Moving Forward, Together: Lending in the Time of COVID-19

A pandemic like COVID-19 is unprecedented in our lifetime, so predicting the future is difficult, whether it’s the medium- and long-term impact on the economy or in specific sectors. Will bricks and mortar retail grow even more troubled because more people decide they prefer shopping online? Are work-from-home positions going decrease the need for office space?

In the world of residential real estate, the past three weeks at our brokerage have focused on getting deals that were in process to close. We also are trying to help clients who have been in process shopping for a home and applying for pre-approval for mortgages so they know how much home they can afford. It was only a few weeks ago that the rates fell to less than 4% on 15- and 30-year loans. It’s an excellent time to lock in a loan, to be sure, but with unemployment grabbing headlines, borrowers and banks are nervous.

This week our agents received an update from Celeste Spadaccini, president of Integrity Home Lending LLC, a Bucks County, Pa.-based mortgage broker, to help them understand a few important changes in the lending landscape. Here are some of the highlights from her update.

DESKTOP UNDERWRITING (DU) is the automated approval system that calculates whether a loan meets Fannie Mae or in some cases FHA (Federal Housing Authority) loan requirements.  A DU evaluates a borrower’s risk of delinquency by comprehensively evaluating several risk factors.  That being said some investors are putting  their own “overlays” on top of the findings.

• Stronger credit requested: Some investors are upping the minimum FICO score they will accept from applicants. Federal Housing Authority (FHA) and Federal National Mortgage Association (FNMA or Fannie Mae) guidelines typically allowed a 580 FICO score. Some investors are implementing overlays and requiring a minimum 640 to 680 FICO score. Typically FHA does not require any reserve principal/interest/taxes/insurance (PITI) funds, but some investors are requiring a three-month reserve.
• Debt-to-income ratio shift: Some investors are now requiring a 40% debt-to-income ratio even though FNMA allows a ratio of 45% and in the case of very strong buyers we can even get an Approve/Eligible for ratios of 50%.
• FNMA loans: Those already approved are getting a second review from underwriters and new conditions are being added. For self employed borrowers, they are requesting a CPA letter that the borrower’s business is still in operation.  They are also now adding a condition requiring a 2020 Year-to-Date Profit and Loss statement to show there is steady income.
• Jumbo loans: Many mortgage-servicing companies are not allowing jumbo loans; various jumbo loan products are suspended temporarily. Celeste says she still has small bank outlets offering a jumbo loan product. She also can split the loan into a conventional first and an equity line of credit second.
• Rehab/reno loans: FNMA is temporarily suspending their renovation loans.  FHA’s 203(k) loan program (purchase/rehab loan product) commonly used by investors who buy properties to renovate is also being suspended by some investors.
• Mortgage forbearance is not mortgage forgiveness. If your current loan is approved for a forbearance with the loan servicer, you need to be aware that  while you may not pay your mortgage for three months, on month four you would be required to make all three payments and the fourth month payment.

Celeste notes that while some of these measures are reminiscent of the measures lenders took after the 2008 recession, mortgages are still being approved and refinancing is still taking place. Approvals and pre-approvals are able to be done electronically, so those buyers who want to take advantage of low rates should prepare now so they can confidently consider properties when in-person showings are again permitted. For more information, email Celeste or visit Integrity Home Lending LLC.