In this era of rock-bottom interest rates, millions of Americans have already refinanced their mortgages or are doing so right now, locking in lower rates than they had before.
But if you have a so-called FHA loan – backed by the Federal Housing Administration, typically going to borrowers with lower credit scores and/or smaller down payments – the process might not be so smooth going forward.
The reason: Almost every investor and company in America is in a mad dash to safety. And that means FHA loans aren’t the most desirable assets to have on your books, since they tend to come with higher risks.
So what does that mean for FHA borrowers? It could mean higher rates than you expected, or additional requirements like a healthier credit score or updated income verification, or longer processing times – or it could mean that you have trouble finding a lender at all.
“It’s absolutely true that there are big changes going on,” says Rocke Andrews, president of the National Association of Mortgage Brokers and owner of Lending Arizona in Tucson.
“Most lenders are now requiring a minimum credit score of 620 or 640 for FHA loans. Or they are eliminating them altogether, for fear that they will go into forbearance.”
The reason: The CARES Act requires that loan servicers grant a period of forbearance of up to 180 days, with no fees, penalties or documentation required. That’s good news for hard-hit borrowers – but not so good for loan servicers. And since mortgages are often sold from one institution to another, you are going to be hard-pressed to find a buyer for FHA loans that are in forbearance.
“The major risks involved with lending in the coronavirus environment has cause nearly all lenders to tighten qualifying guidelines and even drop loan programs,” agrees Anthony Bird, owner of Riverbank Finance in Grand Rapids, Mich. “The hardest hit from these changes are government-backed loans, which are designed to assist borrowers with lower credit scores and lower down payments.”
Ironically federal guidelines for FHA loans have not changed, requiring a credit score of only 500. But the final decision is up to the lender – and while in the past they might have accepted scores around 580, says Andrews, those expectations have now shot higher.
Another potential glitch in your refinancing plans: Social distancing has gummed up the works for mortgage pipelines. When in-person activities are restricted, and staffers are all working remotely, it’s gotten much harder for lenders to process and close deals.
All the swirling economic winds don’t mean that you can’t get your FHA loan refinanced. It just means there is likely a higher degree of difficulty in getting a deal done. Some thoughts from the experts:
Expect a rate surprise
According to the Mortgage Bankers Association and its Weekly Mortgage Application Survey, the average rate for a 30-year fixed conforming loan is 3.49%, while an FHA loan is 3.54%. Historically FHA loans have typically been offered at slightly lower rates, says Andrews — but that’s not so at the moment, reflecting lender skittishness.
Note that these numbers are not always tied to what’s going on with federal interest rates. Sometimes lenders hike them “artificially,” says Andrews, because they’re swamped and need to slow their pipeline to an amount they can handle. Ideally those numbers will tick back down again, once pipelines clear and pandemic fears ease.
Be prepared for more documentation requests
The staggering number of new jobless claims – almost 10 million in two weeks, shattering all previous records – means that lenders want to see the most updated employment and income information possible. So if your documentation is a few weeks out of date, expect that you will be asked for more current confirmation.
“Now more than ever, the faster the better,” advises Joel Kan, associate vice president at the Mortgage Bankers Association. “Have your documentation ready to go, and respond to any requests from your lender, which will help on the operational side. Because every little delay is going to add up.”
This is a rapidly evolving environment, and things are changing not only week by week, but even day by day. So don’t be surprised if your lender changes its stance on FHA loans, even if yours is already in progress.
One strategy to mitigate those risks: Work with an independent mortgage broker, who typically deals with multiple firms, giving you more flexibility. “I shop with four or five different lenders, and every day their pricing and guidelines are different,” says Andrews. “So be ready to check out more than one option.”