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How Has COVID-19 Affected Mortgages?

July 13, 2020

COVID affecting mortgages depiction

When the novel coronavirus hit the United States and spread from coast to coast earlier this year, no one could accurately predict what would happen. The contagion’s effects on the economy have been devastating, with unemployment rates soaring above 25 percent and nearly 35 million jobs lost. With its widespread economic impact, COVID-19 has not only affected mortgage rates, but also stiffened requirements for getting a home loan in some markets.

Mortgage Rates Dropped in Response to Coronavirus
Average mortgage rates in the United States loosely follow the yield on the 10-year Treasury, a debt obligation issued by the U.S. government that matures after ten years; it is how the government partially funds itself. So after weaker-than-expected retail sales the past few months, investors refocused their attention to the bond market to protect their money in place of investing in company stocks. This led to mortgage rates decreasing to the lowest in more than a decade.

With a dramatic drop in interest rates — the average hovering near 3 percent — potential homebuyers are finding that it’s a seemingly great time to buy. However, with nearly 5 million mortgage borrowers in forbearance — when lenders allow mortgage-holders to temporarily pay back their loan at a lower payment or pause on payments altogether — lenders are hesitant to extend credit on new mortgages, or even refinance existing ones.

Lenders Upped Their Mortgage Requirements Due to the Pandemic
With mortgages in forbearance and more Americans filing for unemployment, home loan lenders have toughened up on the criteria buyers must meet to qualify for a mortgage. Many lenders feel that issuing loans in the current economy is high-risk, with the Mortgage Bankers Association model showing a 25% plunge in mortgage credit availability as a result of the virus outbreak.

One lender’s standards tightened to require that borrowers have a minimum credit score of 700 and no less than a 20 percent down payment, including for mortgage refinances if the bank didn’t already hold the loan. Another lender increased their credit score requirements for government loans, like FHA loans, to 680. Typically, buyers need only a credit score of 580 and a 3.5% down payment for government-backed mortgages. These same banks have suspended issuances of home equity lines of credit, and others have altogether halted cash-out refinances, no matter how well-qualified the homeowner is.

In general, lenders chose to up their restrictions after the $2.2 trillion stimulus bill that the House and Senate passed in March. Under the new law associated with the bill, lenders must allow borrowers with government-guaranteed mortgages (like FHA, USDA, or VA loans) to delay as much as a year’s worth of mortgage payments if the novel coronavirus outbreak directly affected them. As points out, mortgage lenders will eventually be reimbursed for these delayed payments, but they also are required to cover the missed payments to compensate bond investors. If lenders determine potential homebuyers are likely to need forbearance in the future, they are more hesitant to lend to them and compound lenders’ existing financial conundrums. Lenders consider lower credit scores or limited available cash on hand to be hallmarks for potential forbearance.

So, although mortgage rates are low, it can be harder to get approved for a home loan at this time, depending on the lender you’re working with.

Coronavirus Effects on the Real Estate Housing Market
Although spring is typically a popular time to buy and sell homes, the Federal National Mortgage Association, a publicly-traded government-sponsored enterprise affectionately known as Fannie Mae, expects to see home sales decline by 15 percent this year due to the coronavirus pandemic. This downturn is in part due to fewer homes listed for sale, along with fewer buyers shopping the market because of unemployment concerns.

Some sellers have pulled their homes from the market, either because they fear their sales price may drop, or for a desire to minimize the number of people passing through their homes. The National Association of Realtors has kept a watchful eye on the unfolding coronavirus situation as it relates to the housing market. The organization issued guidance for its constituents, advising they check with local and state executive orders before conducting in-person home showings and implementing precautions for their clients, including opening all cabinets, closets, window coverings, and doors before the potential buyer views the home to limit hands-on contact with surfaces and wiping down any surfaces touched with a disinfectant. Some sellers have opted to offer virtual-only home showings, which, for some buyers, has negatively impacted their perception of the home for sale.

Home Prices May Decrease Because of COVID-19
According to Fannie Mae, sellers shouldn’t worry too much about declining home prices if they choose to list their home for sale. The median price for existing homes is still projected to rise by about 1 percent, as compared to last year, while some areas may see a 2- to 3-percent decline in home value.

Fannie Mae also reports that the real estate market is projected to improve in 2021, but that trajectory is highly dependent on what happens next with the pandemic.

Work with a Direct Lender

If you’re ready to purchase a home despite coronavirus, we recommend working with a direct lender like Homestead Financial to get your pre-approval and finalize your mortgage. At Homestead Financial our loan officers always look forward to talking to you and answering your questions about how we can help you purchase a home.

Before you start shopping, contact us to get pre-qualified. It takes only a few minutes, and we can help determine how much of a mortgage you could qualify for. A pre-qualification shows potential sellers and your real estate agent that you’re serious about buying and prepared to make a purchase should the right home come along.

Homestead Financial offers conventional loans, along with government-backed FHA, VA, and USDA loans, for which we are the direct lender. Our mortgage programs have helped homebuyers in ten states achieve their dream of homeownership, including in the Kansas City and St. Louis metro areas.

To get started on your pre-qualification, contact us. Learn more about our programs on our website.

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- Jayson Hardie on Growth

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