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Mortgage lenders are dealing with economic uncertainty caused by the Covid-19 economic shutdown by tightening qualifying standards. They began increasing the minimum credit scores, demanding larger down payments, verifying your employment status multiple times, and even taking away specific loan products completely.

Job losses have gotten to astonishing levels due to the corona virus pandemic. More than 26.5 million workers have filed jobless claims in the last five weeks. Fear has taken over and lenders are extremely concerned that these high unemployment rates will equate to late payments and mortgage defaults in the future.

These changes were put in place since it has become more complicated for lenders to confirm the borrower’s ability to repay their loan as unemployment spikes and facts are changing every day because of COVID-19.

Here’s a glimpse into how lenders are tightening their criteria to qualify

Union Home Mortgage changed its process of double-checking and other conditions.
• Age of documents: The age of document requirements has been lowered from four months to two months for most income and asset documentation.

• Verbal employment follow-up confirmation: If not able to receive a traditional verbal verification of employment, the lender will allow an email sent from the employer’s website address, year-to-date pay stubs from the pay period that is just before the note date or an account statement confirming the payroll deposit from the pay period that is the most recent before the note date.

Mortgage lenders need to incorporate additional assurances against borrower delinquency

Specific types of mortgages – such as jumbo and non-QM loans – have been canceled or suspended indefinitely as lenders have paused offering loans that are considered riskier than GSE loans.

According to Federal Housing Finance Agency Director, Mark Calabria, some of these adjustments may be with us for quite a while.

“Certainly, we saw credit standards tightening in 2009 and 2010. In fact, we saw credit standards tighten as early as 2006. So, there was a slow tightening over that time. I think you’ll see this as a reminder that credit risk is an actual thing in the mortgage market”, said Calabria.

Additional requirements lenders add are called overlays which puts in another layer of protection for certain mortgages, like increasing the minimum FICO credit score to quality for a Federal Housing Administration loan from 580 to 640.

Caliber created a number of overlays for its conventional, jumbo and government loans, that include:
• Age of documentation: Income and asset documents must be dated within two months (60 days). If an asset statement is provided only on a quarterly basis, the most recently issued quarterly statement must be provided.

• Verbal VOE: All verbal VOEs must be completed and be done within three business days of the note date, confirm the borrower is presently employed and not on leave or being furloughed, confirm that the borrower’s hours and pay have not been affected in the last 30 days and be completed by an HR representative, owner or digital vendor.

For those that are self-employed, the borrower must provide a written statement that the business is open and operational and that the COVID-19 effects will not have a material impact on the financial statement provided at time of approval.

If bank statements are not able to be provided, then the qualifying income must be decreased by 25% and be viewed as acceptable to proceed.

• Rental income: Rental income may only be used if the borrower’s FICO is above 700 and the borrower can provide six months of reserves for each property that has a mortgage in which rental income is being used to qualify.

If the FICO score and reserve requirements are not able to be satisfied, then the borrower needs to qualify with the full mortgage payment, property taxes and insurance for the subject and other real estate properties they own.

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Wells Fargo and US Bank both changed their minimum score requirement to 680 for FHA and VA loans, which commonly feature credit-score requirements as low as 580 before the pandemic. Flagstar Bank has raised its minimum credit score to 640.
• The good news is 1st NWM has not raised their credit score requirement.

U.S. Bank
Like other big banks, U.S. Bank put in additional overlays for government loans; FHA, VA and USDA.
• Minimum credit scores: increased minimum FICO requirements to 680.
• Debt-to-income: maximum DTI of 50%.
• Funds for Closing: If any funds used for closing costs or down payment are not borrower’s own funds or gift funds, then borrowers must possess a FICO score minimum of 700 with a DTI maximum of 43%
• Navy Federal Credit Union suspended its offering of FHA loans, with the expectations they will start to offer it again in early 2021.

“Credit requirements have become tighter in general. Lenders have raised credit score requirements by 100 points,” said David Fitzpatrick, regional marketing director at 1st Nationwide Mortgage in Aliso Viejo.”

Portfolio loans are getting destroyed right now because Wall Street investors are saying no to those deals. Any loan that is unique, non-qualified, not conforming or government, is either being suspended or the rates have become borderline ridiculous from where they were in February 2020.

Adding to the pain are the stay-home orders from state governors. People who are working from home and are borrowers encounter challenges in finding the correct person to validate their employment.

This could easily slow down the loan process considerably, so lenders are requesting borrowers to make sure the employer’s HR person is reachable to confirm your employment.

Although lending standards have tightened, interest rates are still low and home prices have come down. What a great time to secure a low fixed-rate payment for first-time home buyers.