Those who are looking to take advantage of low mortgage rates to purchase a home in the U.S. during the pandemic might be surprised to find that banks are tightening their lending rules. With a huge increase in unemployment across the country due to COVID-19, lenders are becoming more risk-averse.
Lenders Change Requirements
U.S. banks have raised down payment and credit score requirements significantly, according to a recent Bloomberg report.
Previously, borrowers could make a 3.5% down payment and have a minimum credit score of 580 when buying a home through a government-supported program like Fannie Mae or Freddie Mac. But the COVID-19 pandemic has led to some changes.
In JPMorgan’s case, for instance, borrowers must now put down at least 20% on a home and have a minimum credit score of 700. Customers must also pass similar criteria to be approved by the bank for refinancing. On the same note, Wells Fargo now requires borrowers to have a minimum credit score requirement of 680 in the case of government loans, and borrowers have no option for refinancing through the bank. Both banks are no longer taking applications for new home equity lines of credit (HELOCs).
In the Bloomberg report, Michael Neal, a senior research associate at the Urban Institute Housing Finance Policy Center, noted that in March:
“[Higher-risk borrowers] could get a mortgage but just pay a higher price than other people. Now, some people are just not going to get mortgages.”
Impact on the Housing Market
The U.S. housing market is expected to see the impact of banks tightening credit standards, particularly now during the spring selling season. The pandemic has already impacted this busy time for the real estate market.
Mortgage credit availability in the U.S. decreased by as much as 25% in April, according to a Mortgage Bankers Association (MBA) model.
Joel Kan, Associate Vice President of Economic and Industry Forecasting at MBA, stated:
“The abrupt weakening of the economy and job market – and the uncertainty in the outlook – drove credit availability down in April for the second consecutive month.”
U.S. mortgage rates have dropped to record lows after seeing a sharp uptick in March. While some experts believe the lower mortgage rates could encourage more homebuying, others say the tighter lending standards could prevent many from making home purchases.
Borrowers who have government-guaranteed mortgages have started delaying repayments due to the pandemic, and banks don’t have much control in the current situation. As more borrowers choose forbearance plans, lenders will be required to keep paying the delayed payments to bondholders. This will contribute even more to the liquidity issue.
Shifts in Unemployment
Banks are raising their lending standards in light of record job loss numbers in the past few months. About 20% of the total American workforce (33.3 million workers) have filed for initial unemployment claims since mid-March.
Many companies, large and small, have announced spending cuts, which includes cutting the number of employees they have. The impact of the pandemic has been felt in nearly all industries of the U.S. economy, but particularly the medical, administrative, and hospitality fields.
Recently released data from the Bureau of Labor Statistics shows the monthly unemployment rate for April in the U.S. at 14.7%. In comparison, the rate was just 3.5% a couple of months ago, which had marked a 50-year low.
On the other hand, if banks were to have looser lending standards amid pandemic-related uncertainty, the U.S. housing market could be negatively affected even more. If borrowers lost their jobs after taking out a mortgage, banks would have to bear the burden of bad loans, which would worsen the liquidity crunch. Considering U.S. households already hold record debt of $14.3 trillion, it’s a particularly risky situation.
Ultimately, if prospective buyers have the financial stability and job security required to meet the new temporary lending standards implemented by banks, now might still be a good time to purchase a home. With lower mortgage rates and potentially fewer competitors looking to buy, those who meet the more stringent standards could find themselves with a unique opportunity to purchase real estate.