How the Mortgage Application Process is Changing Because of COVID-19

During the past two months, the majority of our nation has been asked to stay home as much as possible to stop the spread of COVID-19. With rigid regulations on what industries must remain shut down for the time being, many businesses have had to close their doors, leaving over 26 million Americans unemployed for the foreseeable future. 

How the Mortgage Industry Has Been Affected by COVID-19

For the mortgage industry, this has been a double-edged sword. Even with the sudden downturn in the economy, mortgage rates have remained at near historically low rates and have many borrowers eager to refinance or buy their first home. Especially when the volatility of the market will likely result in significant increases to rates in the next few months. 

Updates to the Mortgage Application Process

With the drastic changes in the economy, there have been significant updates made to the mortgage application process. Some are dedicated to helping make it easier for borrowers, while others have been put in place by the lenders to protect themselves from an increase in missed payments or defaulted loans.

There are a few key changes to be aware of that will directly impact you as a borrower. 

Lowered Debt-to-Income Ratio

The amount of debt you owe compared to your income will determine if you qualify for a mortgage loan and how much you can borrow. During the past few months, lenders have deemed it essential to tighten restrictions by lowering the debt-to-income ratio. This means they may reject your loan if the amount of debt you owe is high compared to your current income. Mortgage lenders want to avoid loaning money to borrowers with a high DTI to protect themselves from missed payments and defaulted loans. 

Increased Credit Score Minimums

An average of 5 million people a week are being let go from their jobs or have been asked to take a short-term leave of absence because of the current pandemic. Millions more are seeing reduced wages as employers are trying desperately to cut back on expenses. 

Mortgage lenders see this as a higher risk of foreclosures and have drastically increased their credit score minimums to help protect themselves during these uncertain times. 

Most financial institutions have increased their minimum credit score to 680 and above. They cannot afford to take on additional risk, so by increasing the requirements, they are making sure they only loan money to borrowers with a positive track record of making payments on time. 

Frequent Employment Verification 

During a typical mortgage loan process, the borrower is required to submit at least two of their most recent W2s, bank statements from the past couple of months, and their most recent tax return forms to prove they are employed and bringing in a steady income. These documents are usually sent over during the beginning stages of the application process. 

However, with the recent changes in the market and many people losing their jobs in recent weeks, most lenders now require a second employment verification and, in some cases, are even requesting a third be done the day you close on your home. 

Alternative Forms of Employment Verification 

With so many businesses shut down right now, and many employees are working from home, it can be difficult for lenders to directly verify a borrower’s employment. For those who are applying for a conventional loan backed by Fannie Mae and Freddie Mac lenders are now accepting an email from your employer, recent year-to-date pay stubs, or bank statements showing recent payroll deposit for your employment verification. However, they will still try to reach out to your employer first. 

What You Should Do If You’ve Lost Your Job 

If you’ve recently been given a leave of absence or been temporarily laid off, immediately reach out to your lender to discuss your options. 

If you’ve been let go without the possibility of going back to the same job, it may prove to be difficult to close on your loan due to the new restrictions. However, always reach out to your financial institution to see what they suggest you do in this situation. 

Titles Are Taking Longer to Finalize 

During the mortgage application process, a title search will be completed. To verify that the title to the property is legitimate and there are no legalities in the way of you taking ownership of the home. For the title company to complete a title check, they need to access documents that can only be found at the local courthouse. With many government facilities currently closed or operating on limited schedules, it’s taking much longer for most titles to be approved. 

Flexible Appraisal Requirements

With the majority of the nation still under a stay at home order, most appraisers aren’t able to complete an in-home inspection. To help ease the burden and allow borrowers to move forward in the home buying process, lenders are relaxing their appraisal requirements. 

Approved Alternatives Available for Appraisals 

Drive-by, desktop, and exterior appraisals are all now allowed for the time being. As long as the interior of the home is accurate online (no major remodels have been done), your appraiser can use that information and a quick stop to take a look at the exterior of the home to create the appraisal.  

Low-Interest Rates

In the past two months, lenders have seen a 200% increase in mortgage applications since March 1st. This goes to show that borrowers are still very optimistic about the housing market and want to take advantage of the near all-time low-interest rates that are currently available. 

Many are anxious to lock in a low rate before they start to increase, which may happen within the next few months if the economy isn’t able to bounce back quickly. 

Consider Refinancing Your Mortgage 

It’s also a great time to consider refinancing if you’re looking to lower your interest rate or switch loan types. Most of the paperwork you need to complete can be done from the comfort of your home, and chances are you’ll come out of the process with a decreased monthly payment, which is a plus.

You’re Ready to Make An Informed Decision

Whether you’re a first-time homebuyer, looking for an investment property, or wanting to refinance in the near future, you now have all the tools you need for a successful loan process. 

The mortgage application process might not go smoothly due to the COVID-19 pandemic. However, you’ll be prepared to handle any obstacles that might get in the way by knowing what changes have been put into place and to handle them.