May 22nd, 2020 11:11 AM by Jackie A. Graves, President
Sure, mortgages today are historically cheap, but that doesn’t
mean you’re going to land a great deal: Getting a mortgage isn’t as easy as it
used to be.
Indeed, mortgage rates have fallen to all-time lows. Freddie Mac’s weekly rate
survey for May 21 finds that interest rates on 30-year
mortgages averaged 3.24%. Less than two years ago, the average rate was a percentage
point and a half higher. Five-year adjustable rate mortgages this month were
even cheaper—at 3.17%—and 15-year fixed-rate loans averaged 2.7%.
Sounds great, right? Here’s the gotcha: These inexpensive
mortgages are getting harder to come by. The Mortgage Bankers Association’s Mortgage Credit
Availability Index showed just how difficult qualifying for a
mortgage has become. The index, which falls as lending standards tighten,
dropped by 12.2% in April, after having plummeted by 16.1% in March. This makes
the decline following the 2008-2009 mortgage-driven housing crash look
What these numbers are telling us is that there are some
all-time great mortgage deals out there, but lenders are turning down all but
the most well qualified applicants. Still, we’ll show you what you need to do
to improve your chances for winning a home loan.
The impetus for all of this is, of course, the COVID-19 crisis.
As investors fled to the safety of government securities, yields on 10-year
Treasury notes fell to record lows. Mortgage rates tend to follow Treasury
yields. Meanwhile, the Federal Reserve pushed the federal funds rate to near
zero in order to stimulate the economy. That indirectly helps
keep adjustable-rate mortgages in check.
However, no matter how cheaply mortgage lenders can get their
money, they still want to be paid back. And with 12-month forbearance options
available to mortgage borrowers facing financial hardship, this
puts a severe financial strain on both mortgage servicers and lenders. Few of
them, especially those that service loans, have the capital to carry borrowers
for a year while the economy sorts itself out.
Forbearance is not merely a theoretical problem for lenders.
More than 2.9 million homeowners had entered into forbearance agreements by
mid-April, according to mortgage research firm Black Knight. That’s 5.5% of all mortgage holders
seeking to delay their payments. The number is almost certainly going to
increase as the financial crisis continues to unfold.
Of course, all those forbearance-seeking mortgage borrowers are
driven by the same economic necessity that is affecting lenders. Basically,
they’re worried about being able to earn enough money to make their mortgage
payments. This is an equally real concern.
After nearly 3 million people lost jobs in March, the
unemployment rate in April increased by 10.3 percentage points to 14.7%,
according to the Bureau of Labor Statistics.
Those numbers may well get worse before they get better. And
the country could, in fact, still have double-digit unemployment in 2021.
When people can’t work, they can’t pay their mortgages. So
delinquencies and defaults could rise as sharply as the market has declined.
With all this in mind, it’s not surprising that getting a
mortgage loan is harder to do in 2020. However, the basic outline and moving
parts of the process are still the same.
Whether getting ready to obtain a purchase mortgage or to
refinance an existing loan, here are the steps you should take:
Prior to this year, a credit score of 580 was usually good
enough for many lenders, as was a down payment as low as 3% of the purchase
price. In some cases, borrowers could verify their income with last year’s tax
return. The process wasn’t fun, but it was easier than it is now.
Today, standards for credit scores and down payments are up
sharply. Chase, for instance, is suggesting a credit score of 700 and a
down payment of 20%.
Lenders also have become more strict about income verification.
In addition to requesting current pay stubs, they are asking for borrowers to
prove their income. If income from rental property is part of what you’re using
to meet the desired debt-to-income ratio, you may be asked to prove that your
tenants are still in place and paying on time.
With a renewed emphasis on credit scores, borrowers need to make
sure their scores are as high as possible. The most effective way to boost your
credit score is to make sure you always make on-time payments on your existing
loans—from credit cards to car loans—and to pay down your balances. Also, avoid
taking out new loans or opening new credit cards while you are house-hunting.
Finessing a credit score is one thing, but coming up with tens
of thousands of dollars for a bigger down payment is something else. One way
borrowers may be able to do this is through a gift from a family member
or friend. Make sure, however, that it’s not a loan; you may be
asked to prove the money is a gift. Lenders don’t want you to borrow your down
payment from another source.
Also round up as much current documentation of your income as
you can and have it ready in case questions arise during underwriting. Mortgage
processors are busy dealing with a flood of applications. Try to avoid any
delay coming from your side of the table.
When it comes time to apply, shop around for the best mortgage
for you. Lender standards, while they’re getting tighter, still vary widely.
Big commercial banks may be reacting the fastest to economic uncertainty by
ratcheting up requirements. You may find a more welcoming reception at a small
community bank, credit union or online lender.
While it’s unfortunate, it’s also a fact that some borrowers
will have to reduce their expectations. The tougher benchmarks for credit
history, down payment and income stability are putting a ceiling on the
mortgage loan amount that some home shoppers can realistically expect to
Ultimately, the most universally applicable and effective
solution to the difficulty of getting a mortgage in 2020 may be plain old
patience. Interest rates may not fall any lower, but even if they increase
they’ll still be low by historical standards. And home prices could moderate as
borrowers have more trouble getting bigger loans.
You may just learn that 2020’s frustrated and unsuccessful
borrower may become 2020’s happy owner of a new home or refinance at a
still-attractive rate. If all else fails, wait and try again next year.
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