Despite the COVID-19 pandemic, people all over the country are still buying and selling homes as well as refinancing their mortgages to take advantage of historically low interest rates. This is despite the fact that rates did not drop as low as people expected.
I took some questions about mortgage lending during the pandemic to Christina Razzi, the #1 U.S. Bank loan officer with more than 20 years of experience. She explained that as banks adhere to stricter guidelines and adapt to working from home, lenders are facing backlogs, which can slow down closing. Further, buyers need to be prepared for stricter underwriting rules.
Despite the aforementioned changes, lending continues and Christina is actually doing more business than usual.
What’s happening with interest rates?
In mid-March, early in the COVID-19 pandemic, the Federal Reserve dropped its benchmark interest rate to near 0%. This made many financial professionals believe that interest rates on mortgages, which were already quite low on average, might drop even lower, Christina says.
At the same time, of course, the pandemic forced processing centers to close down. As their staff members transitioned into working from home, backlogs grew. Regulations require banks and mortgage lenders to disclose certain documents within specific periods of time, and in many cases, lenders didn’t have the capacity to do so.
Ultimately, interest rates didn’t fall as people expected, but this didn’t stop people from applying for refinances. Banks were actually forced to raise rates because they couldn’t handle the loan applications in a way that complied with disclosure regulations. To add fuel to the fire, the Paycheck Protection Program arrived, and banks had to shift as many resources as they could toward processing business applications instead. This caused even further backlog and many lenders turned off their application process to stop the flow.
Things continue to change fast in the mortgage industry, with rules and regulations evolving almost daily. Interest rates remain historically low, making this a good time to refinance your loan — as long as you’re prepared for it to take longer than it may have pre-COVID. Currently, at U.S. Bank, a refinance takes six to eight weeks. I’ve seen the process take at least three months, if not six months, with other lenders.
How has underwriting changed?
The uncertainty fostered by the pandemic has made underwriting departments much more conservative. Self-employed borrowers are now being asked to submit profit and loss statements and corresponding documentation of their business banking assets. They may need double the reserves they needed prior to the pandemic. This means you’ll need more cash or other investable assets available post closing.
Additionally, borrowers have to submit employment verification within five days of closing. Other lenders may do three or more employment checks during the underwriting process. Self-employed borrowers have to show proof of business income within five days of closing — for example, a real estate agent would have to prove that they have a closing scheduled within five days of closing their own purchase. Understandably, that’s difficult.
If you’re self-employed and planning to buy a home or refinancing your mortgage, be prepared to show invoices as evidence of consistent income. You’ll also need to show proof that money is coming into your business accounts.
Additionally, minimum required credit score requirements have increased. Private mortgage insurance (PMI) is another item that may be required for buyers who are putting less than 20% down, whereas pre-COVID they may have avoided PMI. During the winter, Christina says buyers who could put 10% down were permitted to forgo PMI on loans of less than $1 million. That offer is no longer available.
If you received a loan through the Paycheck Protection Program, it shouldn’t affect your ability to get a mortgage, Christina says.
There are also bank-to-bank challenges that have made other parts of the mortgage process more cumbersome. Lenders are seeing fallouts from other banks when those banks are not able to process loans on time or their underwriting requirements are even stricter. Christina has seen increased applications from this — she has to step in to try and save the loan.
The CARES Act, which was signed into law in April, allowed for mortgage forbearance with an assumption that there would be no impact on a homeowners’ credit score. Mortgage forbearance allows a borrower to temporarily defer their payments for a period of time, which was three months in this case. After the deferment period is over, all outstanding payments are due.
Christina and I have both seen situations in which clients were put on forbearance either by request or automatically and told it wouldn’t impact their credit score. Unfortunately this is not true. The forbearance has created issues with underwriting, and in most cases, lenders denied refinancing. In one situation, my client who went on forbearance had to take the following steps to be able to refinance their mortgage: Repay the months of forbearance, contact the lender to remove the account from forbearance, wait 30 days to have it come off the credit report, and request a letter from the bank indicating that the account is paid in full. There were a lot of extra steps that could have been avoided if we knew the forbearance would appear on the credit score.
If you’re considering forbearance on your mortgage — or if you’re already in it, whether it was your decision or your lender’s — check your credit report and make sure your account is up to date before you attempt to refinance or purchase a home. Be cautious of what your lender is telling you regarding forbearance and impact on credit score. If you are facing a financial hardship then forbearance may be an option to explore.
Prices and sales are steady, despite forecasts
The factors that contribute to a hot housing market remain steady, despite the pandemic: interest rates are low, inventory is low, and there hasn’t been a notable decrease in the number of buyers, Christina says.
In fact, Christina is doing about 50% more business than she ordinarily would — about an average number of purchases and significantly more refinances. Christina believes people applied for refinances expecting interest rates to drop further and they didn’t want to miss out. Unfortunately, rates didn’t drop as low as people thought, so many borrowers closed at rates that were just 0.125% lower than what they had in place. Normally, borrowers wouldn’t bother refinancing for such a small decrease in interest rates, but since they had already applied, lenders went ahead and processed the refinance.
In the first months of the pandemic, sellers did not want appraisers to enter their homes, so it was impossible for lenders to complete certain loans. This problem seems to be subsiding. As far as appraised values go, lenders aren’t seeing the impact of the pandemic yet, since appraisers use comps that are up to six months old. In some areas, prices are going up, since inventory is low yet demand still seems high.
In general, Christina says the strict underwriting guidelines are temporary and lenders plan to go back to normal underwriting guidelines once we return to a new normal. For now, exceptions are very hard to get, so be prepared to provide more documentation and expect longer wait times. Despite the additional documentation and wait times, Christina is still encouraging people to apply. If you can put up with the process, it is worth the time and effort to get a lower interest rate.
Christina Razzi is the #1 U.S. Bank loan officer with over 20 years of experience. She helps clients across the U.S. obtain mortgages for their first homes, second homes, investment properties and more. She is focused on customer service and works with her clients across the country to help them decide which options are the best for their situations. NMLS 162739.