COVID-19 Mortgage Guideline Changes

The Corona Virus has changed many economic models and forecasts that no one apparently saw coming.  Because of this, those folks who buy mortgages, and the Institutions who agree to put mortgage insurance on them – have ALL made guideline changes.  Some of those guideline changes are coming to us 3 and 4 times a day.  I can honestly say – this has been one of the most stressful times for those of us involved in ANYWAY with a Real Estate Transaction in my career.  We have been SCRAMBLING to try and figure out new ways to get (mostly first time home buyers) approved amid the COVID-19 Mortgage Guideline Changes.

Why are first time home buyers being disproportionately affected?  Because they don’t have the credit history to have higher credit scores (for one thing) and many of them are being laid off from their jobs.  When the Recession hit in 2006 to 2009, the credit models showed which borrowers were more likely to go into mortgage default – and many of those were folks with credit scores under 680.

If you’ve been working to find the perfect home, and you finally get your score over 640, and now we can’t get you approved – that’s frustrating.  It’s frustrating for the borrower, who did everything we told them to do, it’s frustrating for the Agent who has been working with the Buyer for a year – and it’s frustrating for us.  If you get that call, please understand that no one initially mislead you, the guidelines changed.  (While writing this, I just got a whole new string of changes, smh)

Late last week, we were informed that our company, and many others in NC, will no longer participate in the NC Housing First Time Home Buyer down payment program.  Our company made this decision because of a program requirement that says they are going to re-verify Employment up to 90 days after closing.  It’s just too much of a risk right now for us to close on a mortgage… and then 90 days later find out we can’t sell the mortgage, because someone’s job was eliminated.  As the Economy changes, we expect to have this program available to us again.  We just don’t know when.

But what do we do in the mean time to help first time home buyers buy a house?

COVID-19 Mortgage Guideline Changes

NOT ONLY are those of us over here in Mortgage World fighting a problem with the elimination of programs, we are also struggling with the fact that the Agency backing Government Mortgage Backed Securities (GNMA) is being traumatized by the Stimulus Plan.

Within the Stimulus Plan, Congress rolled out the ability for folks with Government Backed Mortgages (FHA, VA and USDA) to skip a bunch of mortgage payments.

How is that a problem for new Home Buyers? 

First let’s explain what Mortgage Forbearance is (that’s what it’s called – Mortgage Forbearance, and they may do it for Student Loans too).  You contact the folks you make your payments to, tell them you are going to have trouble making your mortgage payment because one or more of you household can’t work due to COVID-19 (for instance), and they send you some paperwork.  You skip 3 months of mortgage payments…

If you can’t make your payment, the folks you make your payments to still have to make an Interest, Tax and Insurance payment to whoever actually bought your mortgage by the 25th of the month.  Let’s say there are 500,000 Americans that take up the opportunity to not make a payment, that that’s a TON of money Corporations are going to be required to kick “out of pocket.”  In addition, if a company can’t make the payment – then GNMA is required to write the check to the folks who own the mortgage.  That’s how our banking system works.

No Company (or entity) has enough money to carry the mortgage payments for most of America for 6 months to a year.  And if you were the Entity (in this case GNMA) would you want to make more mortgages right now to folks who might loose their job?

For the folks who do go into the program – just know that when you go into forbearance for 3 months – by the 15th of the 4th month – you owe ALL 4 Payments.  It doesn’t automatically go onto the end of the mortgage.  To do that, you have to go through a mortgage loan modification.  A modification can look like pre-foreclosure.  That screws your credit.  That’s why I’d rather help you refinance if we can figure that out, because you will skip at least one mortgage payment with a refinance, and it doesn’t hurt your credit.

What it means for Government Loans and COVID-19 Mortgage Guideline Changes… Credit score requirements have gone higher.  FHA has not made a guideline change, the Veterans Administration and USDA did not make a change – but all of the Banks are making changes.  The biggest is that Credit Score requirements are pretty much 680 for these programs.

We might be able to do a manual underwrite for folks with lower credit scores – but your mortgage rate will be significantly higher. I’ve seen days in the past 2 weeks where we could not GET A PAR PRICE for a USDA Home Loan.  Meaning there wasn’t a price for a loan with no discount points.

Manual Underwriting Guidelines / COVID-19 Mortgage Guideline Changes

These guidelines haven’t really changed, but I think it’s important to understand that if we can’t get a loan approved with minimum down FHA, we are looking at Gift Funds, and can we get that loan to run with 5% down.  Often that small change is the difference in getting a super high rate, and getting an approval.

We are seeing the same thing with Conventional Loans with their low down payment programs.  We can offer a 3% down payment with Fannie and Freddie – but even with those programs, we now need more cash left in the bank after closing to get loan approval.  I think you can rationalize that they underwriting “computers” are looking for lower risks.

Employment History just got more important (as I was writing this) we received these guidelines for Freddie Mac Loans (read this will be adopted across the board in a few days):

1. When the Borrower’s income is derived from fluctuating hourly employment earnings, under no circumstances may the employment history be less than 12 months. “Fluctuating hourly employment earnings” are considered to be wages that are based on an hourly rate of pay and where the number of hours fluctuate each pay period.
2. For base hourly earnings to be considered non-fluctuating for the purpose of the income calculation, the Borrower must have a documented history of working the same number of hours with the same employer for a minimum of six months.

Manual Underwriting requires a 12 month rental history.  So if you’ve been living at home, and not paying rent that can be documented – we won’t be able to make you a loan under the Manual Guidelines. 

Having said all of this – the main couple of things I want you to read is this… Mortgage is moving just like everything else.  If you are looking for information on buying a house, and it says FHA accepts lower than 680 credit scores (and I admit it’s written that way on this site about a million times), that’s true.  But the reality is you have to show a significant amount of “off setting” factors to get a lower credit score loan.  It’s just tough right now.  Down payment Assistance loans are on hold – and USDA Home Loans, that don’t require a down payment are going to be very expensive.

If you have more questions about COVID-19 Mortgage Guideline Changes call Steve Thorne and Eleanor at 919 649 5058.  Check back here and I will update the post as we get new updates.  Stay safe folks, and wash your hands. ((Hugs)) we will help you buy a house, we just need to update our strategy together.  The dream of owning a home is not dead.  We are going to get through this stronger than ever!