Let’s start with the facts about how the pandemic has affected the mortgage market: In a word, it’s a lot. Given the coronavirus crisis and its enormous economic fallout, all borrowers with existing government-backed mortgages or loans supported by government-sponsored enterprises (Fannie Mae and Freddie Mac) are permitted to delay monthly payments by at least 90 days (and possibly up to a year) — with no questions asked, as required by law through the CARES Act.
Naturally, under these circumstances, requests from borrowers for the federal mortgage forbearance program are flooding in on a massive scale.
So given the massive hit to the mortgage market and existing borrowers, hopeful new borrowers are wondering: Can I still get a government-backed mortgage loan during coronavirus?
The good news is — yes, lenders are still issuing government-backed loans… “reluctantly,” according to Dale Mattison, a top-selling agent based in Maryland. “As it stands right now, you can get an FHA or VA loan. The requirements for them have tightened up — meaning the minimum credit score is higher — although I have heard rumors that there are still lenders that will still use the old credit score parameters when issuing those kinds of loans.”
So there’s optimistic news to be found even at such an uncertain time. Here’s a primer on what you need to know about getting a new government-backed mortgage loan right now — and making it to the closing table — with expert-backed tips and intel.
What’s a government-backed mortgage?
First, let’s start with the basics. A government loan is one that is backed up, or ensured, by the federal government. That means the lender is protected if you default on your loan.
Government-backed mortgage loans include an FHA loan, backed by the Federal Housing Administration, and are generally the best option for people who have low savings or a credit score that needs work. Under normal circumstances, you can qualify for FHA loans for as little as 3.5% down if you have a credit score of 580 or more, and they’ll accept a credit score as low as 500 with a higher down payment.
A USDA loan from the U.S. The Department of Agriculture applies to rural areas and offers loans with 0% down and very low interest rates; subsidies can take them as low as 1%.
A VA Loan is backed by the U.S. Department of Veterans Affairs, and it’s available only to service members, veterans, and surviving spouses. No down payment or mortgage insurance is required.
So again, in the cases of these agencies’ loans, the FHA, USDA, or VA is guaranteeing the loan for the lender, who will be more protected if you as the borrower happen to default. And this allows the lender to make a loan that might be considered too risky according to conventional loan standards.
Usually, you’d pursue a loan option like this if your credit score or down payment isn’t high enough to qualify for a conventional loan. If that’s the case and you don’t have 20% down, you’ll pay mortgage insurance on the loan.
But are lenders still issuing these government-backed loans?
As Mattison said, the short answer is, yes — lenders are still issuing government-backed mortgage loans. But they are increasing the standards for those loans.
Credit score requirements are going well above official FHA minimums, and interest rates are rocketing sky-high for borrowers with lower credit. In short, it’s an especially tough time for would-be buyers without flawless credit.
Consider that some lenders have increased the minimum credit score from 580 to 660. Others are pricing government-backed loans higher for buyers with poor credit scores; one lender is requiring buyers with a 580 FICO score to pay a whopping 10% above the market interest rate for an FHA loan, according to HousingWire.
Given these new overlays, it’s important for buyers to arm themselves with as much information as early as they possibly can in the process to avoid surprises. The Department of Housing and Urban Development (HUD) has a resource center to guide your research. And rely on your lender to inform you early as to overlays you need to know about — and buy yourself time to take additional action if need be.
“If you’re looking for a government-backed loan, you really need to know the requirements of the lender you’re using, and in most cases, they’re going to be upfront with that when talking to you for the first time,” Mattison says. “So it really shouldn’t create any issues with getting to the closing table given you meet those guidelines.”
How can I protect my home purchase?
There are a few things you should know about how to protect your home purchase at this uncertain time.
First, be aware that the tightened guidelines are universal in a global time of crisis: The challenges facing the mortgage-lending market in the time of coronavirus aren’t just an issue for government-backed loans. “All loan products are acting in a very volatile environment,” Mattison says. “Things are sometimes different day to day.”
Second, be smart: If you’re shopping for a home at the very top of your price range, your mortgage could be in danger before you close due to new lender overlays. Shop toward the lower end of your price range.
Third, save as much cash as you can: Another requirement besides a higher credit score could be a bigger down payment, and you’ll still want money for an emergency. Do whatever you can to save up all you can right now to make your purchase possible.
Fourth, offer smart: Even if this is the home of your dreams, and your offer price is solidly at the lower end of your price range, don’t offer more than the house is worth, especially right now. You don’t want (and probably can’t afford) any issues with the appraisal.
“It’s always prudent to act fiscally responsible,” Mattison says. “Sometimes people will try to push to the very limit of their qualifications, and that may be fine when everything is fine — but when a crisis arises or a sickness occurs, or when somebody temporarily loses a job, there’s nothing worse than sitting there with a responsibility that’s above your means versus being in a position of comfort. I try to caution people to live within their means.”
Should I consider switching lenders?
This should be a last-resort step, but if you’re concerned that your lender is going to cut your loan out from under you and a different loan is starting to look awfully appealing, talk to your real estate agent about your options.
The important thing is to “surround yourself with a team of quality professionals: the Realtor, the lender, the title company, and any other participants,” Mattison says. “When you’re working with quality people, they’re going to aid you in making it down the path without stumbling.
“Oftentimes you’ll hear opportunities from potential participants that sound too good to be true — and I think of the old adage, ‘If it sounds too good to be true, it is.’”
In other words, if you’re tempted to switch lenders, make sure you do your homework. “I would caution buyers to be leery of people who tell you they can do something outside of the norm,” Mattison says.
“If you do switch lenders, you want to do so with caution and verification and documentation and ask for some references to ensure you’re working with somebody reputable who will actually be able to perform. There’s nothing worse than getting to the settlement table, and the loan you thought was going to be there is no longer there.”
If this all feels a bit daunting while the pandemic plays out, consider some encouraging tidbits.
First, if you are able to get into that government-backed loan right now, it comes with a key advantage: Having one qualifies you for mortgage relief through the CARES Act, which could come in handy if you lose your job after you move in.
And consider this encouraging news for the near-term future from the Maryland agent Mattison: “As we deal with any crisis kind of situation, there’s always an alarm at the offset. And as we work through the issues, things mellow out.”
So if your credit score is posing a challenge right now, relief might soon be on the way as restrictions ease.
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