What you can expect if you’re a homeowner or applying for a mortgage in the current market.

With every day that goes by, we all seem to find ourselves wondering what ways we’re going to see both health and economic impacts during this pandemic. So today, I wanted to talk about what homeowners, and people who are in the process of purchasing a home, might be experiencing in this turbulent financial market. 

Fed Fund Rate vs. Mortgage Rates

Before anything else I think it’s important for people to understand that the “Fed Funds Rate” is not the same as mortgage interest rates. The Fed Fund Rate is the rate that the Federal Reserve designates for loaning money to banks and businesses for overnight liquidity. So when the Fed announces that their rate is zero, it does not mean that MORTGAGE rates are at zero. Mortgage rates are in the 3-4% range. That is historically low, but I don’t want anyone to confuse it with the zero percent Fed Fund rate. 

Varying Rates Between Banks

Pre-COVID, when it came to mortgages, Interest rates didn’t vary much between banks. You could ship around, but in general, rates at different banks were very close (often within a quarter of a percent) to one another. 

Today, we’re seeing significant differences in rates from bank to bank (often over a whole percentage point, or sometimes more). This has nothing to do with how much a loan officer is making on the transaction, but has everything to do with bank liquidity. Depending on the strength of the bank, the loan program, credit, debt to income ratio, etc… any risk factor that may be present will increase the rate of interest in today’s market. 

So what are Risk Factors?

If you’re in the process of acquiring a home loan, your loan officer is going to be looking at several things that are considered possible risk factors and how they are going to affect your probability of repayment. When determining ability to pay, we’re looking at  employment history, strength of credit, income, etc. When determining risk factors, we’re looking at debt-to-income ratio, overdrafts, deposits, etc. In today’s climate, every lender across the board is looking much more critically at how you make payments, what debt you have, etc. in order to determine your likelihood of repayment. 

I know that this may seem like extra hoops to jump through, and can be downright annoying. But the good news here is that there is still plenty of financing available, especially if you’re borrowing under $510,500.

What is a Jumbo Loan?

Borrowing an amount over 510,500 is considered “Jumbo” financing, and has its own set of rules. Some banks are no longer offering Jumbo programs, and those who are have higher levels of scrutiny to contend with during our current economic shift. To be clear, not every bank has abandoned jumbo financing. It just means that there have just been a lot of changes- you might just have to look into different banks rather than the big box banks. If you are seeking Jumbo financing, it’s important to stay informed throughout the process as this situation is so fluid.

The same holds true with things like bond financing and down payment assistance programs… not all banks are offering them anymore, but they are absolutely still available. If the bank you chose no longer offers what you’re looking for, be sure to look to different banks and lenders.

What Isn’t Available Right Now?

If you’re a consumer who needs financing outside of the box, like bank statement financing, or foriegn investors (typically called non QM loans)… you’re going to have a hard time finding it. That type of financing was typically found through investors and hedge funds. As the market declined, that financing was pulled. To be perfectly candid, I don’t know when that will come back. In the last recession we saw it take about 10 years to return. I genuinely don’t know if that will be the case this time, so we will just have to wait and see what develops in the coming months and possibly years. 

Why can’t I “lock”?

ANother peculiarity in this environment is that banks are having to pay very close attention to how many loans they issue because of liquidity issues. They are having to make sure they they have warehouse resources, that they won’t have margin calls on their available resources, and as a result, are limiting the amount of rate locks that can happen within any given time period

What this means for you, if you are in the process of buying a home or refinancing (especially if you are refinancing) you may not be able to lock in your interest rate at the very beginning. This is common right now. But it’s not the worst thing in the world. Rate are incredibly low right now, and since the government is buying all mortgage backed securities, this trend is likely to continue for at least the next 30 days. 

Forbearance vs. Deferment vs. Modification

I spent some time talking about this in detail a couple weeks ago (you can see that video here) But I want to bring this up again because it is SO important right now. There are differences between forbearance, deferment, and loan modification. 

Forbearance does not mean forgiveness, it does not mean deferment, and it does not mean loan modification. It means that you are able to delay your payment for up to 90 days. But when that time is up, you owe all those payments. A forbearance does not automatically happen. You have to apply, and that application is reported to credit agencies. It does not negatively affect your credit score, but they do have an impact on your ability to borrow in the future. 

My warning against doing this is to only seek this sort of relief if you absolutely have to. In the past when people have sought a forbearance, they were prevented from getting new financing for a number of years (up to seven!). We don’t have guidelines out right now to determine what 

will happen as a result of COVID related forbearances, but I will say that if you are still able to make your payments, you should. 

Deferment programs are slightly different in that whatever payments would have been made during the deferment period are simply tacked on at the end of your loan term, and they still accrue interest as they normally would. 

Loan modification means that you’re either breaking up late payments over a course of time to be paid along with your regular payments, or you’re lowering your payment, but you are still responsible for the entire amount by the completion of your loan. 

All of these can be a great move if you want to stay in your home and you know that you’re going to get back on your feet. My only warning is that if you’re seeking a forbearance, only do it if you know that you will have a large sum of cash available to you by the end of your forbearance period so that you can make the payment that will be due. 

I’ve lost income- can I still buy?

This is the type of news that every loan officer hates to give: If you’ve been furloughed, or lost your income, it will have an impact on your purchasing power and ability to qualify. 

You may be wondering if you can use other income to make up for what was lost. As a basic rule (any time, not just during this pandemic), if the lender cannot “rely” on the income – things like bonuses, overtime, shift differentials – they can’t include it. 

So just please be aware that if you’re looking to use “other” types of income to apply for a mortgage, they’re subject to an analysis of their stability. Same goes if you’re self employed. Lenders want to know that your business is still making money, so they may ask for invoices, current receivables, profit/loss statements, etc. 

And on a positive note, if you have been furloughed or are unemployed, if that gap is less than 6 months, we will be able to use that income again for your home loan. Not all hope is lost! 

So hang in there, and if you have specific questions, I really am happy to answer them. Take care and stay well!