Mortgage catch-22: Interest rates are lower than ever, but millions of borrowers can’t get a loan
Despite the fact that mortgage rates have been at or near record lows for more than a month, millions of potential borrowers are facing a situation where it’s simultaneously never been a better time to buy a home and never been harder to get a mortgage; a true mortgage catch-22.
Ironically, the cause of both the record low interest rates and certain borrowers’ powerlessness to take advantage of those rates is the same thing: the coronavirus.
Even as the impact of COVID-19 has driven mortgage rates down, the virus has also crippled the U.S. economy, sent unemployment skyrocketing, and altered the mortgage lending landscape so deeply that it may take years to recover.
That’s leading to millions of would-be borrowers being left behind thanks to a brutal combination of factors that’s making it nearly impossible for them to get a loan, even if they want and could get one otherwise.
Before the coronavirus truly took hold in the U.S., the interest rate for a 30-year fixed-rate mortgage had never been below 3.31%. But as February turned to March, global economic uncertainty drove those rates below 3.3% for the first time ever.
And while rates briefly pushed back up above 3.5% in mid-March, rates recently fell back to new record lows, hitting 3.23% in the week ending April 30, 2020.
But as those rates fell, making getting a mortgage a more enticing option for people, it also became much harder for certain people to get a loan.
As the virus crisis worsened, numerous lenders raised their lending standards, thereby limiting the types of borrowers they’d lend to, because they were trying to protect against lending to borrowers who were either about to or just had lost their jobs.
The immediate impact was felt in the segments of the lending business that are not the pristine borrowers whose mortgages are typically sold to Fannie Mae and Freddie Mac. Very suddenly, lending to borrowers who are viewed as “riskier” dried up significantly.
Case in point: numerous mortgage companies that focused on lending to borrowers outside the Qualified Mortgage box halted their lending operations. Many lenders also dialed back their jumbo lending as investor interest dried up.
Beyond that, it became considerably more difficult for some borrowers to get a Federal Housing Administration loan. It wasn’t because of any government actions though. Instead, many mortgage lenders increased their minimum FICO scores for FHA loans to as high as 660, which would prevent a large section of borrowers from accessing an FHA loan.
But the changes weren’t limited to smaller companies or nonbank lenders.
It also got much harder to get a mortgage at some of the nation’s biggest banks.
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