The Mortgage Brothers Show
New and Stricter Rules for Mortgages During COVID-19
In this episode, we touched base on mortgages as it relates to where we are with COVID and how it is affecting purchases, refinances, timing, pricing, and the like. The virus is causing mortgage lending and bank guidelines to continually evolve and tighten down. Banks want to protect themselves from the risks that mortgages inherently have during times of uncertainty. Some borrowers will find it more difficult to get pre-qualified in the current climate compared to before the virus.
At A Quick Glance
- In regards to mortgages…
- Credit scores are more critical than ever
- Debt-to-income ratio requirements are lower
- Cash-out refinances have stricter requirements
- Self-employed borrowers need to prove they are actively in business within 10 days of closing
- Jobs in affected industries will require some overlays
- In regards to banks…
- There are longer review times (purchases vs. refinances)
- Reserves are becoming more important
- Verifications of Employments (within 24 hours of funding)
- More frequent (10 days prior to COE and with 24-hours) verification of employment
- Borrowers are signing extra rep/warranties
One of the big things is going to be credit scores. It always is, but now more than ever it’s important to have a high credit score.
Right now, investors are getting leery and when they do, they become pickier. The first thing that they end up not wanting to do is invest in low credit score loans. So, in accordance banks are ratcheting up the interest rates and risk adjustments on lower credit scores. They want to make sure that payments keep coming in.
Now, the CARES Act gives the borrowers a right to have six months of forbearance. What they’re afraid of is that statistically lower credit score borrowers are going to apply and have late payments and then what will happen is it just destroys the value of the mortgage note. Lenders are giving borrowers money. And, even before they lend the money, the lenders know there are certain rights that the borrowers have to not pay a certain amount a month should they choose. So, it’s creating some adjustment from the investors within these loans. Banks are having this fear of missed payments.
So, regarding credit scores, there are really two items that have kind of changed. One is the cash-out. A lot of banks, but not all, are moving to where you’ll need a credit score of over 700 to do a cash-out. This is significant. Two months ago, it was around 620. What we are basically seeing is that banks are afraid of borrowers taking cash out and then going late with mortgages and then just not paying. Then on the FHA side, they still have the 580 credit score out there. So, you may see it in some asterisk form, but really a lot of the banks that we’re working with are having credit score minimums of 620 to 640.
We technically have a bank that will offer 580, it’s like three and a half points just to get the loan, and of course, getting approval is hard anyway, between 580 and 600 in score. So, it’s ridiculously expensive. I think, in general, for those lower credit scores it’s going to be tough.
When a bank does your loan, they take the monthly debt and divide it by your monthly income to come up with a ratio.
Now, before COVID-19, a 50% ratio was basically the max. Right now, we’re seeing a lot of banks ratchet that down, saying that they want to make sure that the borrowers don’t have over 47% and in some cases 40%. Basically, you want to make sure you have a lower deb-to-income. That’s for conventional financing, but it’s the same for FHA. We’re seeing a movement down.
Reductions in Maximum Loan Value for Cash-Outs
A lot of banks, not all, are reducing the maximum loan to value from 80% to 70%. So, 80% of a $400,000 home value would be $320,000. So, $320,000 would have been the normal cash out, but today, because of COVID, that would be reduced to $280,000.
And, not only is that reduced but also they’ve also added some reserves. If your mortgage payment’s $2,000 a month, and the bank says, okay, we want to make sure you have six months of reserves. They basically take your mortgage payment and multiply it by six. They want to make sure you have $12,000 parked.
If you’re self-employed and your net income was $100,000 dollars in 2019 and 2018, the banks are taking that number and giving it a haircut. A lot of banks will say they’ll only give you credit for like 75% of the value of the income.
On top of that, for self-employed borrowers, you have to prove that you’ve been in business and that you had business activity within 10 days of closing. That means a receipt of business, a contract, some type of activity report, something that shows that your business is doing something.
If you have any other questions or there’s anything we didn’t cover, give us a call. We’re always happy to help. There’s always lots of layers to financing and we know how to get over any hurdle with as much ease as possible.
So, thanks for listening to or reading The Mortgage Brothers Show. Please let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to firstname.lastname@example.org or email@example.com.
Be sure to ask us for a free quote on your next mortgage, we will personally work with you and help you through the whole process.
Signature Home Loans, LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisory before engaging in any transaction. Signature Home Loans, NMLS 1007154. NMLS# 210917 and 1618695, equal housing lender.