As homeowners raced to refinance their home loans amid record-low mortgage rates recently, they overwhelmed lenders by their sheer numbers—triggering repercussions for the shoppers gearing up for the spring home-buying season.
"If a buyer finds a house today, they’re going to need a longer amount of time to close," says Tucson, AZ–based mortgage broker Rocke Andrewsof Lending Arizona. He's also the president of the National Association of Mortgage Brokers, a national trade group. "Things are taking a little bit longer because of the large number of refinances going through the system."
Andrews is seeing the time needed to complete a loan go from about 30 days to 45 days. To put the refi boom into perspective, refinance applications were up 401.5% year over year in the week ending March 13, according to the Mortgage Bankers Association (a different organization). And refinances made up about three-quarters of all mortgage applications.
"This is unprecedented," says Elysia Stobbe, author of "How to Get Approved for the Best Mortgage Without Sticking a Fork in Your Eye.” Lenders everywhere, she says, have way more business than they can handle.
In a desperate effort to slow the deluge of refinance applications, mortgage companies have actually raised rates. That's why, despite the Federal Reserve slashing short-term interest rates, mortgage rates actually went up for two weeks in a row. The rate for an average 30-year fixed-rate loan went from a historic low of 3.13% on March 2 to 4.13% as of Thursday, according to Mortgage News Daily.
And it's not just the refi backlog slowing lenders down. In some areas that have been particularly hard-hit by the novel coronavirus, appraisers aren't going out in person to assess homes. Shutdowns of local government offices may make it harder for buyers to have title work done. And many lenders won't sign off on a loan without these key pieces completed.
This could hurt buyers brave enough to purchase property during an economic downturn.
"It's a two-way street," says national real estate appraiser Jonathan Miller of the fear many folks have of interacting with one another and potentially contracting COVID-19. "The consumer's becoming much more hesitant to allow appraisers [into] the interior of their properties just as appraisers are becoming more reluctant [to go] inside of a stranger's home."
While a buyer may be able to obtain a home loan without an in-person appraisal, they run the risk of having the terms of their mortgage revised once that appraisal is able to be performed, says Miller. Loan officers could say the buyer misrepresented a condition of the property that makes it a riskier purchase than they originally assumed, and raise the borrower's interest rate as a result.
Simply having everyone work from home amid the pandemic is also causing delays. Some lenders have slower internet connections at home, their equipment might not be up to date, and there's no IT department on the third floor where they can bring malfunctioning equipment. And many are trying to balance work with child and pet care.
"The large majority of folks working from home slows things down," says Andrews. "It’s hard to be quite as efficient when you have children home from school and other distractions.”
The delays could leave buyers who need financing vulnerable to cash offers from other buyers.
"If you are a home seller and you’re getting a cash offer for less, you are more apt to take the cash offer," says Andrews.
It could be harder to qualify for a mortgage
Setting aside the delays, it could be harder for some borrowers to even qualify for a loan with the economy at a standstill, the stock market in shambles, and layoffs spreading across the country.
Lenders will likely scrutinize a prospective buyer's employment more closely than ever, and those whose jobs are on hold or who have been recently laid off likely won't be able to qualify. Loan officers may also more closely scrutinize an individual's type of employment, credit scores, and debt loads.
“The primary concern is going to be continuity of income," says Andrews. "If you are a policeman or a fireman, odds are that your employment will continue. If you are in the medical profession, odds are that your employment will continue. [But] if you are in retail or [are] self-employed, there may be greater scrutiny of these borrowers.”
Potential borrowers with lower credit scores will likely be given higher interest rates on their mortgages, says Stobbe. That's how lenders can help protect themselves from the risk.
"It's just the lender's way of saying, 'We can afford to be choosy right now and we're going to be.'"
Mortgages may take longer to complete—but likely won't fall apart
At the end of the day, however, most lenders prioritize buyers over those seeking refinances. They're typically more reliable business.
Buyers "are more likely to close because there's a sense of urgency involved," says Andrews. They're less likely to walk away from a deal if rates go down, because they're on a short timeline.
"With refinances, if rates move lower, people cancel their contracts and move to a different lender," Andrews says. "So the lenders have done a lot of work for nothing."
There's also more of an imperative. Buyers could be homeless if their deals don't go through in time, says Stobbe. Those seeking refinances still have a place to live.
“It’s just going to take a little more time to close loans," says Stobbe.