Despite the impacts of COVID-19, the buyers and sellers are doing their best to move forward in the market.
One obstacle they’re facing is tightened restrictions among lenders regarding who can take out mortgages. But while this may sound a little discouraging, there are still plenty of options to take out loans – for those who want to. The choice is up to you, we’re just here to help you become informed and educated.
On one hand, interest rates are dropping below 3.3%, a historic low. This means that if you were to take out a mortgage now, your monthly payments would have one of the lowest interest rates in the history of the housing market. (Check out our explainer on consumer interest rates for a deeper dive.)
Now for the bad news: Since the national unemployment rate hit 14.7% in the week of May 11 (its highest level since the Great Depression) and more than 4 million homeowners filed for forbearance since mid-March, lenders want to make sure that new borrowers will have the financial stability to make their payments in the future.
To mitigate potential risk, several lenders announced stricter qualifications for potential borrowers, such as by raising the minimum credit scores that borrowers need to qualify for a loan or the amount of reserved financial savings (aside from down payment savings).
As of early May, new mortgage requirements included:
- For conventional loans, Chase bank raised its minimum credit score to 700 and is requiring a down payment of 20%
- Wells Fargo raised its minimum score requirement to 680 for all government loans — Federal Housing Administration (FHA), Veterans Affairs (VA), and Department of Agriculture (USDA)
- US Bank is requiring a 680 credit score for FHA, VA, and USDA loans, and 640 for conventional loans
- LoanDepot set its minimum credit score at 620 for VA and FHA loans
- Flagstar is requiring a 640 score
This may feel a little overwhelming, but take comfort in knowing that it will get better. If we use history as an example, by referring back to tightened requirements that were set by lenders during the 2008 financial crisis, these restrictions will be temporary. They’ll likely relax as the economy improves.
Meanwhile, the changes have not yet affected first-time homebuyer programs. If you’re a first-time homebuyer, you can still access low down payment loans with private mortgage insurance that have more flexible credit score requirements. These include the Fannie Mae HomeReady® mortgage and the Freddie Mac Home Possible® Advantage mortgage, both of which require 3% down and a minimum score of 620.
Similar options are offered to veterans by the US Department of Veterans Affairs (VA), to buyers in rural areas by the US Department of Agriculture (USDA), and to those who qualify by the Federal Housing Administration (FHA). Numerous banks and other lending institutions also provide these types of programs.
For those who aren’t first-time buyers, there are still thousands of lending institutions around the country to shop from.
Regional portfolio lenders, for example, haven’t been hit as hard by COVID. They loan money that comes from their own balance sheets, meaning they aren’t affected by what happens in the secondary market. And some smaller banks are actually loosening requirements to attract borrowers that are blocked out of the major lender market. In other words, they see other lenders’ tightened restrictions as an opportunity.
For those who are looking to take out a mortgage during COVID-19, Melissa Cohn, executive vice president with the mortgage lender Family First Funding, advises two things: First, enter the loan-shopping process as prepared as possible.
Quarantines are making business take longer to get done, as people who normally work together in an office are now at the mercy of phones and email. Being prepared, however, can help cut down the amount of time it’ll take to get you a preapproval letter. Have copies of your bank statements from the last two months handy, along with your 2018 and 2019 tax filings, your paystubs from the last two months, plus proof that your income will be stable during pandemic shutdowns.
Second, ask professionals for guidance and reach out for offers from at least two lenders. “You need to go back to doing business the old-fashioned way,” Cohn explains. “Reach out to your mortgage or real estate broker, or your attorney, and ask them who they have relationships with and shop around.”
One last thing to keep in mind is that the lending landscape is continuously changing as we’re all adjusting to the unique circumstances during COVID-19. Check back with this blog for updates and ask questions to lenders you’re working with about their specific guidelines.
Need more info on low downpayment loans? Check out our guide to down payment assistance.
Curious about buying a house during COVID-19? We explore the art of virtual homebuying.