Sure, mortgages today are historically cheap, but that doesn’t mean you’re going to land a great deal: Getting a mortgage isn’t as easy as it used to be.
Indeed, mortgage rates have fallen to all-time lows. Freddie Mac’s weekly rate survey for the second week of May found that interest rates on 30-year mortgages averaged 3.28%. Less than two years ago, the average rate was a percentage point and a half higher. Five-year adjustable rate mortgages this month were even cheaper—at 3.18%—and 15-year fixed-rate loans averaged 2.72%.
Sounds great, right? Here’s the gotcha: These inexpensive mortgages are getting harder to come by. The Mortgage Bankers Association’s Mortgage Credit Availability Index showed just how difficult qualifying for a mortgage has become. The index, which falls as lending standards tighten, dropped by 12.2% in April, after having plummeted by 16.1% in March. This makes the decline following the 2008-2009 mortgage-driven housing crash look relatively gentle.
What these numbers are telling us is that there are some all-time great mortgage deals out there, but lenders are turning down all but the most well qualified applicants. Still, we’ll show you what you need to do to improve your chances for winning a home loan.
How COVID-19 Impacts Mortgages
The impetus for all of this is, of course, the COVID-19 crisis. As investors fled to the safety of government securities, yields on 10-year Treasury notes fell to record lows. Mortgage rates tend to follow Treasury yields. Meanwhile, the Federal Reserve pushed the federal funds rate to near zero in order to stimulate the economy. That indirectly helps keep adjustable-rate mortgages in check.
However, no matter how cheaply mortgage lenders can get their money, they still want to be paid back. And with 12-month forbearance options available to mortgage borrowers facing financial hardship, this puts a severe financial strain on both mortgage servicers and lenders. Few of them, especially those that service loans, have the capital to carry borrowers for a year while the economy sorts itself out.
Forbearance is not merely a theoretical problem for lenders. More than 2.9 million homeowners had entered into forbearance agreements by mid-April, according to mortgage research firm Black Knight. That’s 5.5% of all mortgage holders seeking to delay their payments. The number is almost certainly going to increase as the financial crisis continues to unfold.
Of course, all those forbearance-seeking mortgage borrowers are driven by the same economic necessity that is affecting lenders. Basically, they’re worried about being able to earn enough money to make their mortgage payments. This is an equally real concern.
After nearly 3 million people lost jobs in March, the unemployment rate in April increased by 10.3 percentage points to 14.7%, according to the Bureau of Labor Statistics. Those numbers may well get worse before they get better. And the country could, in fact, still have double-digit unemployment in 2021.
When people can’t work, they can’t pay their mortgages. So delinquencies and defaults could rise as sharply as the market has declined.
How Mortgage Qualification Has Gotten Tougher
With all this in mind, it’s not surprising that getting a mortgage loan is harder to do in 2020. However, the basic outline and moving parts of the process are still the same.
Whether getting ready to obtain a purchase mortgage or to refinance an existing loan, here are the steps you should take:
- Check your credit score and debt-to-income ratios.
- When buying a home, consider how much down payment you can afford.
- Decide whether a fixed- or adjustable-rate mortgage is right for you.
- Pick a lender and apply.
Prior to this year, a credit score of 580 was usually good enough for many lenders, as was a down payment as low as 3% of the purchase price. In some cases, borrowers could verify their income with last year’s tax return. The process wasn’t fun, but it was easier than it is now.
Today, standards for credit scores and down payments are up sharply. Chase, for instance, is suggesting a credit score of 700 and a down payment of 20%.
Lenders also have become more strict about income verification. In addition to requesting current pay stubs, they are asking for borrowers to prove their income. If income from rental property is part of what you’re using to meet the desired debt-to-income ratio, you may be asked to prove that your tenants are still in place and paying on time.
How to Qualify for a Mortgage Today
With a renewed emphasis on credit scores, borrowers need to make sure their scores are as high as possible. The most effective way to boost your credit score is to make sure you always make on-time payments on your existing loans—from credit cards to car loans—and to pay down your balances. Also, avoid taking out new loans or opening new credit cards while you are house-hunting.
Finessing a credit score is one thing, but coming up with tens of thousands of dollars for a bigger down payment is something else. One way borrowers may be able to do this is through a gift from a family member or friend. Make sure, however, that it’s not a loan; you may be asked to prove the money is a gift. Lenders don’t want you to borrow your down payment from another source.
Also round up as much current documentation of your income as you can and have it ready in case questions arise during underwriting. Mortgage processors are busy dealing with a flood of applications. Try to avoid any delay coming from your side of the table.
When it comes time to apply, shop around for the best mortgage for you. Lender standards, while they’re getting tighter, still vary widely. Big commercial banks may be reacting the fastest to economic uncertainty by ratcheting up requirements. You may find a more welcoming reception at a small community bank, credit union or online lender.
While it’s unfortunate, it’s also a fact that some borrowers will have to reduce their expectations. The tougher benchmarks for credit history, down payment and income stability are putting a ceiling on the mortgage loan amount that some home shoppers can realistically expect to obtain.
Ultimately, the most universally applicable and effective solution to the difficulty of getting a mortgage in 2020 may be plain old patience. Interest rates may not fall any lower, but even if they increase they’ll still be low by historical standards. And home prices could moderate as borrowers have more trouble getting bigger loans.
You may just learn that 2020’s frustrated and unsuccessful borrower may become 2020’s happy owner of a new home or refinance at a still-attractive rate. If all else fails, wait and try again next year.