How to Get a Mortgage During the COVID-19 Pandemic
As the COVID-19 pandemic rages on, the hit to the economy means current and aspiring homeowners are unsure how to continue making payments or how to close on a loan already in progress. Take heart, though, because mortgage help is available to navigate this new normal, which could impact the housing finance industry for months to come.
Whether you’re buying or refinancing a home, it’s critical to understand how the mortgage process has changed in the current environment and how to work through hiccups with your lender.
- How to compare mortgage rates during financial turmoil
- How the coronavirus crisis is impacting mortgage underwriting
- Challenges for jumbo and alternative mortgage borrowers
- How the coronavirus pandemic is changing mortgage closings
- What to do if you can’t make your mortgage payments
How to compare mortgage rates during financial turmoil
Rates on 30-year fixed mortgages plummeted to historic lows in early March 2020, following the trajectory of the U.S. Treasury rates as economic fears over the COVID-19 pandemic hit financial markets. Homeowners jumped on the refinance bandwagon, leading to the biggest jump in refinance applications since 2008.
An oil price war between Saudi Arabia and Russia added to mounting economic uncertainty, pushing the 10-year Treasury rate to a record low of 0.318% on March 9, 2020. Currently, the Federal Reserve is providing additional funds to mortgage lenders, a move that is expected to help them manage the extra refinance volume, said Tendayi Kapfidze, LendingTree’s chief economist.
Lenders have still struggled to keep up with skyrocketing refinance demand, leading some to raise their rates to slow the flow of new business. The table below shows the swings in refinance activity over a recent six-week period, based on data from the Mortgage Bankers Association’s (MBA) weekly mortgage applications survey.
|Refinance Index for Week Ending:||Week-Over-Week Change in Applications||Year-Over-Year Change in Applications||Average 30-Year Fixed Rate*|
|Feb. 28, 2020||+26%||+224%||3.45%|
|March 6, 2020||+79%||+479%||3.29%|
|March 13, 2020||-10%||+402%||3.36%|
|March 20, 2020||-34%||+195%||3.65%|
|March 27, 2020||+26%||+168%||3.50%|
|April 3, 2020||-19%||+144%||3.33%|
*Rates based on weekly Freddie Mac Primary Mortgage Market Survey (PMMS) data from Feb. 27 to April 2, 2020.
As the roller coaster refinance rate trend continues and mortgage rates respond to economic shifts, consider these five strategies if you’re thinking of refinancing or getting a purchase loan:
- Shop around more. Not all lenders will offer the lowest rates. “The big thing we are seeing is the range of rates has really widened,” Kapfidze said. The bottom line: Compare rates with more lenders to find your best available mortgage rates. While some lenders may be unwilling to provide the type of loan you need because they deem it too risky, other lenders may be willing to work with you. Shopping around gives you a better chance of finding the best type of loan, rates and terms for your needs.
- Consider locking in early. Given how quickly rates can change, it makes sense to act fast if the right combination of factors is there, said Joel Kan, associate vice president of economic and industry forecasting with the MBA. Consider a mortgage rate lock if you find a lender with an affordable interest rate and closing costs.
- Evaluate your income situation. A drop in pay or the loss of a partner’s income may not end your chances of getting a mortgage. With a purchase, it makes sense to delay the process if your preapproval or your housing budget was based on two incomes. Lenders may be willing to approve a refinance with less income if you’re saving money with a rate reduction or debt consolidation refinance. Disclosing assets can also help your application so be sure to not leave any out.
- Get your home appraised soon if you need to refinance or sell. Median-home prices rose to $270,100 in February 2020, completing a 96-month trend in year-over-year gains, according to a recent report from the National Association of Realtors. That trend may change as homebuyers delay their plans and foreclosures potentially drag prices down. Getting your home appraised now could result in a higher appraised value, because the appraiser considers the most recent sales to value your home.
- Consider a cash-out refinance while home values are high. Higher sales prices may mean more tappable equity from a cash-out refinance to consolidate credit card or other debt into one monthly payment with a lower rate. On the other hand, avoid using your home as an ATM, and keep your payment low and leave some equity in place in case you need to sell your home soon.
How the coronavirus crisis is impacting mortgage underwriting
Mortgage lenders have adjusted many aspects of the mortgage process to comply with social-distancing guidelines to stop the spread of the coronavirus. Additionally, the prospect of a new wave of mortgage defaults due to rising unemployment is forcing many lenders to make changes to their underwriting criteria.
Some mortgage underwriting changes may include:
- Reduced access to mortgage credit. The MBA’s latest Mortgage Credit Availability Index (MCAI), a report that measures accessibility to consumer mortgage credit, fell by 16.1% in March from February. Conventional loans saw a month-over-month 24.2% drop in its index in March, compared to just 6.6% for government-backed loans.A drop in the index indicates that credit standards are tightening while an increase signals that credit standards are easing. In order to lower their risk in the current environment, lenders may add new restrictions, such as:
- Requiring a higher FICO Score.
- Requiring higher down payments for purchases or more equity for certain types of refinances.
- Requesting more documentation for loan approvals.
- Scrutinizing the purpose of a cash-out refinance.
- Employment and income-verification flexibility. Lenders will temporarily allow the following items in lieu of a pay stub or verbal verification of employment:
- An email from your employer’s work email confirming your employment status. The name and title of the person verifying employment must be provided.
- A current bank statement showing a payroll deposit for the most recent pay period before closing.
- Proof of two months of monthly payment reserves in lieu of a verbal verification of employment for USDA and VA loans.
- New requirements for self-employed borrowers. Small businesses and self-employed borrowers will need to jump through extra hoops to verify income. Below are four pieces of information lenders may request:
- Copies of current contracts or invoices showing business is still operating.
- Evidence of current business receipts.
- Confirmation that the business is open and operating (will vary by lender).
- Business website confirming business is operating normally.
- Special appraisal exceptions. If you’re buying a home or doing a rate-reduction refinance, lenders may waive the requirement for an interior inspection during a property appraisal. This “exterior-only” home appraisal is available on all property types.
- Less appraisal flexibility for cash-out refinances. If you’re tapping equity with a cash-out refinance to consolidate bills or make home improvements, the appraiser will likely need to inspect the interior of your home.
- Additional asset documentation. Because of the volatility in the financial markets, lenders now require a paper trail of any funds taken from retirement accounts, stocks or mutual funds. That may include the most recent monthly or quarterly statement and an additional transaction history showing activity up to the date the funds were transferred into your bank account.
All of these underwriting changes apply to conventional loans and government-insured mortgages, including those backed by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA).
No-income verification refinance options
If you have an FHA or VA loan, you may be eligible for reduced documentation programs. The FHA streamline refinance and VA interest rate reduction refinance loan (IRRRL) don’t require income verification or an appraisal. Borrowers with a USDA loan may also be eligible for a streamlined assist refinance loan with no income or appraisal needed.
Challenges for jumbo and alternative mortgage borrowers
Borrowers looking for loans over the maximum conforming loan limit in their area (also known as jumbo loans), may find fewer lender choices and higher rates. Banks worried about balance sheet constraints are shutting down some lender channels and lending only to their retail bank clients, Kan said. As a result, jumbo 30-year fixed rates are higher than conforming 30-year fixed rates, he added.
The 36.9% drop in the jumbo MCAI is also bad news for borrowers seeking alternative lending options, such as stated-income or no-income verification loans (also called non-qualified mortgage, or non-QM, loans). “Non-QM lending depended on investor appetite to take on credit risk. Given the economic uncertainty, that appetite has gone away,” Kan said.
Plus, the flexibility for appraisals and income documentation doesn’t currently apply to jumbo and non-QM loans since they aren’t owned by Fannie Mae or Freddie Mac.
Piggyback financing alternative to jumbo loans
Borrowers searching for jumbo loan alternatives may want to consider piggyback financing to bridge the gap. For example, someone borrowing 70% of the value of a $1 million dollar home might not be able to get a $700,000 loan in the current jumbo lending environment.
With piggyback financing, they could take out a $510,400 (maximum conforming loan amount for most areas) first mortgage and “piggyback” a home equity line of credit (HELOC) or home equity loan (HEL) for the $189,600 difference. Once the jumbo lending world normalizes, both mortgages could be refinanced into one jumbo loan again.
How the coronavirus pandemic is changing mortgage closings
A key part of the mortgage process — closings — has become trickier as in-person closings have come to a halt in many states with stay-at-home orders. Here’s how some lenders are responding to ensure transactions are closed.
- Online notary signings. In states where you can’t sign in person, an online notarization may be possible. There may be extra steps you have to take to verify your identity depending on the state you live in. For example, the state of Illinois implemented a new policy permitting remote notarizations using audio visual communications.
- Power of attorney signings. As of April 7, borrowers needing help managing financial responsibilities due to circumstances such as illness or extended work hours may choose someone to sign on their behalf with a power of attorney. An internet video or phone conference may be used to ensure the borrower understands the terms of the loan.
- Electronic signings. Some lenders may be approved for electronic mortgage signings, allowing all documents, including the note and deed of trust, to be signed with an electronic signature. There may be extra hoops to jump through to prove your identity during the signing process that varies from lender to lender.
What to do if you can’t make your mortgage payments
The recent passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides homeowners with a variety of ways to get help amid the current pandemic. If you need assistance, learn about mortgage relief programs available from the federal government, your state and major lenders. Contact your loan servicer as soon as possible to discuss options.