Mortgage Loans Are Becoming Harder to Get: Here’s Why

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If you follow the mortgage rate news, you’ve likely noticed some good and bad news surrounding the housing market recently.

Though interest rates are hovering at near-record lows, it’s growing more difficult to secure a mortgage or a refinance loan. Last week, Yahoo Finance reported that 30-year fixed rates are down by 161 basis points, but these low rates are only good news for those who can actually secure a mortgage. As far as the market goes, uncertainty and volatility are the themes of the moment.

Why are banks and other lenders tightening their standards? Since the beginning of the year, market volatility has caused interest rates to fluctuate. These ups and downs make it challenging for homebuyers who are looking for a loan.

Here’s a summary of how recent mortgage rate news may affect home buyers and home sellers.

Mortgage Credit Availability on the Decline

Home buyers and home owners who wish to refinance to secure a lower rate face a dilemma: Though mortgage rates have returned to historic lows in recent months, it’s growing harder to get a loan.

According to a survey by the Mortgage Bankers Association, in March credit availability dropped to its lowest point in five years. The drop is caused by a decline in liquidity, thanks to spooked bond market investors. What’s the connection? The bonds in question are backed by investments in so-called jumbo mortgage loans.

These investors are pulling back due to fears stemming from the economic impact of the Coronavirus/COVID-19 pandemic. With so many Americans losing their employment virtually overnight, investors anticipate a wave of defaults on loans, credit cards, and mortgages.

In response, lenders are tightening their loan standards. As their tolerance for risk decreases, borrowers face more stringent standards, such as higher FICO scores and rising down payment requirements. As of mid-April, many major mortgage lenders such as JPMorgan Chase are requiring FICO scores of at least 700 or above, with at least a 20 percent down payment for home loans.

Mortgage Rate News for Home Sellers

In response to the dire economic news, the Federal Reserve has purchased billions of dollars worth of bonds and mortgage-backed securities. Though the move was an attempt to create liquidity, it also led to volatile interest rate in the mortgage market.

In a nutshell, the Fed’s activities caused Treasury rates to bounce from .32 percent (a historic low) to over 1.25 percent in just a few weeks. This volatility makes it harder for lenders to protect their profits. As a result, they’ve tightened lending standards significantly in an attempt to mitigate some risk.

Unfortunately, the impact on lenders is now trickling down to impact home buyers. Some lenders are sharply cutting the period of time they’ll guarantee a rate, to as little as two weeks. That means home buyers can’t lock in a favorable rate, potentially exposing them to unfavorable rate jumps. For some home buyers, this is simply too risky.

For other home buyers, this means it’ll take longer to find a lender that is able to meet their timeline. This slows the whole process, in an industry that’s already sluggish due to disruption and uncertainty.

For instance, record low mortgage rates mean mortgage and refinance lenders are dealing with a flood of loan applications, according to a survey by Freddie Mac. Add in service disruptions from the Coronavirus pandemic, and it’s easy to see why loans will take longer and be more difficult to secure.

None of this is great news for home sellers. Decreased loan availability, tighter loan standards, and pandemic conditions means fewer buyers… and a much higher likelihood that a sale will fall through.

Fortunately, there’s a silver lining. Home sellers have a solution other than riding out the storm: Sell to HomeGo. HomeGo purchases homes with cash, so there is no chance of the offer falling through due to financing difficulties. You’ll enjoy a fast, hassle-free sale that closes in as few as seven days.

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