As mortgage lenders raise credit standards, how to get in on the refinance boom

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With a refinancing frenzy in full swing, a flood of homeowners are locking in historically low mortgage rates. And yet the availability of mortgage credit plunged in March and has stayed low since.

Call it one of the many puzzles presented by the coronavirus recession. The Mortgage Bankers Association’s Mortgage Credit Availability Index dropped 16 percent from February to March, as the pandemic took hold in the U.S., then fell further in April, May and June before ticking up slightly last month.

“We’ve seen a very significant dropoff, to say the least,” says Joel Kan, MBA’s associate vice president of economic and industry forecasting. “We’ve seen a lot of tightening in credit availability across the board.”

With worries about rising defaults, lenders have cracked down on credit scores. They’re stricter about cash-out refinancing. They’ve been quadruple-checking borrowers’ employment status. And lenders are reluctant to make jumbo loans, mortgages that are too large to be purchased by Fannie Mae and Freddie Mac.

Meanwhile, borrowers are being asked to provide more documentation than ever, including additional verification of employment and forms declaring that they face no financial hardship, says Rocke Andrews, broker-owner of Lending Arizona in Tucson. “It’s basically harder for everyone,” Andrews says.

Boom for some borrowers, bust for others

Despite all of that credit and qualification belt-tightening, loan officers and mortgage brokers say they’re flooded with applications. Rates have fallen to record lows, and those who can qualify are taking advantage. Mortgage applications have doubled from the same period a year ago.

Mortgage broker Gordon Miller of Miller Lending Group in Cary, North Carolina, says he’s working seven days a week and handling four times the volume of mortgages he typically processes.

He’s so busy that he put his marketing campaign on hold and stopped accepting voicemail messages. Miller rates his activity levels as “12 on a scale of 1 to 10.” One caveat: His typical client has a 750 credit score and a 70 percent loan-to-value ratio, factors that make those borrowers attractive to lenders even in a credit squeeze.

Even with the tightening standards, loan officers are still slammed. Blame the uneven effects of the coronavirus recession.

White-collar workers who can do their jobs remotely have continued to earn paychecks during this downturn. Those borrowers have driven the refi boom.

However, many employees in hard-hit industries — retail, entertainment, hospitality and travel — have lost income or have made up that income with enhanced unemployment benefits that recently expired. In an era of close scrutiny of loan applications, borrowers in those sectors are less likely to get approved even if they keep their jobs. They’ll almost certainly be turned away if they are unemployed.

“A large segment of those types of workers are being impacted,” Kan says.

Mortgage delinquencies spiked this spring, and unemployment soared in April. While the labor market has improved markedly this summer, the health of the economy remains unclear.

“You still have 10 million people who are either temporarily unemployed or permanently unemployed, and that’s playing into the tightening of credit availability,” Kan says.

What’s more, generous forbearance policies have led lenders to fear extending credit to borrowers who will stop paying.

What you can do

Here are a few ways to make sure you’re one of the borrowers whose application is approved:

  • Improve your credit score. This is the single biggest factor determining your mortgage rate, and it’s also a crucial part of your overall creditworthiness. Many lenders are looking for stellar scores — in the range of 720 or higher.
  • Make sure there are no gaps in your income. If you’ve been furloughed, laid off or otherwise subjected to a pay cut, your odds of approval are long. Wait until you are back at work for at least six months before applying for a mortgage.
  • Keep debt-to-income levels in check. The lower your monthly payment compared to your income, the better your chances.                
  • Don’t apply until you know you can qualify. Getting turned down for a loan will hurt your credit.
  • Consider a VA or FHA loan. Those mortgage refinances are generally easier to get and the rates are good — but credit availability has tightened for those programs, too.

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