How is coronavirus affecting the mortgage markets?
Uncertainty isn’t a great recipe for stability. The last 30 days have been highly unusual for the mortgage market as we’ve had fast decreasing interest rates at the same time as rising credit risks. Decreasing interest rates and increasing credit risks are both bad for banks. How is coronavirus affecting the mortgage markets?
What are banks doing in response to the coronavirus crisis?
Because risks are rising, banks are reducing their lending. This is due to the fact that an increasing number of expected defaults or delayed payments means they need to save cash to cushion expected losses.
Reduction or elimination of some mortgage products
Mortgage investors don’t have an appetite right now to buy consumer mortgages in certain categories, so these categories have dried up. For example, jumbo loans are not as available. Some banks like Wells Fargo have announced they are pulling back. An area of lending that has completely disappeared are loans with a naturally higher risk profile called “non-QM” loans, or, non-Qualified mortgages.
Will these products come back?
There will have to be some more stability in the market before jumbo loans are more readily available for a larger group of borrowers or non-QM loans reappear. Jumbo loans are a pillar of lending, so they will always be around, just with more stringent qualification requirements. Stability will come when banks are certain that the homes will have an anticipated value as collateral and that that the people borrowing money will have jobs and income to pay them back. If homes aren’t worth as much as the mortgage, or there is doubt about whether home values will hold, that increases risks to the banks and decreases mortgage product availability.
What’s happening to mortgage rates?
Even though the fed cut the lending interest rate to near zero, mortgage interest rates are determined by additional factors. Because of the massive increases in risk right now to banks, mortgage rates have risen. Higher mortgage rates help absorb risk to banks.
What about lending for investment properties?
Loans for investment properties are much more hard to come by. And for loans that are still available, the interest rates have increased more than 150 basis points in the last 30 days.
How are qualifications being affected?
Qualifications are tightening for all borrowers. Even government backed FHA and VA loans have seen increases in the qualification requirements from lenders. Because of more perceived lending risk, loan originators want to increase their margins by offering higher rates, particularly because they don’t know which loans they will be able to sell to investors.
What does this mean for someone looking to purchase a home?
If you have poor credit or a high debt to income (DTI) ratio, it will not be as easy to get approved. You will likely pay higher rates than you would have a month ago, but you’ll still have access to a number of different loan programs, just not non-QM products. You’ll want to keep an eye on the markets and see how is coronavirus affecting the mortgage markets.
What about availability of refinances?
Refinances are available, but like all lending, the best rates are reserved for people who have outstanding credit, good debt to income ratios and plenty of assets. There are still excellent interest rates available for 30 year fixed mortgages in the 3.25-3.5 range which is still near a historic low. But to get those rates, generally you need to have higher than 740 FICO, 25% equity in your home, and lower than a 36% debt to income ratio.
Advice for borrowers buying a home?
If you want to get the best deal on a mortgage right now, you want to maintain perfect credit. Don’t pay late or buy expensive items on credit. If you are looking to refinance, don’t pay your mortgage late or accept a forbearance agreement or mortgage modification unless you are totally unable to pay the full amount. If you do need to pay late on a program, document the circumstances, such as being furloughed or having coronavirus illness in your family. If at all possible, keep your employment, even if you are working at reduced hours or pay. Save as much money as you can and delay any unnecessary purchases.
You also might want to get in contact with some mortgage advisors, even if you aren’t quite ready to buy yet. You can stay up to date with current environments and be ready when you are looking to close. Rates and qualifications will fluctuate during this period of uncertainty, but if you keep a finger on the pulse of the market, you’ll be in great shape.
Because of the volatility, it’s more important than ever for people to shop around effectively, through comparison shopping, for mortgage rates and offers, given the variation in the market.
What about long term?
Mortgage rates are expected to remain at historical lows for a while, which is great news for home buyers and people refinancing.