3 Reasons Why Getting a Mortgage Is So Hard Right Now
Anyone who’s currently in the market to buy a new home has undoubtedly noticed that it’s a great deal harder to get a mortgage loan than it was three months ago, before the COVID-19 State of Emergency declaration by the Trump administration.
Now, almost three months into the pandemic, states are gradually reopening and returning to normal business operations, realtors are able to show homes in person again, and as of early June, home prices are back to pre-pandemic highs. While this would generally be seen as the start of an economic recovery, mortgage lenders and potential buyers alike know that the economic fallout from COVID-19 is far from over. Following are three reasons why lenders are so hesitant to make new home loans:
1. You might default on the loan
At the start of the coronavirus pandemic, mortgage rates plummeted as the seller’s market weakened. Stay-at-home orders and travel restrictions caused a ripple effect throughout the economy, forcing the closure of many non-essential businesses as well as drastic labor cuts throughout the airline and hospitality industries. Likewise, thousands of potential home buyers forfeited their plans as the risk of either losing their jobs or of contracting the virus while touring homes seemed too high.
This reality was not lost on any lender from whom you might have requested pre-approval. Regardless of how secure your current employment may be, most lenders see in every applicant the potential to default on the loan due to an unexpected job loss.
2. You might not have the down payment
Another consequence of the looming recession is that lenders are much less confident in borrowers’ ability to repay their mortgage loans in a timely manner. Overwhelmed with requests from current borrowers for the mortgage forbearance program available through the CARES Act, some lenders, including JP Morgan Chase, are now requiring 20 percent down and “excellent credit” (i.e. credit score of 700 or higher) of all new mortgage loan applicants.
As a result, requirements are once again as stringent as they were during the Great Recession. Borrowers who once took 5 percent down payments for granted are now finding themselves priced out of a market where 20 percent down has become the new normal.
3. The home you want might appraise below your offer
It also means that, in the current lower loan-to-value environment, buyers have to be confident that the appraisal value on the home they have under contract will be equal to or greater than their offer amount. While the recent resurgence in home values will help, buyers still need to be currently knowledgeable of the recent comparable sales in the area where they are buying even before making an offer. Your real estate agent can help with this, but savvy home buyers will also do their own research and steer clear of “fixer-uppers” for which they don’t have at least 20 percent for the down payment plus funds to cover the renovation.
If you are currently in the market to buy a home, expect an uphill battle. The environment is at its least favorable for new buyers in over a decade, and the days of being able to leverage your dream home to the hilt are – at least for now – over. However, if you are prepared with 20 percent down as well as several months’ expenses in an emergency fund, and if you have done objective research before deciding on the home on which you would like to make an offer, then you stand a decent chance of being approved for a mortgage.