The COVID-19 pandemic has led to business shutdowns, furloughs and layoffs across the United States. Many homeowners are unable to afford their mortgages and have requested forbearance to reduce or delay their payments. The new reality has made lenders cautious when deciding whether to grant new mortgages to homebuyers. Lenders are also being careful when it comes to applications from homeowners who want to refinance their existing loans.
More Stringent Requirements for Homebuyers Due to COVID-19
The economic uncertainty has mortgage lenders worried that if they grant new home loans, borrowers who are struggling financially due to the coronavirus might make payments late or miss them altogether. Lenders are therefore taking steps to reduce their risk.
Many have raised their minimum credit score requirements, some dramatically, to make sure they give loans to people who will be likely to repay them. Lenders have also raised their down payment requirements in many cases.
Some lenders have stopped offering mortgages backed by the Federal Housing Administration. Those loans have lower down payment and credit score requirements than conventional mortgages.
Due to high unemployment rates, lenders are being especially careful when it comes to verifying employment status. Many lenders have been checking several times during the mortgage process to make sure that applicants are still employed, and some even contact a borrower’s employer the day before approving a mortgage to make sure nothing has changed that could affect a borrower’s ability to repay a loan.
Who is Most Affected by Stricter Mortgage Requirements?
The changes in mortgage guidelines may have a disproportionate impact on first-time homebuyers, who often have lower credit scores than people with lengthier credit histories and who tend to look for loan options that allow for smaller down payments. First-time buyers may struggle to qualify for a mortgage under the tighter guidelines.
How the Coronavirus has Affected Mortgage Refinancing
Lower mortgage interest rates have led to a spike in refinancing applications, but job losses have made it difficult for many applicants to qualify. Even if an applicant is receiving unemployment benefits, a lender may not consider that a reliable enough source of income to approve an application to refinance.
What to Do if You Want to Buy a House or Refinance Your Mortgage
If you want to purchase a home and your job is secure, but your credit score is fairly low or you can’t afford to make a substantial down payment, you may need to postpone making a purchase until you have beefed up your credit score and saved enough money to put down a significant amount. If you have been furloughed or laid off, or if you think that might happen, you could have a hard time getting approved to buy a house or to refinance your existing home loan. As always, if you want to take out a mortgage or refinance your current loan, you should compare interest rates, fees and other terms from several lenders to get the best deal you can.