In this week’s episode, Brian and David discuss some strict changes to mortgage lending and financing due to the spike in unemployment sweeping the nation.
This week’s highlights:
- FHA and VA loan lenders have raised their credit cutoff and debt-income ratio
- Jumbo loans are temporarily off the table for those over the mortgage limit
- Your financing contingency is being highly scrutinized for employment changes
COVID-19 affects FHA, VA loan criteria
In light of growing unemployment numbers and furloughs due to COVID-19, loan servicers such as Wells Fargo, Quicken Loans, etc. are tightening their loan criteria.
Since these companies have to keep advancing the principal and interest payments on a loan to the end investor, even if the borrower is not making their monthly mortgage payments, they are also in a tough spot.
The new minimum credit score to apply for an FHA loan is 640, and your debt to income ratio is now considered 45% of your gross income.
For a VA loan, the minimum credit score is 640, with a 50% debt to income consideration.
Call your mortgage lender to see if the criteria have changed for you, and if you have been preapproved for a loan, still double-check, as you may not qualify any longer.
Read more about FHA loan limitations by county.
Jumbo lenders “out for now”
Another Coronavirus-related disruption in the mortgage world is that jumbo loans are also getting tabled. Major lenders such as Wells Fargo — as well as smaller regional banks — are nervous about borrowers getting sick or becoming unemployed and not being able to pay off their loans, and have halted their processes.
If you still were hoping to get a jumbo loan, Brian suggested “doing a split” if you’re just over the qualification limit for a conventional loan.
In this case, apply for two mortgages, making your first mortgage a conventional mortgage, and then add a second mortgage as a home equity line of credit (currently at 3.4%).
Alternatively, you could get a fixed-rate second mortgage, so a “smaller slice” of your borrowed money is on that secondary mortgage.
Learn about Accunet’s adjustable-rate mortgage options as a safe alternative to a jumbo loan in these uncertain times.
The financing contingency infraction
Brian warns of the dangerous period of time between the financing contingency date (aka, the deadline on which you are supposed to give the seller your loan commitment letter) and the day of closing.
If you are under a loan contract, and your job is on the line due to COVID-19, including:
- A recent furlough
- A reduction in salary
- A temporary closure of your business
You are at risk, because your lender can now recheck your employment status within 3 days of closing and cancel the deal.
If your income or employment changes during this period, you are in breach of contract and can no longer use the inability to get financing to wiggle out.
If this is the case for you, Brian suggests your best option is that you do not deliver your loan commitment on time. The seller will then get the baton and may choose to cancel your transaction, but if your contract goes through and you lose your income, you are safe from legal ramifications.
Be sure to get Rock-Solid Preapproved on any loan to get a plan in place for any surprises down the line.
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