No one has anticipated the astounding effects of COVID-19 on the global economy, and yet, here we are. Mortgage rates are at their lowest as a direct effect of the Feds bringing down interest rates to record lows to buffer the sting of the pandemic on people’s purchasing power. Nevertheless, many lenders are tightening their requirements for borrowers.
Who wouldn’t be afraid to lend money these days? Many Americans are now struggling financially from layoffs and business closures brought about by the hit from the COVID-19 pandemic. Business is still business, and lenders want someone who can still make their mortgage payments.
If you’re a first-time home buyer, here’s a guide on what to expect when you’re applying for a mortgage during a public health crisis.
You’ll need a higher credit score
Before the pandemic, a high credit score increases your mortgage approval chances and landing a lower rate. But now, more lenders are changing their underwriting guidelines. Prominent companies such as JP Morgan require borrowers to have a minimum FICO credit score of 700 and above.
The good news is, not all lenders are adhering to the strict credit score requirements. You can still find a lender who will consider your application, even with a lower credit score. Due diligence is the key.
You can also focus on making other parts of your application stand out like your debt-to-income ratio (DTI) – you’d want it at 30% or lower. A lower DTI helps balance out your low credit score.
You might pay a more substantial down payment
Some lenders are now asking borrowers to make a down payment of up to 20%. While this is becoming more common, there are still other lending institutions out there that can still require a lower down payment. You just need to intensify your shopping for lending institutions in your area to find the one who presents the most amenable terms.
Your application will be turned down if you’re unemployed
If you’ve lost your job or you’re working reduced hours, you’re more likely to get rejected for a mortgage, even if you’ve begun the process.
If there are red flags at work indicating that you may lose your job or get retrenched, you should withdraw and cancel your application. It’s also better to cancel if you just find out you lost your job before closing. Lenders do background checks, and they need to verify before closing that you’re still employed.
You might want to rethink getting a jumbo loan
A jumbo loan has a bigger value than the parameters set by the Federal Housing Finance Agency. If you’re looking to apply for one right now, you may find fewer lenders offering this. Banks would rather keep jumbo mortgages instead of putting them out on the secondary loan market. Another dampener is the trending increase in interest rates for these particular loans. Until economic conditions become more favorable, lenders won’t be so keen on offering these mortgages at this time.
You’ll be asked for more papers if you’re self-employed
If you’re a small-business owner, you’ll need to provide more proof for lenders to verify your income. You may face more scrutiny since the flow of your income isn’t as steady.
Below are some documents that your lender will request:
- Copies of current invoices or contracts to show that your business is still in operation
- Proof of present business receipts
- Authentication that your business is open and operational
- A business website showing that your business is normally operating
You will need to compile your financial documents
Now more than ever, you need to prove to lenders that you’re financially stable despite the economic slowdown. If you’re attempting to get a mortgage now, one of our home buying tips is to gather all your income and asset documents. Your underwriter will most likely ask for these anyway, so it’s better to be prepared with these papers.
You’ll have to play the waiting game
With many companies making the shift to remote work and processing applications electronically, the timeline for closing a loan just got longer. Social distancing measures make it difficult for lenders to work with third-party partners. That’s why even if you have completed your requirements, expect a longer waiting time for getting your approval. Practice the art of patience and flexibility and anticipate delays.
Are you interested in real estate in Williamsburg, VA? Put your trust in the company that has become an institution in the area, serving clients since 1885 –Coldwell Banker Traditions. You can leave us a message here. You can also call us at 757.229.9595 or send an email to info(at)cbtraditions(dotted)com.