I talked to a lender earlier this week to find out more about how Covid-19 impacts home loans. These were my five biggest takeaways from my conversation.
Rates are fluctuating like crazy
When the Federal Reserve dropped the borrowing rate to zero early in the Covid-19 crisis, rates dropped to new record lows. The result was a huge demand for refinancing. Since the initial drop, rates bounced all over the place. There are a variety of factors at play causing rate fluctuations. They include basic supply and demand, the purchase of federal mortgage backed bonds by the Federal reserve, and concerns about the financial impact of forbearance from the investors who buy mortgages .
Whether you want to refinance or you are looking for a mortgage for a purchase, the current situation requires working closely with your lender to determine when it is a good time to lock your rate. If you tend to go to your local bank for all things mortgage, it may pay to shop around a little. While most banks are typically competitive with each other when it comes to rates, consumers can expect to find a much broader range in rates with the current volatility.
Lenders are tightening standards for credit scores
With greater economic uncertainty, banks are raising minimum credit scores to qualify for a loan. The banks are concerned about greater potential for foreclosure. As a result, they are shying away from buyers with credit issues. If you had a lower credit score but still qualified for a loan before Covid-19, it might be worth checking in with your preferred lender. In some cases, buyers are finding they may no longer qualify for a loan or the lenders will be seeking higher interest rates.
Expect repeated scrutiny of your income when obtaining a mortgage
Specifically, banks are really going to scrutinize your employment. Lenders are looking at the status of your employment, your hours and your wages repeatedly during the borrowing process. They will check early in the loan process, and they typically check at least two more times. Lenders are requiring proof of your employment status prior to signing final loan documents and prior to funding the loan. This stems from the number of prospective borrowers who are being laid off or seeing their hours or wages reduced.
If you are self employed, the banks will be looking more closely at recent income. They want to see signs that checks are still coming in steadily during the pandemic. The banks want to continuously make sure your financial picture does not change prior to closing.
The Jumbo loan market is shrinking
This one impacts the Hawaii market with the large number of high priced homes. Loans of $765,000 or more are considered to be a Jumbo loan in Hawaii. While there are still some banks offering jumbo loans, the options are shrinking.
Loans are taking longer
The demand for refinancing means that a lot of banks are taking a long time to process the volume of mortgages in their pipeline. Appraisal is a particularly big bottle neck. In some cases, banks are having staffing issues as employees balance work and kids at home due to school cancellations. The big take away for buyers is that you should give yourself room for delays in closing.
Other Covid-19 Impacts on Financing
This is not a comprehensive list. Don’t be surprised if we see additional changes in criteria for loans. The one thing I heard in my discussion with a lender was that mortgage standards, loan programs and the process remain in flux. It pays to have an experienced and capable lender in these circumstances.
Published April 19, 2020