Hitting a seven-year high, more than 1.3 million homeowners refinanced their home mortgage throughout the first 3 months of 2020. Primarily, this was triggered by low-interest rates. Particularly, rates on the 30-year fixed home mortgage loans have progressively dropped from 3.5% in late March to 3.07% recently. Despite this fact, numerous banks and lenders were initially overwhelmed and couldn’t handle the influx of refinancing applications.
In general, many homeowners were enjoying record levels of home equity while dealing with financial unpredictability as the pandemic began rattling the nation earlier this year. This triggered homeowners to apply to refinance their home mortgage with their lenders. Predictably, this pattern has continued into July. Currently, refinance activity is 74% higher compared with this time in 2015, according to the most recent Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey.
Overall, today’s low mortgage rates provide borrowers a possibility to save money by refinancing their home mortgage. However, as explained below, loan providers have made it harder to qualify amid the Coronavirus (COVID-19) pandemic.
It’s Harder for Homeowners to Qualify for Re-financing.
Several lenders have tightened up borrower requirements such as, decreasing the required loan-to-value (LTV) ratio to 70% in cash-out refi and increasing FICO score minimums for all refinanced home loans.
Likewise, the two biggest purchasers of home mortgages on the secondary market, Fannie Mae and Freddie Mac, have stiffened requirements for self-employed borrowers. They now require a current audited profit-and-loss statement, showing income, expenses, and earnings along with the last two business deposit statements. A certified accountant should be able to help self-employed individuals navigate these tighter requirements.
The current credit crunch by lenders is a direct result of the uncertain financial outlook spearheaded by the Coronavirus (COVID-19) pandemic. The Department of Labor reported there were approximately 1.4 million unemployment claims during the last week of June. As such, the lender will likely keep their standards tight at least until there is a sign of stability in the financial markets and/or a proven COVID-19 vaccine is developed.
How to Get the Lowest Mortgage Rate?
With all that being said, the good news is that it’s still a good time to refinance if you can qualify. The most effective tool borrowers have in obtaining a lower home loan mortgage rate is increasing their FICO score. Below are a few points to remember.
Correct your payment history over time. If you frequently pay your charge card, home loan, car loan late (30 days past due), this will have an unfavorable effect on your credit rating. The minute you begin making on-time payments, you will be on the road to increasing your FICO score, albeit it won’t happen immediately but over time.
Installment loans (such as automobile loans) do not have the exact same negative impact on your credit score as high credit utilization on credit cards. Therefore, keeping your credit card balance under 30% is the best way to increase your FICO score. This is true even if you pay your bills timely.
Lastly, don’t make the costly mistake of closing credit accounts. Keeping accounts open will assist you in building a credit report, which is 15% of your FICO rating. Just pay off or down the balance and keep the cards active. This will likewise increase your debt-to-income ratio.