What Stricter Lending Rules Mean for You

Albert Einstein said, “In the midst of every crisis, lies great opportunity.”

For many of my buyer clients, they are seeing an opportunity to buy a home when there are fewer buyers looking right now.  They continue to move forward with their home purchases and win offers because of the decreased competition (all at a safe, social distance, of course).

Many of my past clients, who have no interest in moving, are taking advantage of the low interest rates right now, refinancing to save hundreds of dollars per month and thousands over the life of their loan. 

However, it’s important to keep in mind the impact that COVID-19 is having on the mortgage industry right now and how it affects borrowers. 

Lenders have made adjustments due to the financial uncertainty for themselves and for borrowers. 

On one hand, this is a good thing.  We want banks to protect themselves so they remain stable.  But on the other hand, these stricter guidelines mean some borrowers will have a harder time getting a loan. 

As we always say, it’s not a “one-size-fits-all” world out there, and right now not all banks are making the same adjustments.  The changes are truly bank by bank, so be in touch with us so we can be sure you are paired with the right bank, which can help you accomplish your goals, even now. 

What This Means for Borrowers

Whether you are buying or refinancing, you will be impacted by changes to loan guidelines, and it’s important you are aware of this if you plan to move ahead.

In this COVID-19 mortgage market, lenders are tightening their guidelines slightly.  That means they may need additional paperwork, or you’ll find that certain loan programs have higher qualification requirements. 

Chances are most borrowers will still qualify as they always have, it just might be with a higher interest rate or down payment for those who have a lower credit score or other factors now considered risky to a lender. 

One of the most important things a borrower can do right now is to work with a trusted lender.  Be in touch with me, as I have the best recommendations for trustworthy and reliable lenders who can help you.  

Here’s a breakdown of the current, but evolving, status of the mortgage market plus some tips to prepare borrowers, whether homebuyers or refinancers:

Credit Scores & Down Payments

·      Lenders are avoiding risk and are uneasy about lending to borrowers whose FICO credit scores are not high enough.  According to some reports, lenders are raising their minimum credit score requirements by 100 points or more, which means in the 700+ range.

·      Borrowers that have a credit score lower than that are still able to get loans, such as an FHA loan, but those bring with it additional costs, like monthly mortgage insurance. 

·      Lenders are looking even more carefully at the debt-to-income (DTI) ratio as a factor.  The higher your DTI, the more difficult it may be to get a loan.  However, loans sold to Fannie Mae and Freddie Mac can exceed the 43% DTI ratio, and there are many lenders who can accommodate this DTI if you’re  over that percentage. 

·      Some lenders are increasing down payment requirements, some up to 20% for certain loan products.  These lenders are typically not backed by Freddie Mac or Fannie Mae and tend to be private banks, such as JP Morgan or Chase, like you’ve might have heard on the news. 

·      Lenders are raising credit requirements for Home Equity Loans.  They are also lowering the amount you can borrow against your home, from as high as 90% to 80% or lower.

FHA Loans

·      Many lenders are raising their FHA requirements for its mortgages. FHA loans typically accept lower credit scores (sometimes in the 500s) and smaller down payments, and that will no longer be the case for many lenders.

·      Some lenders have stopped offering FHA loans entirely right now, while others are increasing the credit score requirement to be in the 600s.

Jumbo Loans

Many borrowers in the DMV area seek out jumbo loans since they can go up to $765,600. These are riskier loans since they aren’t guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. 

·      Some lenders have stopped offering jumbo loans. There is no secondary market for them by investors since they are considered too risky and not government backed.

·      Borrowers will need to search for lenders willing to give them a jumbo loan and could experience setbacks.  Again, contact us if you need a jumbo loan, as we are keeping in touch with banks and what they offer.

·      It’s still very possible to get a jumbo loan, just not with every bank.  We have recommendations if you are looking for this type of loan.

Verifying Employment Status

With layoffs in the job market and employment uncertain for borrowers, lenders have taken additional steps to verify income and employment status. This process could make it hard to close on a loan.

·      Borrowers will have their employment status checked more frequently during the entire loan process.

·      Those working from home will be asked to make sure their employers are reachable. It can be hard if business sites are closed

·      Lenders may require self-employed borrowers to provide a written statement that the business is open and operational, and that COVID-19 won’t impact its financial statement.

Refinancing

With interest rates at record lows, many homeowners want to take advantage of these rates and save money on their mortgages.  This can be a good opportunity for many homeowners.

·      Lenders are facing high demand from those who want to refinance right now.  You could experience delays.

·      Lenders are looking at applicants that pose the least financial concerns and roadblocks to finalizing.  That means higher FICO scores, secure employment, and no other possible snafus.

·      Reach out of us if you have any questions about refinancing and what to expect right now.

Possible Roadblocks

The loan process and any procedures are evolving, so please keep that in mind. Borrowers will have to have patience and perseverance in this current mortgage market to make it to closing.

·      Go with a trusted lender who wants to work with you and where you could get a competitive mortgage rate. Ask me for recommendations—I have lenders I've been working with years that are the best in the business. 

·      Compare rates but it’s a volatile market now and rates can shift daily. Make sure your rate is locked before closing.

·      Consider the many steps involved behind the scenes and the possible delays if there are closures or social distancing protocols: title searches, appraisals, applicant employment and income verification, notarization, closings, and county recordation offices.

Don’t Give UP!

For those who want to buy a home or even refinance in the coming weeks or months ahead, you can still move forward with your plans.  Lenders are just taking a more careful look at your finances, your employment, and your credit score. 

Now, more than ever, it’s important to focus on improving your credit score and having a stable financial picture. And, if the timing isn’t right for you right now, there will always be homes on the market and there will be some when you are ready to look. 

I am here to give you a better understanding of the current mortgage conditions and what you can expect as it evolves. Don’t hesitate to reach out, especially for a lender recommendation if you are starting the loan process as a buyer or looking to refinance.

I look forward to hearing from you!