When you’ve talked to mortgage lenders this year, you’ve probably heard an earful about how excessively busy they’ve been. They started the year with low mortgage rates creating a frenzied market for refinancing and for purchases. Then COVID-19 hit and, like everyone else, they needed to pivot to work remotely and, shortly thereafter, to help homeowners hurt by the economic shutdown. Yet refinancing and purchase applications continued to rise because of low rates.

The combination of these factors had two major impacts on home financing: lenders became more cautious in their underwriting and the adoption of entirely digital loan applications accelerated.

“We saw credit standards loosening a little last year but then the floodgates of loan applications opened and lenders started to hold back a little to control their volume,” says Jonas Moe, senior vice president of market strategy for Ellie Mae, a San Francisco-based software company that processes 35% of U.S. mortgage applications.

Loan qualification guidelines, mortgage products and mortgage rates change frequently, which means that real estate agents should develop close relationships with several trustworthy lenders who will keep them informed and work with their clients.

The Ellie Mae Origination Insight Report in June 2020 showed the average FICO score for all loans, including purchases and refinances, was 751. The average loan-to-value was 73% and the average debt-to-income ratio was 35%. For purchase loans, 36% of borrowers had a FICO score between 750 and 799, followed by 24% with a score between 700 and 749. Approximately 18% of borrowers had a FICO score between 650 and 699 and 15% had a FICO score of 800 or above. The largest group of FHA borrowers (42%) had FICO scores between 650 and 699.

“As long as COVID is around and we have high levels of unemployment, we’re likely to see lots of restrictions on loan programs,” says Sam Atapour, branch manager for Embrace Home Loans in Ashburn. “We raised our minimum FICO score to 640 from 620, although that may go down again as things improve. We don’t do loans with down payment assistance from Virginia Housing anymore or jumbo loans.”

But Atapour says these things can change again quickly depending on investor confidence. And not every lender reacted the same way. Some pulled back more than Embrace, and others maintained business as usual and offer FHA loans to borrowers with a credit score as low as 580 if they have steady income.

“Some lenders have tightened credit requirements for home loans,” says Rashalon Hayes, assistant vice president of field mortgage for Navy Federal Credit Union in Vienna. “However, some lenders base their loan decisions on a combination of factors and can work with borrowers to help them get their finances in order so they qualify for the loan they need.”

SETTING BUYER EXPECTATIONS FOR THE LOAN PROCESS

Most borrowers anticipate the need for extensive documentation for a loan approval, but because of the economic downturn, many lenders require additional employment verification before closing the loan, says Hayes.

Anyone whose income dropped because they were furloughed, had their hours reduced or earned less in commissions will be carefully vetted to make sure their income is stable, says Patrick Cunningham, a mortgage banker and partner with HST Mortgage in Fairfax. If someone has variable income that comes from commissions and bonuses, they may need to stabilize for at least two or three months to qualify for a loan, he says.

"Down payment assistance in the form of grants and loans is available through Virginia Housing and other local nonprofit groups as well as through banks. Many potential buyers are unaware of these programs and that the income and home price limits are adjusted to account for areas with a high cost of living."

“We moved up our minimum FICO score for most loans to 660, up from 640,” says Cunningham. “Borrowers with a credit score below 660 will typically choose an FHA loan or, if they have been in the military, a VA loan. We still prefer a 660 FICO score for VA loans, but we may be able to do those with a lower score.”

Jumbo loans, required for loans larger than $765,600 in the Northern Virginia region, disappeared from the market briefly when the pandemic started but have started coming back, says Kevin Kelly, area manager for Homebridge Financial Services in Glen Allen. However, he says, borrowers should expect to need a credit score of at least 700 or above and a larger down payment with those loans than in the past.

As the economy stabilizes, most loan programs are still available and the main changes are just higher credit score requirements and extra attention to employment and income verification.

“We still offer jumbo loans,” says John Cross, division sales director for Bank of America, based in Charlotte, N.C. “We also have conventional loans with a 3% down payment requirement and FHA loans with a 3% down payment.”

One other change, says Cross, is that closing times are a little longer because lenders are so busy.

“Sometimes we can do it faster, but it’s smart for agents to set expectations that a 45 to 60-day close is more common than a 30-day close,” he says.

While some potential buyers may be reluctant to consult a lender out of fear that they will be denied a loan, your reassurance and ability to connect them with a lender experienced with first- time buyers can help.

“It’s important to remember that lenders don’t make money if they don’t make loans, so they will do what they can to approve a mortgage,” says Kelly.

LENDER TIPS FOR AGENTS Spread the word that buyers don’t need a 20% down payment. Remind potential buyers to check out online calculators to get a general budget idea, check their credit report at AnnualCreditReport.com for errors and schedule a consultation with a lender you trust. Working with preapproved, financially ready buyers is more important than ever in this competitive housing market. Remind your clients: mortgage rates can go up as fast as they came down and are impacted by a variety of factors. Buyers shouldn’t wait to lock in low mortgage rates. Prepare your clients for tougher scrutiny from lenders. Understand that with delinquencies up and worries about unemployment, loan standards have tightened and more documentation may be required. Self-employed borrowers and those with variable incomes will need additional proof of steady income. Remember that many lenders continue to offer low down payment loans and that down payment assistance is available for first-time buyers from some banks and through Virginia Housing. Set expectations for closing times based on lender recommendations. While some closings can be done fast, 45 to 60 days is more common than 30 days due to high volume. Be ready to work with millennials and direct your marketing to this cohort of buyers that will dominate the market for the next decade.

SELF-EMPLOYED AND BUSINESS OWNERS FACE EXTRA SCRUTINY

In recent years, loan guidelines made it a little easier for self-employed borrowers and business owners to qualify for a mortgage, but the outsize impact of the pandemic on small businesses reversed that trend.

“Self-employed borrowers will need to prove that they have consistent income with a year-to-date profit and loss statement to compare to their 2019 income,” says Kelly. “There’s also more sensitivity to the type of business they’re in because of the different impact of the virus on various parts of the economy.”

At Embrace, self-employed borrowers need a minimum FICO score of at least 700 for now since they’re considered riskier borrowers, says Atapour.

LOAN PROGRAMS FOR VARIETY OF BUYERS

While loan products are available that help underserved groups and first- time buyers purchase homes, a lack of education about low-down-payment loans and the lingering impact of redlining and other factors have kept homeownership rates for Blacks far below Whites. In the most recent Census Bureau report, 44% of Black households owned a home compared to 74% of White households.

Among the many obstacles to homeownership for Black households, which include lower rates of education that lead to lower incomes, lower credit scores and lower savings rates, a recent study by Lending Tree found that Blacks are denied mortgages at a higher rate than Whites. On average, the study found, Blacks are turned down for a mortgage 13% of the time, while overall mortgage denials are six percent. In the D.C. region, 5% of all home loan applications are denied, while 12% of applications by Black borrowers are denied.

“The gap in homeownership rates isn’t just about availability of loans, it’s also about education,” says Moe. “A number of people probably never even apply and think they can’t qualify because they don’t have a 20% down payment.”

Down payment assistance in the form of grants and loans is available through Virginia Housing and other local nonprofit groups as well as through banks. Many potential buyers are unaware of these programs and that the income and home price limits are adjusted to account for areas with a high cost of living. For example, in the D.C. region, Virginia Housing’s income limits range from $110,500 for a one or two-person household for grants and down payment assistance to $129,000 for a household with three or more people. They also offer low- cost loans without down payment assistance for households with incomes of $138,200 for one or two people and up to $161,300 for a household with three or more people. The home price limit is $525,000 in the D.C. area. Other down payment assistance programs can also be searched on DownPaymentResource.com.

“The Community Reinvestment Act (CRA) and the Community Development Financial Institutions Fund (CDFI) programs ensure that low- cost loans and down payment assistance are available to underrepresented members of the community from banks,” says Moe. “In addition, the VA and FHA loan programs offer options to borrowers with less cash or some credit challenges.”

In Virginia, for example, Bank of America offers the America’s Home Grant program for up to $7,500 towards closing costs and a Down Payment Grant program for 3% of the purchase price (up to a maximum of $10,000) for qualified buyers.

“Our lenders are trained to talk with first-time buyers about these programs, some of which don’t require repayment,” says Cross. “Realtors® need to be aware of these options, especially the access to down payment funds.”

For members of the military and their relatives, VA loans may be an option. In addition to VA loans that typically don’t require a down payment, Navy Federal Credit Union offers a variety of other loan programs that may be particularly appealing to first-time buyers since they require little or no down payment, says Hayes.

“These low or no down payment loans can be a tremendous benefit for renters who feel like they may not be able to afford a home,” says Hayes. “Also, most Navy Federal mortgages don’t require private mortgage insurance.”

Renovation loans are a specialty at Homebridge, says Kelly.

“Agents should know about the option to build in renovation costs into a mortgage, which opens up a broader range of fixer-upper properties to buyers,” says Kelly. “People shouldn’t be afraid to look at these loans because they can close quickly and the work can be accomplished before anyone moves in. It’s a good solution to low inventory issues.”

FUTURE OF MORTGAGE FINANCING

Digitalization of the mortgage process has been happening for years, but the pandemic accelerated that process. Ellie Mae saw a 300% growth rate in the number of fully electronic loan applications in June 2020 compared to June 2019.

“We expect even more progress in using technology to streamline the loan process for a better customer experience over the next six to 18 months,” says Moe.

Digital closings will become more common in the future, too, says Atapour.

“I think in the future we’ll see a bigger difference between fast track loans for salaried borrowers who work for a corporation or the federal government with easily verifiable jobs and incomes versus a more complicated borrower,” says Cunningham. “Fast track borrowers need very little underwriting and don’t necessarily need a loan officer. Other borrowers will need more documentation, including profit and loss statements.”

While digital applications can be faster and less cumbersome than paper applications, there’s still a place for lenders to provide guidance to borrowers.

“We like the idea of a ‘high tech’ and a ‘high touch’ approach,” says Cross. “Customers can see status updates on their own, but they can also collaborate with a loan officer to discuss their options in the context of their life plan.”

The value of real estate agents and the value of lenders is similar, says Kelly.
“People want a good price and a streamlined experience, but they like to talk to someone, too,” says Kelly. “They want advice and that’s what we’re here for.”



Michele Lerner, a freelance writer based in the Washington, D.C. area, has been writing about real estate and personal finance for more than 20 years.