Today should have been the day Ignacio Paulino took out his new mortgage. But thanks to the coronavirus outbreak – and fears that it may spark a wave of foreclosures – this is no longer happening.
Paulino applied to refinance his FHA mortgage on March 4 and was approved, with conditions, last week. On Tuesday, he learned the news: his loan would no longer close on April 3 as planned.
In fact, according to his loan officer, he couldn’t get the loan at all.
The reason? His credit score, which qualified him for refinancing a week earlier, was no longer high enough.
That’s because the COVID-19 pandemic has forced the hand of lenders when it comes to FICO score minimums. As more Americans lose their jobs or see their wages drop because of the virus, the risk of foreclosure increases. Investors who buy mortgages will lose out when this happens and take more risk by lending to borrowers with poor credit? It’s just not something that investors (or the lenders who sell them) are interested in.
To be fair, the official minimum for FHA loans, as set by the Department of Housing and Urban Development, is actually 580. If you can put down a 10% down payment, it’s only 500. .
But these are only minimums to qualify for FHA insurance. Lenders set their own credit score requirements based on the level of risk they are willing to take. And according to Paulino’s conversation with his lender, their new FHA FICO low is now 680, well above the established HUD floor.
A review of rate sheets from lenders across the country reveals a similar theme. Credit score requirements are either much higher than the official FHA minimum (a lender’s floor was 740), or stepped interest rates make loans virtually unaffordable for borrowers with poor credit (a other lender added 15% for scores between 600 and 619).
The result is a mortgage market that essentially excludes buyers (and existing homeowners) who do not have sterling credit. It also cancels out outstanding loans like Paulino’s. (She was even told that some previously closed loans would no longer be funded due to the change, although her loan officer refused to confirm it).
“People like me – who are just waiting to close their home loans – are left 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 that the fact that this was an FHA loan, that it would serve as a safety net for investors. in case me or someone is defaulting due to the current situation. I suppose not.”
In a recent presentation titled “How the Coronavirus Broke Mortgages,” Michigan mortgage broker Anthony Bird summed up the situation best, calling it “the perfect storm for the mortgage markets.”
“The combination of market volatility and the unintended consequences of government has left mortgage lenders and service agents in shock,” he said. “Until the storms subside and the coronavirus is better controlled, we will continue to see more restrictions on loans and fewer people eligible for mortgages.”