As the coronavirus pandemic sends shockwaves through the U.S. economy, banks are fighting financial uncertainty with tightened mortgage lending standards, making it harder for house hunters to get their hands on home loans. The Mortgage Credit Availability Index—a gauge of how easy it is to obtain a home loan—tumbled 16% in March to the lowest level in five years, as banks grew wary of more borrowers requesting delayed payments (forbearance) made possible by the government’s stimulus program. An estimated 25% of the loans written by Redfin Mortgage last quarter may not have been possible to originate under the new standards, as the investors who buy the loans have become more selective about what they purchase.
“Thousands of Americans who were priced out of the housing market due to the affordability crisis of the past decade might finally see homeownership as within reach, especially given historically-low mortgage rates. But unfortunately, they are now faced with another roadblock and may not be able to get a loan,” Redfin senior economist Sheharyar Bokhari said. “Home equity is the primary way for Americans to build wealth. It’s important that policymakers address this tightening of credit, as it has raised the barrier to homeownership.”
At the high end of the market, banks have begun to retreat from jumbo loans, which are regularly used for purchases of more expensive homes. But, average borrowers are also being squeezed. Earlier this month, for example, JPMorgan Chase raised its credit score minimum to 700 and began requiring applicants to have enough savings for a 20% down payment. Similarly, Wells Fargo is reportedly shying away from riskier loans for borrowers who are unable to provide down payments of 20% and increasing its FICO-score requirement to 680. As unemployment continues to skyrocket and more homeowners default on their mortgages, other banks may follow suit.
Nearly half of all Americans financed their home purchases with down payments of less than 20% last year, according to data compiled by Redfin. For this report, we analyzed the 50 largest U.S. metropolitan areas to determine the share of homeowners in each who bought a home with less than 20% down in 2019. Because lenders are beginning to restrict specific types of credit, the table below also shows the percentage of home sales in each metro that were financed using Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans and jumbo loans.
One might assume that homebuyers would need to take out larger loans in more expensive areas. Yet, the regions where housing is more affordable saw a higher share of home sales financed with less than 20% down, indicating that in general, higher down-payment thresholds enforced by lenders could disproportionately impact Americans in lower-income communities. Nine of the 10 metros where homeowners were most likely to opt for sub-20% down payments last year had median sale prices below the national level of $348,809. Six of those 10 were on the East Coast.
In Virginia Beach, 70% of home sales were financed with a down payment of less than 20%—the highest share of the top 50 metros. This is because the region has a large presence of military employees, many of whom take out VA loans that don’t require down payments, said local Redfin agent Jordan Hammond. Camden, NJ came in second place, at 58.5%, followed by Washington, D.C., at 58%.
VA loans are holding up relatively well in Virginia Beach, but not all types of credit are, Hammond said, noting that some clients are having trouble securing FHA loans as lenders raise standards.
FHA loans typically cater to first-time homebuyers with more modest budgets and lower credit scores, and also have among the highest forbearance rates, which is why they’re considered relatively risky from a lender’s perspective, Bokhari explained. The Mortgage Bankers Association said this week that 10% of FHA loans are in forbearance. The share of FHA borrowers with a credit score below 640 recently dropped to 16% from 30%, according to a report by the American Enterprise Institute, indicating that FHA lenders are increasingly shunning buyers with lower FICO scores.
Of the metros we analyzed in this report, Camden, NJ had the largest share of home sales financed with FHA loans last year (30.7%). Riverside, CA and Detroit rounded out the top three, both at about 25%.
Michael Kowalski, a Redfin agent in New Jersey, said one of his clients was recently denied an FHA loan after going under contract on a $370,000 home in Lyndhurst, NJ. When the buyer applied for the loan, his credit score was above the required level, but because the lender still hadn’t submitted the application to the government by the time threshold had increased, the client’s loan request was denied.
Hammond, the Virginia Beach agent, said one of her clients had been approved for an FHA loan but was then furloughed four hours before he was scheduled to sign the papers for his new home. Because he was unable to show the lender proof that he’d be able to return to his job, he was forced to back out of the deal.
“It’s not just Americans in relatively affordable areas like Virginia Beach who are bearing the brunt of tighter lending standards,” Bokhari said. “Buyers at both the low and high ends of the market seem to be having the most trouble getting loans right now, leaving the middle of the market relatively unscathed.”
Jumbo loans have been among the hardest hit, with some lenders halting them entirely. This type of credit, often extended to buyers who need to borrow more than $510,400 (or more than $765,600 in many high-cost areas), can be considered risky because it’s not guaranteed by Fannie Mae or Freddie Mac. The Mortgage Credit Availability Index tracking jumbo loans tumbled 37% last month, compared with a decline of just 2.7% in a benchmark that follows conventional loans.
Of the 10 metros with the highest share of jumbo loans last year, eight were pricey regions on the West Coast. San Francisco, the most expensive metro in our analysis, had the highest share of home purchases funded with jumbo loans, at more than 50%. That compares with just 5.5% of home sales nationwide. San Francisco also had the lowest share of home sales financed with less than 20% down, which makes sense, as jumbo loans require down payments of at least 20%.
“COVID-19 has significantly impacted the lending industry in many ways over the past few months and jumbo loans have been one of the first products taken off of the shelves,” said Redfin mortgage adviser Katie Bradner.
One Redfin customer in Maryland had planned to complete their home purchase on April 13, but the closure of the $2.2 million deal has been postponed because the lender began taking longer to review applications for jumbo loans. Ari Musliu, the Redfin agent representing the buyer, said the repercussions of this funding setback have spread beyond just his client.
“This delay has had a domino effect,” Musliu explained. “My clients are buying a home from sellers who are also buying a home from sellers who are also buying a home, so it’s a three-home deal.”
Another Maryland Redfin agent, Dan Borowy, had to put a home he’d nearly sold back on the market after the buyer’s funding fell through at the last minute. The buyer had been approved for a non-qualifying mortgage loan—a type of credit extended to borrowers who don’t meet typical lending standards, such as those who don’t collect regular paychecks, like the self-employed. Borowy’s client, the seller, was on the way to the deal closing when the buyer got a call from her lender saying they could no longer fund the deal because investors had stopped buying this type of loan.
“When a loan is cleared to close, it closes 100% of the time. This time, it did not,” Borowy said.
Redfin analyzed county home-sale records from the 50 most populous U.S. metropolitan areas that had more than 10,000 home sales in 2019. We excluded the New York, NY and Nassau County, NY metro areas due to a lack of complete data. The national sale price figure is the average of the median sale prices from the top 50 metros.
