Mortgage lenders are battling economic uncertainty by raising minimum credit scores, requiring higher down payments, triple-checking employment status and even eliminating certain loan types altogether.
As job loss reached staggering heights due to the coronavirus pandemic, fear strikes deep among lenders worried that high unemployment numbers will translate into mortgage defaults and late payments down the road.
Lenders handpick low-risk borrowers as bulwark for cratering economy
Chase recently announced that it would raise its minimum credit score requirement to 700 and hike the minimum down payment up to 20 percent, from 3.5 percent. Lenders large and small across the country are following suit.
Wells Fargo and US Bank both adjusted their minimum score requirement to 680 (including for FHA and VA loans, which typically feature lower credit-score requirements as low as 580), while Flagstar Bank upped its minimum to 640.
Better.com temporarily stopped offering FHA loans, while also increasing its minimum FICO score for borrowers. They’re still offering jumbo loans; however, they no longer lend to anyone with higher than an 80% loan-to-value (LTV) on jumbos.
Navy Federal Credit Union also stopped offering FHA loans, with the hopes that they will resume that product in early 2021, “but that’s not fully confirmed at this point,” said a spokesperson for Navy Federal Credit Union.
“Credit requirements have gotten tighter across the board. Lenders are raising credit score requirements by 100 points,” says David Lazowski, regional SVP at Fairway Independent Mortgage Corporation in Boston. “We used to do loans down to 520, now we’re up to a minimum 580 credit score, there’s a chance they might go to 700. We hope that doesn’t happen because it will put people at a disadvantage.”
A report from the Mortgage Bankers Association (MBA), the Mortgage Credit Availability Index (MCAI), shows that mortgage credit supply fell 16% in March, the lowest it’s been since June 2015.
“There was a reduction in the availability of loans with lower credit scores and higher LTV ratios, and the largest pullback came from the jumbo and non-QM space,” said Joel Kan, associate vice president of economic and industry forecasting at MBA. “This month’s release highlights the large retreat from jumbo and non-QM investors due to a sharp drop in liquidity. Lenders are making credit criteria changes to account for the increased likelihood of forbearance and defaults, as well as higher costs.”
Lenders are also checking employment status several times throughout the loan process, even calling employers the day before the loan is funded to ensure the borrower is still employed.
As people work from home, borrowers face challenges in locating the appropriate person to verify employment. This can slow down the loan process significantly, so lenders are asking borrowers to make sure their employer is reachable during this disruption to the normal workflow, says Lazowski.
New guidelines will jolt first-time homebuyers
Stricter requirements, including larger down payments and higher credit scores, will make it difficult for some folks to qualify for a mortgage, particularly first-time homebuyers. About 80% of FHA loans, for example, are taken out by first-time homebuyers. Since these loans have less-stringent requirements, like lower down payments and credit scores dipping into the mid to high 500s, there’s a correlation between first-time buyers and low down payments, high LTVs and lower credit scores.
The average FICO score for Americans in 2019 was 703, according to a report by Experian. However, that average falls below 700 for every age group under 50, which will affect the ability of Gen Xers and millennials, the largest share of homebuyers, to get a mortgage.
Here’s how those average FICO scores break down by age group:
Ages 60+ = 749
Ages 50-59 = 706
Ages 40-49 = 684
Ages 30-39 = 673
Ages 20-29 = 662
“I think you’re going to see an impact in that first-time homebuyer market,” Kan says. “First-time homebuyers are usually in that low minimum down-payment range and may have a lower credit score compared with repeat buyers.”
What should mortgage shoppers do
The main problem for homebuyers with below-700 credit scores, high LTVs and low down-payments is that lenders are starting to shy away from any perceived risk. As forbearance requests roll in, the strain on the mortgage industry amplifies. And there’s no telling when we’ll begin our trek back to pre-coronavirus days.
“Until the Capital Markets can stabilize, which certainly can be realized by the larger banks, borrowers will be in for a lengthy ride,” says Randy Carty, strategic mortgage consultant at Real Estate Bees, a real estate technology company based in Houston. “In past down cycles, and following the last 2008 crash, it has been shown that confidence was typically restored within 12 to 16 months. However, the current events are unprecedented, and there is no real certainty as to what the markets may or may not do.”
The next steps depend on what position you’re in financially and how secure your employment is. For folks whose situation hasn’t been disrupted by the coronavirus, this could be a good time to improve your credit score and save for a larger down payment, if your budget allows. Continue to shop around, as you might find lenders who will work with you and offer a competitive mortgage rate.
Those who have less secure employment or have been furloughed or laid off might need to put their homebuying on pause until the national emergency is over.