mortgage interest rates at historic lows, it seems like the ideal time to buy a home. However, the coronavirus pandemic has affected more than just rates. Fears of another recession have impacted the mortgage approval process and many lenders are being cautious. So, what do homebuyers need to know about getting a mortgage in the current economy?
Mortgage trends at the start of the shutdown
In March 2020, the average interest rate on a 30-year fixed mortgage fell to 3.31%.[1] That’s lower than rates that fell following the Great Recession. During that time, the Federal Reserve dropped rates to historic lows in an effort to kickstart the housing market after the crash. This time, the Fed is trying to avoid or minimize an economic crash.
At the same time, however, lending requirements began to get more restrictive. According to a quarterly report from Experian, in March the average credit score that qualified for a 30-year mortgage jumped to 747.
Essentially, as shutdowns began in the U.S. and fears of another recession loomed, lenders became more cautious.
What this means for homebuyers
A good credit score and verifiable income are becoming more crucial than ever in determining if a homebuyer can get approved.
“A potential buyer who has good credit, verifiable income, and sufficient assets should not hesitate to take advantage of today’s historic low rates, particularly if they expect to stay in the home for more than just a few years,” says Barry Rothman, a Housing Counseling Program Manager with Consolidated Credit.
Meanwhile, borrowers with higher risk factors may have trouble finding a lender willing to work with them. The industry as a whole is minimizing its exposure to risk, largely because the investment companies that purchase loans want to avoid a repeat of what happened after the housing market crash in 2008.
“As an industry, many lenders have made changes to their lending requirements because the investors that they sell their loans to have an appetite for less risky loans in this environment,” says Barnaby Robles, Branch Manager of Wells Fargo in Coral Gables, Florida. “The investors that buy these loans on the secondary market have obvious concerns because of COVID-19.”
Credit score requirements are increasing for many lenders
Experian’s report shows that in March more than 90% of mortgage approvals were extended to people with a prime or super prime VantageScore.
| Score | Range | Percentage of mortgage approvals in March 2020 |
|---|---|---|
| Super prime | 781-850 | 50.5% |
| Prime | 661-780 | 40.7% |
| Near prime | 601-660 | 6.9% |
| Subprime | 500-600 | 1.9% |
This shows how challenging it may be to qualify for a mortgage with a lower credit score. Products like FHA loans are still available, but lenders aren’t necessarily approving people at the low end of the approval requirements that the U.S Department of Housing and Urban Development (HUD) set.
“HUD has not changed its minimum requirements for obtaining an FHA loan,” Rothman explains. “The minimum FHA credit score remains 580. However, due to concerns about a possible extended financial downturn, many lenders have raised their credit score requirements – some even as high as 700. The result has been fewer borrowers being approved currently.”
Income and capital requirements have also tightened for some lenders
Income verification and capital for a down payment may also be becoming bigger hurdles for homebuyers, depending on the lender that they’re trying to work with.
“New lending requirements have generally affected more challenged borrowers who have less capital available for a down payment,” Rothman says.
FHA loans allow borrowers to qualify for loans with as little as 3.5% down, but lenders who offer these loans are getting more cautious. On the other hand, a homebuyer that can offer 20% down on a traditional 30-year fixed-rate mortgage may have an easier time finding a lender willing to approve them.
Some lenders are also restricting approvals based on a buyer’s debt-to-income ratio.
“Prior to COVID-19, FHA lending outside of banking allowed your DTI to be almost to a max of 57%,” Robles explains. “Now some of those lenders have restricted their DTI box to 50% or less. Conventional lending is typically 50%, but many lenders have placed restrictions of 45% or less.”
Is it still possible to get a mortgage despite these higher hurdles?
Both Rothman and Robles assure that homebuyers who face challenges can still get mortgage approval even in a weakened economy.
“Your average customer with a 640 credit score and 45% DTI can still qualify for a loan,” Robles encourages. “Explore the options that you have available. The only way to know is to shop around and see.”
If you thinking of buying now, these tips can help you get started.
Buying Tips
“Homeownership remains within reach,” Rothman says. “An experienced housing counselor can help a potential buyer determine if they are mortgage-ready and what type of loan (and the amount) they may be able to qualify for.”
A HUD-approved housing counselor can consult with you one-on-one to review your finances, budget and credit. They can walk you through prequalification to see how much mortgage you can really afford. They’ll also help you zero in on the best type of mortgage product for your situation.
This will help you narrow your home search and give you a jumping off point when searching for loans.
It’s always a good idea to shop around and compare rates and terms on your mortgage, but it’s more critical than ever in this current environment. Credit unions and smaller banks may offer lower rates, but they’re also more likely to have stricter lending standards in a weak economy.
Meanwhile, national banks may be more flexible. So, don’t limit yourself when looking for a lender. Remember, you can shop around with a range of different lenders on a mortgage without negatively affecting your credit score.
While multiple hard inquiries for other types of loans can damage your credit, inquiries made within 45 days of each other for a mortgage will get grouped as one inquiry. You can shop around extensively without hurting your score in the process.
The advice that Robles offers homebuyers is the same advice he’s given his own employees who are also dealing with the pandemic:
- Continue making regular payments on all of your accounts, if possible.
- Don’t necessarily jump into forbearance
“Many lenders have now placed restrictions where customers that are in any sort of forbearance cannot take advantage of opportunities to refinance and purchase a home. If a customer can continue to make their regular payments, I think that’s the best place for them to start.”
Anyone who purchased a home just before the 2008 crash can attest to the frustration of negative equity and a potential short sale. Negative equity happens when the current market value of the property drops below the remaining balance on the mortgage. A short sale happens when you sell the home for less than you owe on your mortgage.
Rothman warns that these issues can be possibilities if the housing market takes a turn during a prolonged recession.
“Potential buyers who are unsure if they will stay in the home for a significant period of time could run into difficulty should they look to sell at a time when home values are falling, which is a possible scenario in the event of a prolonged recession.”
If you’re thinking of buying a home, call 1-800-435-2261 to speak to a HUD-certified housing counselor.
