The COVID-19 pandemic has brought unprecedented change to the financial sector, and the mortgage industry has not been spared.
As mortgages are the most important asset on lenders’ books, lenders are being extra careful when determining who they should loan to, making it more challenging for borrowers. However, the pandemic has also made mortgages more attractive to borrowers, as the interest rates have plummeted to new lows.
With such drastic changes, how can you apply for a mortgage successfully and with the most favorable interest rates?
Read on to get helpful tips on applying for a mortgage loan during the pandemic to enable you successfully buy a home.
How Has COVID-19 Changed the Mortgage Application Process?
The COVID-19 pandemic has had a significant impact on the mortgage industry.
This impact has directly affected mortgages and the entire application process. Key changes include:
- Appraisals are now primarily online or following strict social distancing guidelines. Lenders and real estate agents are now incorporating desktop, curb-side, or data-based assessments to determine property values.
- Certain mortgage loans are no longer readily available. Non-qualifying mortgages and jumbo loans, popular with self-employed borrowers and other non-salaried income earners, aren’t easy to come by.
- Lenders have raised their minimum credit scores since the pandemic outbreak, with some even asking for higher down payments.
- Loan approvals now take longer, with lenders taking more time to evaluate borrowers’ suitability by carefully checking employment statuses and incomes.
- Mortgages now cost less. The Federal Reserve lowered its base interest rate in 2020 and increased mortgage-backed securities purchases to stimulate the economy and make mortgages more accessible to borrowers. As of February 2021, a 15-year fixed-rate mortgage cost 2.21%, down from 2.97% in 2020.
Top Tips on How to Apply for Mortgages During the Coronavirus Pandemic
1. Check Your Credit Report
The mortgage interest rates you attract will depend on your credit rating.
Because it can take up to one year to reverse a bad credit rating, you must check your credit report early enough to ensure that it is accurate and favorable, so you qualify for as cheap a monthly payment and mortgage rates as possible. You’ll pay less in the long run, leaving you with more money in your pocket for other expenses.
In these unprecedented times, these small savings can make all the difference.
2. Before Your Mortgage Application, Raise Your Credit Score
If your credit report is accurate but your credit score is not as high as you would like it to be, it would be best to work on improving it before you apply for a mortgage.
Some of the things you can do to get a higher credit score include:
- Not opening or closing current credit accounts during the mortgage application
- Paying every single monthly bill or debt payment on time
- Reducing your credit card balances
Shop around for mortgage rates to ensure you’re getting a good deal. For instance, FHA loans require mortgage insurance, which increases your borrowing costs. Also, if you’re a veteran or service member, a VA loan could entitle you to zero monthly mortgage insurance premiums, lower interest rates, and limits on buyer’s closing costs.
Get at least three quotes from three different lenders, or use a mortgage broker to assist you in comparing multiple quotes.
3. Get Pre-approval Before Making an Offer
Don’t make the mistake, especially if you’re a first-time buyer, of beginning the house-hunting process before getting pre-approved.
Pre-approvals give buyers an idea of the property they can afford, which directly determines their buying budget.
Pre-approvals also give buyers leverage and credibility with the seller. Sellers are likely to take these buyers’ offers more seriously, as they prove the buyer capable of getting the funding for the purchase.
4. If Possible, Make a Bigger Down Payment
In these tough economic times, offering to make a more significant down payment on your mortgage is music to your lender’s ears. These down payments minimize the lender’s risk, making you a less risky investment.
If you have the cash available, aim to put down anything from a 5% to 20% down payment to increase your chances of getting your mortgage approved.
5. Avoid Late Payments on Fixed Obligations
Being late on fixed monthly payments like rent, credit cards, and car payments can prevent you from securing a mortgage.
If you’re a first-time buyer without a comprehensive credit history, your rent payment history is a significant indicator of whether you’ll be a responsible homeowner and make on-time mortgage payments.
Ensure that you pay your rent on time for at least one to two years before completing your mortgage application. You should also make any monthly credit card, loan, or car payments on time and keep all your debt balances as low as possible.
6. Avoid Taking on New Debt
Taking on new debt could mess with your debt-to-income ratio, a criteria lenders use to assess your ability to pay the loan.
The debt-to-income ratio or DTI looks at your total income compared to the total amount you pay in monthly debts. The more debt you owe, the less you have available for mortgage payments, limiting the size of your mortgage.
Lenders also recommend following the 30/30/3 rule to prevent buying a house you can’t afford. This formula stipulates the following:
- Have at least 30% of the property value in cash.
- Don’t spend more than 30% of your annual gross income on mortgage payments.
- Don’t buy a property more than three times your annual gross income.
If you follow the 30/30/3 rule and have a favorable DTI, you shouldn’t have to take out additional mortgage insurance, which will only make your home loan more expensive.
7. Be Proactive with Your Lender
Ensure you have all the paperwork your lender asks for and answer your lender’s queries quickly to facilitate your mortgage application. Have the following documentation, among others, readily available:
- Asset Documentation
- Bank Statements
- Credit History
- Pay Stubs
- Photo ID
- Rental History
- Tax Returns
- W-2 Form
It takes time for the loan officer to check and vet your paperwork, and anything you can do to shorten the process will expedite your application.
Need to Buy a Home During COVID-19? Contact Greater Alliance for Assistance
If you’d like help in understanding how to apply for a mortgage in Bergen or Passaic County during these unprecedented COVID-19 times, contact Greater Alliance online or call 201-599-5500 today or visit our website to schedule an appointment with one of our mortgage experts..
We can help simplify the process of obtaining your home loan, ensuring you get the best rates and repayment terms.