Key Highlights
- Pandemic economy has driven interest rates to rock-bottom levels
- Lenders set aside billions for future defaults while tightening standards, requiring higher credit scores, heftier down payments and more documentation
- Some lenders have temporarily eliminated home equity lines of credit and/or stopped cash-out refinancing
It’s fairly common for lenders to tighten credit standards during a downturn. However, this pandemic economic downturn is trickier than others and lenders are doing their best to steer clear of potential powder kegs in hopes of cutting/avoiding losses.
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Why is this pandemic economy downturn trickier than other downturns? It is much more challenging for lenders to get an accurate read on consumers’ financial health due to paused mortgage payments, halted student loan payments, delayed tax bill payments and billions of dollars going to millions of households in “extra” government support. The result? Less outreach to consumers by companies that specialize in providing credit services, less generous credit terms and shorter loan periods, and fewer loans to subprime borrowers.
According to Freddie Mac, 30-year fixed rate mortgages averaged about 2.98% this July for the first time in nearly half a century. The mortgage industry made some $865B in loans in Q2 2020, the highest amount since 2003, when quarterly originations topped $1T twice, according to Inside Mortgage Finance.
Today, each lender is defining its own borrowing requirements. For example, JPMorgan Chase is making loans to new customers with credit scores of 700 or more and requiring down payments of 20% or higher. USAA has temporarily stopped writing jumbo loans. The Bank of America has also tightened its underwriting standards but is not disclosing any details. Wells Fargo, via its first-time buyer program, is requiring a down payment of 5% rather than the former 3%. Additionally, many lenders are offering borrowers loans for less than their preapproved amount.
“Employment and income verification for self-employed borrowers is now multiple times more detailed as it previously was,” said Ted Rood, a loan officer in St. Louis who lends nationally.
Borrowers such as Tori Smith and her husband in North Carolina told The New York Times that she had never gotten a straight answer about new lending requirements from any of the lenders with whom she had consulted when looking around to get pre-approved for a home loan. Smith said, “I felt like we had to bring more (to the table) just because of COVID.”
Thanks to The New York Times.
Also read: How Will the New FICO Credit Scoring Model Impact Consumers?, Podcast: How To Legally Improve Your Credit NOW | Top 10 Credit Score Secrets, Podcast: Happening Now, Breaking News About Housing | Tim and Julie Harris
