Lenders Are Raising the Credit Bar For Homebuyers and Refinancing
At the start of the year, the percentage of homeowners who were late with their mortgage payments fell to its lowest level in more than 20 years. But that was before the COVID-19 pandemic clobbered the U.S. economy and led to more than 20 million job losses. Now lenders are bracing for a rise in missed loan payments and rising foreclosure rates. They are already tightening credit standards that make it tougher for people to buy or refinance a home.
“Home loan delinquency and foreclosure rates were the lowest in a generation before the COVID-19 pandemic hit,” Dr. Frank Nothaft, chief economist at CoreLogic, said in the firm’s latest mortgage market assessment. “Recession-induced job losses will fuel delinquencies.” Many lenders are offering payment forbearance plans. And the average household was in better shape heading into the pandemic than before the Great Recession — factors that make Nothaft optimistic that foreclosures won’t soar. “Widespread foreclosures across America will likely be averted,” he said
Mortgage firms aren’t taking any chances. They are raising required credit scores and ramping up requirements to get a mortgage.
Major U.S. banks are setting aside billions of dollars for what they fear will be a flood of loan defaults.
Housing analysts worry that stricter lending standards will slow home sales and make it harder for the residential market to recover when the economy turns back on. Young buyers with less credit history will be particularly hard hit. “It is a concern because the momentum we had in the housing market was coming, in part, from younger prospective homebuyers, such as millennials,” said Robert Dietz, chief economist for the National Association of Home Builders. “The tightening of the credit box is likely to prevent some of these potential buyers from the market. This not only holds homeownership attainment back, but it has ripple effects,” he said. “For most of such buyers, they must be able to sell their existing home in order to buy new construction. So a tightening of lending standards can displace sales higher up on the housing ladder.”
Lenders are raising the credit bar for construction financing, too.
“We are seeing evidence of tightening of lending standards for builders as well — that is, loans for acquiring land and construction purposes,” Dietz said. “Builders cannot develop land or build homes without financing, so there is a supply-side effect as well.”
George Ratiu, senior economist with Realtor.com, agrees that young homebuyers will pay the biggest price for the tougher financing standards. “There are about 5 million millennials turning 30 this year, a prime age for homebuying,” Ratiu said. “With younger buyers saddled with student debt and rising unemployment, tightening standards will likely disqualify many of them from a mortgage, making buying a home a much harder proposition...”
