Challenges in Obtaining a Mortgage Loan During COVID-19
The global pandemic brought about by COVID-19 has brought about several economic challenges, forcing governments to try and provide policy and relief in attempts to stabilize financial markets.
The U.S. housing market in particular has seen increased liquidity concerns as a record number of homeowners seek relief, mostly through temporary mortgage forbearance programs. But lenders are not the only ones battling headwinds from COVID-19.
Borrowers are now facing additional scrutiny and stricter credit eligibility requirements when applying for new mortgage financing.
While the mortgage rate environment remains lucrative for the foreseeable future, several borrowers still cannot overcome the temporary credit requirements implemented by both Fannie Mae and Freddie Mac.
Industry wide crackdowns on lending standards have also led to increased lender overlays, which add an additional barrier to qualification.
For example, JP Morgan Chase recently announced that borrowers will now need a FICO score of 700 and a minimum down payment of 20 percent to be approved for a new purchase mortgage.
Non-conforming mortgage financing options have also dried up, including the liberal jumbo market which now has investors turning to safer investments, such as government-backed loans.
Wells Fargo Home Lending announced soon after the CARES Act was enacted that they were suspending the purchase of non-conforming mortgage loans until markets stablized2.
So, what are some of the additional hoops that borrowers can expect as they apply for a new mortgage loan in the middle of COVID-19?
Here are some things to consider when applying for new mortgage financing right now.
Income Continuance and Guidance
If you are a furloughed employee, you may be worried your employment status may interrupt or impede your ability to obtain mortgage financing.
Current underwriting guidelines allow lenders to use additional flexibility and guidance related to borrowers who are on temporary leave from their job. However, Fannie Mae and Freddie Mac have bothered to determine that those same flexibility will not extend to employer-initiated actions.
This means that borrowers who have been furloughed or laid-off, regardless of whether there is a projected return date, cannot use that income for qualification.
Additionally, borrowers taking advantage of unemployment relief as a result of the CARES Act cannot use that income for qualification since the source is determined to be temporary in nature. Traditional and documented unemployment benefits may still be eligible (such as those related to seasonal employment)3.
Further documentation may also be required by lenders who notice fluctuations in any borrower’s hours worked or YTD earnings.
Age of Documentation and Qualified Assets
New age restrictions have now been instituted for mortgage application on or after April 14, 2020. Older documentation was previously acceptable so long as it was dated within 120 days prior to the note date for any given transaction.
New guidance requires that almost all income and asset documentation must now be dated 60 days prior to the note date3.
Furthermore, if you are looking to use stocks, stock options, or mutual funds as qualified assets to cover cash to close or necessary reserves for a new mortgage application, guidance has regressed and currently requires proof of liquidation for assets used toward closing costs or a down payment3.
Lenders also can only use 70% of the value of these asset balances to be used towards meeting reserve requirements where applicable, since these types of assets are considered inherently more volatile than others.
Verifications of Employment
In an effort to engage in prudent and responsible lending practices, Fannie Mae and Freddie Mac have previously required verifications of employment to make sure nothing has impacted the qualifying borrower’s repayment capacity.
However, as lingering ambiguity related to forecasting COVID-19’s larger impact on national and local economies continues, Fannie Mae and Freddie Mac have provided additional flexibility to provide lenders the option of obtaining alternative documentation in lieu of a formal 10-day prior to close verbal verification.
Alternative documentation can include emails from the employee’s work citing the verifier’s information and the employment status of the employee, a copy of the paystub the immediately precedes the note date (with full YTD information), of an asset statement evidencing the last payroll deposit that immediately precede the note date3.
While these extra flexibilities are prudent, the immediacy of these documents has caused timing issues for the borrower and lender, resulting in possible closing delays.
For example, the guidance does not take into account a lender’s mandatory disclosure requirement under the TILA-RESPA Integrated Disclosure (TRID) rule. It also doesn't address the fact that an email verification may not be available if employers are working remotely or partially closed as a direct or indirect result of the COVID-19 outbreak.
Self-Employed Borrower Requirements
Underwriting guidelines became especially tighter for those borrowers who are self-employed. While lenders already had stricter lending standards for self-employed borrowers, Fannie Mae and Freddie Mac now require even further due diligence as to the analysis of a particular business solvency at its ability to generate recurring, stable income for mortgage repayment purposes.
Self-employed borrowers with mortgage applications dated on or before June 11, 2020 will now be under additional scrutiny by lenders. While previous liquidity and cash flow analyses are still required, lenders are now required to ask and analyze profit and loss statements (audited or unaudited with two months asset statements) for the business(es) to help determine if a borrower’s income is stable and there is a reasonable expectation of continuance.
These statements cannot be aged more than 60 days from the note date. If the lender notes a declining income trend, they must determine if the income has since stabilized or, if it has not, disqualify the income for the loan pending a thorough analysis.
Keep in mind that restrictions have also been placed on qualified business assets. SBA Payroll Protection Plan (PPP) or other COVID-19-related relief programs may not be considered business assets4.
Lenders must also take additional steps to confirm that a self-employed borrower’s business is still open and operating within 20 days prior to the note date4. This is in addition to the standard 120-day verification of the business that was previously required.
Purchase and Refinance Eligibility
Borrowers who are looking to take advantage of both current mortgage relief brought about by the CARES Act and the lower-interest rate environment that mortgage markets are currently experiencing are in for a wakeup call.
It was previously decided not to allow borrowers taking advantage of forbearance options to be able to refinance or obtain a new purchase mortgage. New revisions have surfaced that will allow borrowers to bring their loans current.
Alternatively, borrowers may also be eligible to refinance or buy a new home three months after their forbearance ends. The stipulation, however, is that they have a history of having made three consecutive payments under their relief plan (which applies to forbearances, deferrals, and/or modifications).
1 Prosser, G. (2020, April 14). JPMorgan Chase Tightens Mortgage Standards Over Coronavirus. Retrieved July 29, 2020, from https://therealdeal.com/2020/04/13/700-credit-score-and-20-down-jpmorgan-ups-home-loan-standards/
2 Chang, E. (2020, April 03). Jumbo Mortgages Disappearing As Lenders Pare Back Risk. Retrieved July 29, 2020, from https://www.bankrate.com/mortgages/jumbo-mortgage-market-is-shrinking/
3 COVID-19: Temporary Credit Requirements and Appraisal Flexibilities. (n.d.). Retrieved July 29, 2020, from http://www.freddiemac.com/learn/lo/tutorials/covid_temp_processes/index.html
4 Freddie Mac Single-Family Seller/Servicer Guide. (n.d.). Retrieved July 29, 2020, from https://guide.freddiemac.com/app/guide/bulletin/2020-19?_gl=1*bac5sv*_gcl_aw*R0NMLjE1OTE3MTU2MDkuQ2owS0NRand3X2YyQlJDLUFSSXNBUDN6YXJGV2Y3TjRPaE44eEVfclJncWVBUkkxSGhHNS1OWkR1TjJLQVBTVkxhdDdSdjYweDhrNGtZSWFBaUZPRUFMd193Y0I.*_gcl_dc*R0NMLjE1OTE3MTU2MDkuQ2owS0NRand3X2YyQlJDLUFSSXNBUDN6YXJGV2Y3TjRPaE44eEVfclJncWVBUkkxSGhHNS1OWkR1TjJLQVBTVkxhdDdSdjYweDhrNGtZSWFBaUZPRUFMd193Y0I.
5 FHFA Announces Refinance and Home Purchase Eligibility for Borrowers in Forbearance. (2020, May 19). Retrieved July 29, 2020, from https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Refinance-and-Home-Purchase-Eligibility-for-Borrowers-in-Forbearance.aspx