Since the coronavirus outbreak began, millions of Americans have filed for unemployment. The resulting fear about being unable to pay for expenses has caused more than 3.5 million homeowners to apply for mortgage forbearance to date. That has put lenders in a tight spot.
With so many borrowers delaying their mortgage payments, lenders have less cash on hand to make new home loans. Plus, the number of forbearance cases coupled with continued COVID-19 shutdowns has created increased the risk for lenders of mass loan defaults. In order to moderate that risk, lenders are tightening standards for new mortgages.
In fact, the Mortgage Bankers Association’s mortgage credit availability index fell to its lowest level in five years, push available home loan credit 16% lower than a year ago. The availability of federally-backed loans like FHA, VA and USDA loans fell 6.6% while conventional loan credit dropped 24.2%. Jumbo loans were hit hardest, with credit drying up 36.9%.
Unfortunately, the MBA does not see an immediate return to looser credit. “The March numbers were really only a reflection of tightening in the last two weeks of the month,” said Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association. “With the gloomier economic outlook and a full month’s worth of data in April, I think we can expect more conservative lending and thus a decline in credit supply.”
Many lenders have raised the minimum credit score allowed for their home purchase and refinance rates. Some are asking for higher down payments and others have started requiring extra documentation to prove their credit-worthiness.
And yet interest rates today are still at record lows, making mortgages as attractive as ever. So what can you do if you are still one of the millions of Americans still interested in buying a home or refinancing?
Improve Your Credit Score
With some lenders requiring credit scores of 700 or higher these days, in some cases you may simply have to wait and build up your credit. This means making every single debt payment on time and lowering your overall debt balances without closing any current lines of credit. It is also important to scan your credit report for errors that might be pulling your score down.
Prepare Extra Documents
If you already have good credit, you might give your lender some extra assurance by providing more proof of your reliability as a borrower. You can offer documentation of timely rent or mortgage payments for the last few months as well as utility bill payment records. You might also offer tax returns and bank statements farther back than requested.
Beef Up Your Down Payment
Putting more down on your home purchase or refinance reduces the risk that you will default on your mortgage because of the investment you’d lose if you walked away. Larger down payments give lenders greater confidence in your ability to repay the loan and in their ability to recoup their losses if you do go into foreclosure.
Although the coronavirus has made mortgages harder to come by, they are still available for those willing to put in some extra effort.