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The COVID-19 pandemic has caused several negative ripple effects across the U.S. including a huge increase of Americans asking to delay mortgage payments. Millions of American households are now using forbearance programs, stemming from financial hardship caused by coronavirus shutdowns.
Forbearance is a large part of why mortgage rates have been especially volatile as of late. When you combine it with sellers pulling listings due to safety concerns, city dwellers shifting from rentals to suburban homeownership, and various negative economic indicators, it’s created an uncertain market for homebuyers.
However, with mortgages, the rate volatility is mostly constrained to non-conforming loans such as jumbo loans, high-balance conforming loans and investment property loans. For conforming borrowers, rates are still historically low.
How COVID-19 changed the mortgage market
The COVID-19 crisis has created astounding volatility for mortgage rates. Much of that volatility, as mentioned, is because, as of May 10, more than 4 million U.S. borrowers were in mortgage forbearance programs.
These borrowers, mostly with government-backed loans, have been able to declare financial hardship and could choose to delay mortgage payments for up to a year.
Mortgages in forbearance now account for more than 8 percent of all active mortgages in the U.S., whereas they represented less than 1 percent of mortgages at the beginning of 2020. Lenders now face heightened liquidity risks and don’t have money to pay their bondholders.
As a result, lenders are increasingly moving away from or raising rates on more risky loans like jumbo loans, high-balance conforming loans and investment property loans.
But since lenders don’t face the same liquidity risk with conforming loans, rates on conforming loans under $510,400 are still competitively priced. Some of the other significant reasons for volatility and disruption include:
- Lenders are raising qualification thresholds from mortgages including jumbo loans, high-balance conforming loans and investment property loans. This means that, generally speaking, borrowers will need better-than-usual credit scores (above 680), a steady job, more cash on hand and more willingness to close a deal on short notice.
- Mortgage application volume is high across the U.S. With many people trying to obtain mortgages and bank workers adjusting to working from home, banks have struggled to keep up with demand. This means the buying process and getting a mortgage approved is taking longer than usual.
- The COVID-19 crisis has generally made 2020 unpredictable. Many people have lost jobs permanently, a vaccine will likely not be available until at least 2021, and some sellers are afraid to make big life changes during the pandemic. This lack of clarity has caused mortgage rates to trend lower on average, with occasional jumps in places.
All of these issues have created a uniquely difficult environment for homebuyers, who will need guidance from agents.
Preparing prospective homebuyers
The process of getting a mortgage is emotional and stressful for homebuyers in normal times, but it’s even more pronounced in this environment. You should do whatever you can to prepare your clients.
There are many questions you should ask homebuyers while the coronavirus crisis continues to create so much uncertainty. Here are a few examples.
- Do they have enough in savings for mortgage payments if long-term economic prospects continue to trend downward?
- What kind of loan will they need — conventional, FHA or VA?
- What sort of job security do they have?
- How good is their credit score, and will it likely remain steady during the buying process?
- How quickly can they decide to close on a purchase given the current environment and fluctuations?
- Have they gathered all the required financial information (pay stubs, credit reports, W-2, bank statements, etc.) before starting paperwork?
These sorts of questions can help you and your clients think about obtaining a mortgage while COVID-19 causes uncertainty for so many people and businesses.
Agents should consider partnering with a mortgage broker because brokers can get options from multiple lenders and lock down the best possible rates.
In all likelihood, the coronavirus crisis will be with us until 2021 or beyond. With this in mind, it’s prudent for agents to set expectations and explain to buyers that getting a mortgage during the coronavirus can be a little challenging.
For some people — those with safe jobs and savings who are seeking a loan within the conforming limit — rates should remain low. However, there may be more documentation needed than usual.
Although homebuying now might be technically feasible for many buyers, agents should ensure their clients are entering the process with their eyes open. And if buyers do want to go through the process now, they need the ability to close quickly on a property and adjust to the quirks of pandemic buying.
As experts and advisers, real estate agents have always played an important role for buyers. But it’s clear that during the coronavirus era, they have even more responsibility to be a positive guiding force for homebuyers.