If you’re struggling to decide whether or not now is the right time to apply for a mortgage, or if you don’t fully understand what is going on with home loans in this market, then you’ve come to the right place. While the idea of applying for a mortgage might seem overwhelming, at HomeSmart, we’re committed to equipping you with the information you need to feel supported in the mortgage application process––whatever that looks like for you. Here are four major changes that have affected mortgages with the outbreak of COVID-19.
1) Credit Score Qualifications
It’s always important to consider credit score when applying for a mortgage, but this is especially crucial now that many lenders are raising their minimum credit score requirements. As more Americans lose their jobs and see reduced income, the risk of foreclosure increases, which makes both investors and lenders much more conservative when deciding who to lend to. They don’t want to take on any more risk than necessary to accommodate borrowers with low credit scores––and these days, “low” might not mean what you think. Take FHA (Federal Housing Association) loans as an example. The official minimum credit score set out by the Department of Housing and Urban Development is 580 on the FICO spectrum. If you can afford to make a 10% down payment, this requirement is reduced to 500. However, these are only minimums to receive FHA insurance, and individual lenders can set their own credit score requirements that you must meet before you can be approved for a mortgage.
So what are these new requirements? While it all depends on the lender, patterns show that many FHA lenders have recently become much stricter with their credit score requirements by placing their minimums well above HUD’s––some in the high 600s and low to mid 700s. Some lenders consider borrowers with lower credit scores, but they act on a tiered interest rate system where those with lower scores must pay higher rates. Additionally, many programs targeting those with lower credit scores have been suspending, narrowing the options even more.
You might be wondering what all of this means for you. The important takeaway here is that credit score is becoming an even bigger deal for lenders. If you don’t have an excellent rating, you may find it difficult to be approved for a loan––or if you are approved, you might have to pay a price. But know that even with these caveats, it’s still possible to get a mortgage that works for you if you devote time to researching and finding the right lender.
2) Income Qualifications
As with credit scores, income is a leading factor in loan approval. While it’s understandable that lenders are more likely to approve those showing a steady stream of income, for many Americans, income isn’t so simple anymore. With many losing their jobs or working reduced hours, it can be much more difficult to obtain a mortgage than in the past. If you don’t have a reliable source of income and are applying for a mortgage by yourself, it can be tricky to get approved; however, if you apply jointly with a spouse who has a steady income, your chance for approval goes up significantly. It’s still worth noting that even if you are approved without income, you may not be eligible to borrow as much as you would otherwise. Even if you receive some money, it may not be enough to pay for the home you want. Finally, self-employment income is being sharply reduced for qualifying purposes by many lenders. Just be aware of these general rules if you do apply for a mortgage, especially if your job has been affected by COVID-19.
3) Mortgage Rates
With more stringent requirements set by lenders, comes higher mortgage rates. While mortgage rates have historically followed long-term bond yields, in today’s world there is too much risk for mortgage rates to stay this low. Lenders are pricing their loans based on the risk they are assuming for raising credit score and down payment requirements. Many mortgage rates are currently in the mid 3% range, but they are always fluctuating. When looking into a loan, be sure to pay attention to the mortgage rate, along with any underlying fees that you may have to pay––especially in such an unpredictable time like this.
Even if you don’t have a mortgage yet, it’s helpful to know about forbearance policies should you need to use them once you begin making payments. To put it simply, mortgage forbearance allows borrowers to temporarily stop making their payments for a period of time and then pay it back in a lump sum later. Under the CARES Act, you will be eligible for forbearance if you have a federally backed loan––this is good to think about when deciding what type of mortgage to apply for. With the onset of COVID-19, anyone who is financially struggling may request forbearance for up to 180 days, and if necessary can request an additional 180-day extension. This comes at no additional cost to you, and according to the Federal Relief Law, every servicer must grant forbearance regardless of hardship being proven. Therefore, if you do decide to apply and get approved for a federally backed loan, this is an option that might provide you some peace of mind if you can’t make payments like you were expecting.
Overall, many of the general rules for mortgage applications have become more strict in the wake of COVID-19. While thinking about a mortgage might be overwhelming during this time, at HomeSmart, we are committed to equipping you with the tools and knowledge you need to make an educated decision and referring you to trusted affiliates to work with, like Minute Mortgage. Through their seamless digital mortgage process, Minute Mortgage will help you receive an approved home loan quickly, all while keeping your personal needs and goals in mind to find you the perfect solution. If you want to feel secure and validated as a home buyer, apply for a loan through Minute Mortgage today!
Finally, if you need any additional guidance before applying for a mortgage, check out this webinar from HomeSmart’s Business Builder series all about how to navigate mortgages in 2020. With all this new information, you’ll be well-prepared to get a loan for your home!