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Tighter Credit Requirements Make Buying Property More Difficult Than Ever

The coronavirus pandemic has caused the housing market to take a hit.

We’ve seen a major decrease in the number of home sales entering escrow. However, some people are still looking at homes (mostly virtually) to live or invest in. But, most appear to be unhappy due to the current scenario.

What’s Really Happening?

Lenders do not seem to be willing to help.

Many lenders have increased down payment and FICO requirements. We’ve seen mortgage credit tighten and fewer loan applications are getting accepted.

In fact, two major financial institutions are not issuing new lines of credit (home equity).

Low-documentation loans have pretty much dried up and jumbo mortgages are also extremely rare these days.

“Lenders are concerned … with the severity and the duration of what is going on,” said George Bahamondes, an analyst working with Deutsche Bank Securities Inc.

The latest data proves this notion. We’ve seen The Mortgage Bankers Assn.’s Mortgage Credit Availability Index crashing rapidly in the last few days. It’s used to measure how accessible money is to borrowers.

What the Numbers Say

The index has constantly fallen, reaching its lowest number since Dec 2014 in April. The March index was 16% down from the February figures and the April index saw a decline of 12% from the March figures.

Mortgage rates for a fixed, 30-year loan have fallen to 3.26%. These may be low but tight standards means fewer people can take advantage of the situation.

While the situation is bad, some experts believe that we have seen worse. Credit was tighter during and after the 2008 crisis, according to Joel Kan, a financial expert.

Despite very low prices, families could not count on the opportunity due to a lack of credit.

What Will Happen Next?

We can’t be sure as there are several factors that come into play here. The economy can take a while to rebound.

Recovery might be a little slow. Over 30m Americans are looking at unemployment benefits for support. Many startups have shut shop and more may follow.

Lenders have to tighten standards to protect their interests. Poor business means a higher risk of defaults. Plus, the presence of forbearance programs is also a challenge. It allows borrowers to make late payments.

“I wouldn’t be surprised if we got back to the 2010-2011 type of tightness of credit,” said Kan.

What Should Homeowners Do?

Some experts think it might be a good idea to wait for a year to purchase a house. Many banks, including JPMorgan Chase & Co., now require a FICO score of at least 700 to qualify for a mortgage. Plus, down payment requirements are also higher – 20% or more.

Wells Fargo and Chase have also stopped issuing HELOCs.

“The decision to temporarily suspend the origination of new HELOCs reflects careful consideration of current market conditions and the uncertainty around the timing and scope of the anticipated economic recovery,” Wells Fargo spokesman Tom Goyda said in an email.

Moreover, lenders appear to be charging higher premiums. The Federal Housing Finance Agency is trying to play its role but they can’t control the changing economies.

The scenario looks bad for new homeowners. However, if you can afford to pay in cash and you have set your eye on a property then there’s no harm in going ahead with the purchase.

Prices aren’t necessarily going down in the future. In fact, they may rise once things get normal.