Life has certainly changed drastically since the COVID-19 pandemic hit, but life, and everything that accompanies it, still carries on. And life often includes moving, buying a new home, and getting a mortgage to finance that new home.
How has getting a mortgage changed during the pandemic? Here, we cover what to expect when getting a mortgage and what you can do to prepare for it during these unprecedented times.
Lenders have tightened their standards
The most significant change you will see when seeking a mortgage during the pandemic is the tightening of lending standards. With so many Americans out of work or losing income, the likelihood of many people defaulting on a loan and missing a mortgage payment has increased drastically. Because of this, lenders have become wary of making loans to those they suspect will not be able to pay them back, so they have tightened their requirements for lending.
A couple of the key factors lenders examine, and which have recently tightened, include:
- Your Credit Score: Banks have begun to require higher credit scores than in the past. Whereas before you may have been able to get a mortgage with a decent interest rate with a score below 700, most banks are currently lending only to those with scores of 700 (or close to it). Why? They know that even those with good credit history face economic difficulties, so they want to be sure they are lending only to those with a strong history of on-time payments and responsible credit usage.
- Down Payment Amount: Before the pandemic hit, it was common for banks to accept less than 20% down on mortgages. Now, you will (likely) have a tough time getting a mortgage with anything less than that.
- Income Verification: Lenders will be taking their fine-toothed comb to your finances, even more than in the past. Expect to provide supporting documentation to prove your income. Additionally, lenders will continue to monitor your income through the entire lending and closing process, checking on all of your finances up until right before the loan is officially closed. If any numbers change for the worse, they can and will likely reconsider the loan.
- Employment Status: Unfortunately, many Americans find themselves out of work or under-employed. Even those who are employed, but who are self-employed, may face more difficulty obtaining a mortgage during the pandemic.
- Self-Employed: Self-employed individuals are scrutinized more closely than W-2 workers. Lenders have always been warier of lending to self-employed individuals since their paychecks are not as steady as those of a more traditional worker. Be prepared to face stricter standards and to have to provide more proof of income and your ability to continue to bring in income if you are self-employed.
- Unemployed or Underemployed: Lenders will verify your employment and check on your status until the loan is closed to confirm you are still employed. If you are unemployed or lose your job during the mortgage process, it is very unlikely a lender will issue a mortgage (unless you have a spouse whose income alone can cover the mortgage amount). Whatever your situation, be upfront and honest with the lender the moment your employment status changes, as hiding this fact from them will not do you any good since they will verify this before closing on the loan anyway.
- Self-Employed: Self-employed individuals are scrutinized more closely than W-2 workers. Lenders have always been warier of lending to self-employed individuals since their paychecks are not as steady as those of a more traditional worker. Be prepared to face stricter standards and to have to provide more proof of income and your ability to continue to bring in income if you are self-employed.
Finally, check with your lender and your loan officer about any specific rules for lending or closing on a loan during the pandemic. While most lenders have followed the tightening guidelines above, the exact requirements vary from lender to lender.
What can you do to increase your chances of getting a mortgage?
You are in luck – no matter your financial situation, you have options.
First, get preapproved
As always, getting preapproved for a mortgage is the best first step you can take to getting a mortgage during the pandemic. What does preapproval mean? The process lets you know how much of a mortgage loan for which you can qualify. This is important because it gives you an idea of how much you can spend on a house and prevents you from looking outside your budget.
With tightened qualification requirements, you will want to get preapproved to make sure you qualify for a loan. Even if you were preapproved before the pandemic, check again, as the tightening of qualification requirements might change your eligibility.
Second, decide on a budget
Once you have your preapproval number, decide on a realistic budget for your home and, in turn, for the amount of your mortgage. Do not make the mistake of setting your budget at the maximum amount you are preapproved for, especially during such economically uncertain times. When setting your budget, do not forget that additional costs come with owning a home, such as utilities, maintenance, home owner’s insurance, and property taxes.
If there is one thing we have learned as a country during this pandemic, it is that nothing is certain. Buying a home can be a wonderful adventure. And if you stick to what you can afford, it will be an adventure and not a financial nightmare.
Shop around
This is a tough time for everyone, and lenders are not immune to the hits the economy has taken. All lenders have been affected to different degrees, and not many are currently offering their lowest interest rates. However, there is certainly a wide range of rates being offered, which means borrowers should shop around and compare rates with as many lenders as possible to find the mortgage with the best amount, rate, and terms for them. Getting a fair mortgage is still possible during the pandemic, so do not give up hope. Just adjust your expectations and be prepared to prove now, more than ever, that you are a reliable borrower.
If you are struggling to manage a debt load, consider reaching out to a professional or agency for help. Some of the best debt consolidation programs for bad credit specifically can help you get back on your feet if you are struggling financially. Alternatively, reach out to a credit counselor or debt relief agency to evaluate your other options.
