What mortgage qualification requirements changed due to COVID-19?
COVID-19 has disrupted nearly every segment of the U.S. economy, including the mortgage industry. Regulators and lenders have adjusted their guidelines and policies to adapt to the current economic environment and respond to important health considerations.
Below we review the key mortgage qualification requirements that have changed in response to COVID-19 and also highlight the guidelines that have not changed, including credit score and down payment guidelines. Continue reading to understand how to get a mortgage during this unprecedented time.
Verbal Verification of Employment
Your lender is required to obtain verbal verification of your employment within ten days of your mortgage closing. This requirement has assumed added importance because of the economic challenges caused by COVID-19.
With so many people losing their jobs, being laid off or furloughed, lenders want to make sure that you are still employed -- and can pay your mortgage -- before your loan closes. While the verbal employment verification guideline is not new, the methods by which lenders can confirm your job status have expanded.
If verbal verification is not possible due to workplace challenges caused by COVID-19, email or written verification from your employer is permitted. The email or other written verification should include your name and job status as well as the name and position of the person verifying your employment.
If your employer is unable to verify your employment you can provide your most recent pay stub showing your year-to-date income or a bank statement that shows your most recent payroll deposit.
Additional Verification Requirements for Self-Employed Borrowers
If you are self-employed and own your own business, the lender is required to confirm that your business remains open and operational within ten days of your mortgage closing. The lender can satisfy this requirement by reviewing business documents such as contracts, invoices and receipts, by calling the business to determine that it is open or by reviewing the business’ website.
This is a new guideline as previously lenders were only required to verify the business within four months of the mortgage closing date.
What Happens If Your Income Decreases Before Your Mortgage Closes?
In some cases your salary may be reduced or your hours cut back as a result of your employer’s financial challenges. If this occurs during the middle of the mortgage process it does not automatically mean that your application is declined but the lender needs to re-qualify you for the loan based on your new, lower income. This applies to both employment income as well as investment income such as dividends, interest and capital gains.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford based on your monthly income and debt expense
If you can still afford the mortgage based on your reduced income, then your application should be approved. If you cannot afford the monthly payment according to the debt-to-income ratio applied by the lender, then you may not qualify for the mortgage or you may need to reduce your loan amount, if possible. If you can document that your income is going to return to its prior level, then the lender can use the higher income to determine the mortgage you can afford.
What Happens If You Change Jobs Before Your Mortgage Closes?
Unfortunately many people are losing their jobs due to the economic impact of COVID-19. In some cases this happens in between when you apply for a mortgage and when your loan is scheduled to close. If you do not find a new job and currently do not earn income, you are highly unlikely to get approved for the mortgage.
Having trouble paying your mortgage? Check out our resource on COVID-19 Mortgage Assistance Programs
If you are fortunate to find new employment you still may be able to qualify for the mortgage as long as your income is relatively consistent and you meet certain requirements.
In most cases, you are required to provide an offer letter from your new employer that outlines the terms of your employment including the following information:
start date
position
income
type of compensation (salary, hourly wage, commissions and/or bonus)
type of employment (W-2 employee, 1099 contractor or other)
The offer letter should also confirm that the position does not have a probationary or trial period. If the job has a probationary or trial period, you are usually required to wait until the period expires before you can qualify for a mortgage.
You may also need to provide one month of pay stubs from your new job but you should confirm this point with your lender.
If you become a 1099 contractor or your compensation changes to commissions or a bonus, you may need to wait a year or longer before you can qualify for a mortgage. If the gap between jobs is relatively short -- usually one-to-two months -- and you remain a W-2 employee that is paid a salary or hourly wages, you are well-positioned to move forward with your mortgage. As explained above, you also need to earn sufficient income with your new job to qualify for the loan.
In short, in this scenario you should still be approved for the mortgage but you may need to wait a period of time before your loan closes, depending on your specific lender's qualification and document requirements. The best approach is to review your situation with your lender as soon as possible so you can understand their qualification guidelines and develop a solution.
What If You Are on Paid Leave Due to COVID-19?
Some companies are placing employees on paid leave instead of laying off or furloughing them. If you are placed on temporary paid leave either before or during the mortgage process, you can still qualify for the loan but you must satisfy multiple conditions.
You need to provide documentation from your employer that outlines the terms of the leave including your compensation, the date you are to return to your job and your regular income. Additionally, the lender is required to confirm that you are employed by the company within ten days of your scheduled closing, even if you are on temporary leave. You also need to provide the lender a letter that states that you intend to return to your job at the end of the leave period.
If you are scheduled to return to full-time employment before the date of your first mortgage payment, the lender uses your regular income to determine the mortgage you qualify for. Keep in mind that your first mortgage payment is typically due on the first day of the second month after your loan closes. For example, if your loan closes on May 20th, your first payment is not due until July 1st.
If your return date is after your first mortgage payment date, the lender uses the lower of your leave or regular income to assess the loan you can afford. So if your monthly leave income is $2,500 and your regular income is $5,000 and your temporary leave extends beyond the date of your first mortgage payment, the lender uses $2,500 in income for your application.
In this scenario, you can also use your savings and liquid investments to bolster your monthly income. Specifically, your savings after subtracting your down payment, closing costs and applicable reserves, divided by the number of months you are on leave after the date of your first mortgage payment, is added to your leave income. The rationale to this guideline is that you can use your savings to help pay your mortgage until you receive your regular income again.
For example, if you have $6,000 in net savings after accounting for your down payment and closing costs, and you are expected to be on leave for three months following your first mortgage payment, the lender adds $2,000 to your leave income to determine the mortgage you qualify for ($6,000 in net savings / three months of leave = $2,000 in additional monthly income). If your leave income is $2,500 your total monthly income for your loan application is $4,500 in this example.
Please note that temporary unemployment income cannot be used to qualify for a mortgage unless you receive the unemployment income -- as documented by your tax returns -- for at least two years due to seasonal work. Additionally, income you receive while you are furloughed cannot be included in your loan application.
Use of Stocks and Other Investments for Your Down Payment, Closing Costs and Reserves
If you want to use stocks or similar liquid investments for your down payment or closing costs, you are required to provide documentation that you have received the proceeds from selling those investments prior to your loan closing. In the past, if the value of the investments was at least 20% more than the funds required for your down payment and closing costs, you were not required to provide documentation that you sold the investments.
If you want to use stocks or investments to meet the reserve requirement for a mortgage, lenders apply a 30% discount to the market value of the investments but you are not required to sell them. Previously, 100% of the value of liquid investments could be used to meet the reserve requirement.
Online Document Notarization
In light of widespread social distancing and stay-at-home orders, regulators have implemented more permissible guidelines for online notarization of mortgage documents. This policy should enable borrowers to sign more documents electronically rather than meeting in person, which may be preferable in the current environment.
Please note that lenders or other third parties cannot require you to use online notarization if you are more comfortable physically signing documents. Additionally, while online notarization is permitted in over 40 states -- and several more states implemented updated policies in response to COVID-19 -- some states do not allow it. Be sure to check with your lender to understand the applicable regulations in your state.
Finally, not all mortgage documents are eligible for online notarization and e-signatures. Specifically, an e-signature is only permitted on mortgage or promissory notes for loans that are designated “eMortgages” according to specific industry guidelines. Only approved lenders are allowed to offer eMortgages.
More Flexible Appraisal Report Requirement
Mortgage industry regulators implemented temporary guidelines designed to make the appraisal process easier and less intrusive. Purchase mortgages require an exterior-only or desktop appraisal instead of a traditional appraisal that includes multiple photographs of a property’s interior. In some cases, refinance mortgages may also use an exterior-only appraisal. Please note, however, that cash-out refinances and most construction loans require full, traditional appraisals.
An exterior-only appraisal includes at least one photograph of the property’s outside in addition to information that can be gathered from third party sources. A desktop appraisal generates an estimated property value using an automated system.
Neither of these appraisal reports require the appraiser to physically enter the property, consistent with stay-at-home policies adopted by many cities and counties. Additionally, photographs and supplemental information provided by the borrower, property owner or web sites can be included in the appraisal report.
We should also highlight that some properties are eligible for an appraisal waiver which means you do not need an appraisal report to qualify for the mortgage. You can work with your lender to determine if your loan and property qualify for a waiver, which saves you time and money and limits in-person interaction among transaction participants.
Mortgage Qualification Requirements That Have Not Changed
In addition to understanding how COVID-19 has impacted the mortgage process, it is important to highlight that many important qualification guidelines have not changed. As listed below, the down payment required for the most common mortgage programs is unchanged.
Conventional: 3%
FHA: 3.5%
VA: No down payment required
USDA: No down payment required
HUD Section 184: 2.25% for mortgages over $50,000 and 1.25% for mortgages below $50,000
Additionally, the credit score requirements for these programs remains the same and are as follows:
Conventional: 620 to 640 depending on the program and loan-to-value (LTV) ratio
FHA: 500 if your down payment is at least 10.0% and 580 if your down payment is between 3.5% and 10.0%
VA: No minimum score according to program guidelines but typically 620
USDA: 640
HUD Section 184: No minimum score requirement
Beware of Lender Overlays
While many key mortgage qualification guidelines have not changed, some lenders apply their own stricter internal guidelines called lender overlays. This tactic is relatively common during challenging economic conditions when mortgage lenders attempt to focus on the most qualified applicants.
For example, even if you only need a 580 credit score to qualify for an FHA loan according to program guidelines, a lender may require a score of 700. Or a lender may require you to put down 20% to qualify for a mortgage even if the guidelines permit a much lower down payment. Several large national lenders have adopted these more challenging qualification requirements in response to the economic uncertainty caused by COVID-19.
Shop Around to Find the Best Terms
We should emphasize that just because one lender applies more conservative overlays does not mean all lenders do. This is why it is more important than ever to contact multiple lenders when you shop for a mortgage.
One lender may have increased their credit score minimum due to COVID-19 considerations but other lenders may have kept their requirement the same. If you contact multiple lenders -- we recommend at least five -- you improve the likelihood that you find a lender that meets your individual financing goals. If one lender says no, don’t stop there -- contact other lenders as their response may be different.
Comparing lenders is also important because the turbulent economic environment has led to a wider variation in loan pricing. Mortgage rates for different lenders can vary 0.500% to 1.000%, which can make a significant difference in your monthly payment and the loan you can afford.
Now more than ever, we advise you to shop lenders to confirm their qualification guidelines and compare loan terms. We recommend that you contact multiple lenders in the table below to find the mortgage that is right for you.
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Sources
"COVID-19 Frequently Asked Questions - Selling." Fannie Mae, April 22 2020. Web.
"Impact of COVID-19 on Originations." Lender Letter LL-2020-03. Fannie Mae, March 31 2020. Web.
"Impact of COVID-19 on Appraisals." Lender Letter LL-2020-04. Fannie Mae, April 14 2020. Web.
"B3-3.1-09, Other Sources of Income, Temporary Leave Income." Selling Guide: Fannie Mae Single Family. Fannie Mae, October 2 2019. Web.
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