April 4th, 2020
Today should have been the day that Ignacio Paulino closed on his new mortgage loan. But thanks to the coronavirus outbreak—and the fears that it will set off a wave of foreclosures—that’s no longer happening.
Paulino applied to refinance his FHA mortgage loan on March 4 and was approved—with conditions—just last week. On Tuesday, he got the news: His loan would no longer close on April 3 as planned.
In fact, according to his loan officer, he could no longer get the loan at all.
The reason? His credit score—which qualified him for the refinance just a week prior—was no longer high enough.
That’s because the COVID-19 pandemic has forced lenders’ hands when it comes to FICO score minimums. As more and more Americans lose their jobs or see reduced wages because of the virus, the risk of foreclosure goes up. Investors who buy mortgage loans will lose out when that happens—and taking on more risk by lending to lower-credit borrowers? That’s just not something investors (or the lenders who sell to them) are interested in.
To be fair, the official minimum of FHA loans—as set out by the Department of Housing and Urban Development—is actually 580. If you can make a 10% down payment, it’s just 500.
A look at rate sheets from lenders across the country reveals a similar theme. Credit score requirements are either much higher than the official FHA minimum (one lender’s floor was 740), or tiered interest rates make the loans virtually unaffordable for lower-credit borrowers (another lender added 15% for scores between 600 and 619).
The result is a mortgage market that essentially shuts out buyers (and existing homeowners) who don’t have sterling credit. It also throws off in-progress loans like Paulino’s. (He was even told that some already-closed loans would no longer be funded due to the change—though his loan officer declined to confirm this).
“Folks like me—who are simply waiting to close on their home loans—are being dropped out of the blue because investors don’t want to pay,” Paulino said. “I understand that a lot of people are going to miss payments and investors have a right to be concerned, but I thought the fact that this was an FHA loan, that this would serve as a safety net for investors in the event that I or anyone would default due to the current situation. I guess not.”
In a recent presentation dubbed “How the Coronavirus Broke Mortgages,” Michigan mortgage broker Anthony Bird summed the situation up best, calling it “the perfect storm for mortgage markets.”
“The combination of market volatility and unintended consequences from the government has left mortgage lenders and servicers reeling,” he said. “Until the storms calm and the coronavirus is better controlled, we will continue to see more restrictions on loans and less people qualifying for mortgages.”