Interest rates are reaching near record lows, which is not great news for savers but it is good news for borrowers who can get a home loan.
Securing a new mortgage is tougher for many borrowers, thanks to the effects of the COVID-19 ‘pandemic’.
Though it isn’t unusual for home loan lenders to choose to tighten their credit reins during an economic crisis, like a recession, the current situation has made it especially challenging, as it’s even harder to get an accurate read on a client’s true financial health when so many things are up-in-the-air.
For example, job security is harder to gauge, and a lot more due diligence is required to get a reasonable understanding of the borrower’s financial stability.
Therefore one of the challenges for lenders is confidence in borrowers financial situation, particularly those who have taken up the offer of support during the worst of the pandemic. Why did they need it, and will they need it again? So what support are we referring to?
Borrowers have had the opportunity to pause their mortgage, i.e. take a holiday on their regular repayments for up to six months.
Plus also halt student loan repayments and even delay paying some of their tax bills. Unemployed individuals have had an extra £20 per week, but that’s due to stop soon.
These forms of government intervention could further worsen how to qualify for a mortgage, as the rules and regulations of the banking world have taken a real hit.
Home Equity Loans
Big banks and other professional lenders are choosing to pull back on certain loans like home-equity lines.
A home equity loan is where the homeowner uses the equity in their home as security for a loan. There was a sharp increase in the demand for home equity loans from early 2020. Initially, the primary reason was to renovate the property, and then as lockdowns continued to bite, the loan was for survival.
You may be wondering why homeowners were keen on renovating at the start of COVID? The 24/7 occupation revealed poor use of some spaces in the home and a lack of space, so rejigging floorplans to get in a home office or study was popular.
Then by mid-2020 it was evident the home equity loans were being used for survival, i.e. mortgage repayments, and other expenses.
Lenders are getting tough on borrowers, with new lending caps and asking clients for increased proof of employment. The downside is lenders are failing to allow borrowers to benefit from the current low-interest rates.
Obtaining a mortgage has not been so difficult since the year of 2015.
Here’s a summary of all the new lending conditions for borrowers who wish to purchase a new home, as well as the guidelines for existing homeowners who would like to refinance their property or tap into their equity.
If you’re in the UK Barclays and NatWest have slashed the DTI (debt to income) multiple so borrowers know the maximum they can borrow is a multiple of their income.
Borrowing up to 5.5 times your income was not uncommon. If your joint household income was £60K, then all well, you could get a mortgage of £330,000. The new limit for Barclays customers is 4.9, which shrinks your maximum amount to £294,000 or £36,000 less than a few months earlier.
Some caps are also based on your employment status, e.g. self-employed versus employed and the percentage of the house price you’re contributing i.e. your deposit.
JPMorgan Chase – raised its lending standards, requesting that homebuyers have a minimum 20% down payment and a 700 FICO credit score to achieve a home loan(mortgage). Homeowners who wish to refinance their property with JPChase must maintain a higher credit score than ever before.
Wells Fargo and US Bank – decided to raise the minimum credit score requirements for all borrowers to a minimum of 680 whilst increasing the minimum credit score for new home-equity loan borrowers to a whopping 720.
Most if not all lenders carry out several more advanced employment checks throughout their loan application process, meaning you must prove a secure, long term career that isn’t in jeopardy due to the current global situation. It’s becoming increasingly harder to seek out smaller loans for apartments than family homes, making it nearly impossible for new buyers to get a foot on the property ladder.
Luckily, there are a few tips and tricks that you can utilise to get a mortgage despite the drawbacks of the pandemic, so be sure to make the most of these steps to get a great deal.
Lock it in
If you spot an interest rate or package that works for you, lock in on it. The simple fact is that the loan or rate may not even be available tomorrow, so you must grab a good deal with both hands before it’s too late.
Do your own due diligence
Work closely with your lender to prove your employment contract is valid, as this will help to speed up the application process.
Research the market
Do your research on property market values so you don’t overpay and consider what you can do to add value to the property to improve its value and improve your equity position in a short timeframe.
While the interest rates are low, it’s great timing to lock in a low-interest rate. However, homebuyers need to prove their good for the loan, i.e. can afford it and have job security.
Homebuyers can get savvier in their house hunting and make decisions to see the equity growth in their property with a little bit of DIY. Don’t be put off by current market conditions, do your due diligence, research, know your financial position and how you can improve it.
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