Mortgage lenders are on track to have a big year in 2020. Thanks to record low interest rates, many people are buying homes, despite the bleak jobs picture and uncertain economy.
Total lending in the first half of 2020 was $1.8 trillion, just a hair below the $1.82 trillion record set in the first half of 2003, according to Black Knight, a mortgage data company. And applications for mortgages to purchase a home were up last week 21% from a year ago, according to the Mortgage Bankers Association.
The average loan size last week, $371,500, was a new record high according to MBA, as more people took out bigger loans.
But getting a mortgage now is a little different than it was before the pandemic hit and the economy started to unravel.
“In response to uncertainty, [lenders] are looking at credit criteria more closely and that’s not just specific to the mortgage industry,” said PK Parekh, senior vice president of home loans at Discover. “It has really forced everyone to think about how they can do business differently and be prudent about loans they make and provide flexibility for people.”
Here’s how getting a mortgage has changed.
How much debt vs. how much income
The uncertain unemployment and economic picture has lenders looking more carefully at borrowers.
For instance, some lenders could have a lower threshold for the amount of debt borrowers have relative to income.
While mortgage financing giants Fannie Mae and Freddie Mac don’t disclose the exact formula they use to evaluate borrowers, said Bill Cosgrove, chief executive of Union Home Mortgage in Ohio, they seem to be more sensitive to existing debt, which likely means lenders will be more stringent with how much debt they allow mortgage applicants to carry.
“We think their qualifying ratios for income-to-debt payments are a little more conservative,” said Cosgrove.
It isn’t a big change, he said, but it may mean that a person might qualify for a mortgage loan that is $20,000 less. Or, in order to qualify for a certain loan amount, they may be asked to pay off other debt.
But the mortgage industry had already tightened lending standards following the housing crisis that triggered the Great Recession, and that is serving it well now, lenders say.
“We learned a lot from the housing crisis,” said Cosgrove. “What we went through between 2007 and 2010, the industry is taking those lessons and they are dusting off that playbook.”
Up-to-the-minute income verification
With so many people losing their jobs, income verification has become a big priority for lenders, said Karl Jacob, a founder of LoanSnap, an online lender.
“We have people calling in who don’t have a job right now, it is quite common,” said Jacob. “They’ll say, ‘I have a job. But I don’t start for a month and a half, here is my offer letter.’ “
Lenders are asking questions they might not ordinarily ask, he said, like whether someone’s employer will allow them to work remotely in the state where they are buying the home.
“Working from home is so pervasive right now, the person asking for that information is probably working from home,” he said.
Ultimately, he said, lenders need to know you have income and that there is a reasonable expectation it will continue.
Moving things along
With so much in flux, Jacob said a quicker turnaround time to close the loan can help give a borrower peace of mind, but you need to stay on top of things and be responsive.
One of the biggest factors in the time it takes to get a mortgage is the amount of information the lender has to collect, including income and property information so the lender can determine if the loan meets lending requirements.
“That process is what takes time,” said Parekh. “One of the biggest things lenders can do is to set expectations about what information borrowers need to provide and have easy ways to provide that information.”
Jacob’s company, for example, communicates a lot with clients via text. But some clients are slow to gather their paperwork.
“If they get a message and can reply and click a link and do it quick, that is best,” he said. “But we have other borrowers who we won’t hear from for two weeks.”
Many lenders now are offering services online, which can make the process more nimble.
“We watch how a borrower is approaching the transaction and we’ll be more responsive to people who are responsive to us,” Jacob said.