U.S. unemployment swung from a 50-year low in February to 4.4% in March 2020, which reflects a huge jump in newly unemployed people. Unfortunately, most unemployment is the product of layoffs caused by the COVID-19: 10 million people applied for benefits in the last two weeks of March alone.
With so many people now either unemployed, at risk of unemployment, or facing a reduced income, the real estate industry and housing market is deeply impacted. Not only are people unable to pay their existing mortgage payments, but new applications are already being met with speculation.
However, Fannie Mae and Freddie Mac guidelines are changing to accommodate the changing employment landscape. Are the Freddie Mac and Fannie Mae loans relaxing, and if so, why? Here’s what you need to know if you are looking to become homebuyers throughout these unsettling times.
Employment Verification Standards Are Tightening
On March 31, Fannie Mae and Freddie Mac announced that they would offer certain “loan processing flexibilities” as well as tightening lending standards for home buyers coming to them in the immediate future.
One of the big changes is surrounding buyers’ origination of income and assets. In the past, applicants needed to provide proof of income, a solid credit score, and their assets with documents dated within 120 days of the mortgage loan note. It must now be dated no more than 60 days. In other words, you need to still have your job to apply, even if you have the down payment and other assets.
The check also applies to self-employed people. Until March 31, self-employed applicants needed to provide proof of the business and income with documents dated no more than 120 days before the note date. The Fannie Mae guidelines are now 10 days. You must be actively earning to qualify for a down payment.
Even if you’re relying on stock options, stocks, or funds as proof of assets, you may be impacted. Stock market volatility prompted Fannie Mae to provide evidence of the borrowers’ receipts of funds if they are using them as down payments or closing costs. If you want to use your stock as reserves, Fannie Mae says lenders may only count 70% of the value of the asset.
Is there any good news? If you’re an essential worker and you’re still receiving your full paycheck, then you may still be able to borrow for a home loan. For now, you can provide a recent pay stub instead of the traditional employment verification. Your pay stub, however, must immediately precede the mortgage origination. You can also provide bank statements that demonstrate your direct deposit from your employer and proof of a good credit score, but again, they must be from the pay period that precedes the note date.
How Long Do the New Employment Standards Apply?
The new employment verification requirements (“temporary credit underwriting requirements”) apply to mortgage applications on and after April 14, 2020, and apply until May 17, 2020. However, lenders have the right to apply the new standards to existing applications that are still in process.
Appraisal Standards Are Less Stringent
Employment and asset standards are and will be exceptionally tight for the better part of April and May. What’s more, the new regulations may continue for some time as the situation progresses.
Yet, the Federal Housing Finance Agency and the Appraisal Standards Board (ASB) are making some of the Uniform Standards of Professional Appraisal Practice (USPAP) less rigorous. New flexibilities for real estate appraisals will include:
- New appraisal report instructions for desktop and drive-by appraisals
- Alternatives to the Completion Report on new builds (desktop and drive-by)
- Flexibility for providing documentation instead of inspections for renovation draws
- Expanding the use of remote online notarizations
- Expanding the use of power of attorney
These new rules are good news for both appraisers working in the field and home loan borrowers who are at the tail end of their mortgage or loan process and are waiting on their appraisal report. The rules will speed up home loan closings and ensure that those involved in these sales can practice social distancing. They also guide an appraiser who is dealing with a lender or builder who won’t allow
However, the new rules don’t apply to every conventional loan and appraisal. If you’re hoping for a cash-out refinance, you can only use a traditional appraisal if the home loan isn’t Fannie Mae-owned. If you’re looking for a limited cash-out refinance and your loan is Fannie Mae-owned, then you may qualify for an exterior-only appraisal. However, the traditional appraisal is still the preference.
What Do the Fannie Mae and Freddie Mac Guidelines Mean for Buyers?
Millions of Americans were on track for homeownership when the COVID-19 outbreak hit the U.S. in earnest. The new Fannie Mae and Freddie Mac guidelines make it more difficult for those who haven’t applied yet to buy while also simplifying the processes required for existing and approved applications to close.
What does all of that mean this year? Should you go through with the purchase?
Unfortunately, no one knows what the next few months will bring, or whether the impact COVID-19 will even reach its peak by then. The economic uncertainty is, in some ways, similar to what happened in 2008, and some people believe this is an incredible buying opportunity. Interest rates are low, and there will be the potential that housing prices could drop in some more expensive locales, too.
Buying right now could provide you with stable housing payment, low-interest rates, and the opportunity to eventually use mortgage relief if your employment lapses. None of these opportunities are available to those currently renting. You may not even need to refinance later if you get the right rate.
However, there is always the risk of buying now, and watching the value of the house slowly decreases over the next year, particularly in places where buyers are already run the risk overpaying for the property.
Ultimately, the decision is up to the individual homebuyer and their risk appetite. If you have a stable job in an in-demand and essential industry and you were just about to put a down payment on a house, then you probably stand a better chance of acquiring some real estate successfully. All other home buyers should proceed with caution – just as the lenders are.