When the coronavirus started making its way across the United States, many industries had to change they way they do business. In the real estate industry, the massive financial uncertainty created by the national lockdown caused many lenders to slash their mortgage products. High-risk loans, such as jumbo loans, were completely shut off by certain lenders, while others drastically increased the qualification requirements.
But, so it seems, the country is starting to recover. We are learning to adapt to a new form of “normal,” and businesses have adjusted their daily routines, allowing them to serve customers once more. Restaurants, for example, are beginning to reopen with limited capacities, distancing requirements, and other adjustments that let them conduct business in a safe manner.
The steady economic recovery and increasing confidence has allowed the real estate industry to reopen certain products. Many products that were pulled around March, 2020 are now starting to come back. As more people are returning to work, jumbo loans, bank statement loans, asset-based qualification, and loans for second homes are all being reopened.
This is exciting news, both for people in the real estate industry and people who want to enjoy the benefits of these useful mortgage products!
Mortgage Products are Coming Back!
Jumbo Loans Down to 680 Credit Score
When the COVID-19 scare began, one of the first loan products to be pulled from the shelf was jumbo loans. A jumbo loan is simply a mortgage that is above the level allowed by Fannie Mae and Freddie Mac; if you need $2 million to purchase a luxury home, you’ll likely use a jumbo loan.
Jumbo loans are inherently risky to the lender, as they are not supported by any financial or government institution and, by definition, are made of higher amounts. If a borrower defaults in a conventional loan (non-jumbo), the lending institution is not really impacted, as the amount is less and the loan has likely been sold on the secondary market. But on a jumbo loan, the total amount is higher and the lender keeps the risk of default; for this reason jumbo loans have higher downpayment requirements and higher interest rates, which help compensate for the statistical risk assumed by the lender.
Frightened by the financial risk created after the COVID-19 lockdown, mortgage companies immediately pulled jumbo loans. But as the recovery has begun (and we all hope will continue), lenders are now able to offer these loans once again. As of writing this article, you can secure a jumbo loan with a credit score as low as 680, which is considered a “good” score by Experian. So if you qualify on other factors (income, debt ratio, etc.) and have a solid credit score, you can once again use a jumbo loan for the purchase of a high-end luxury home.
Bank Statement Products
Another product that was pulled from the market when COVID-19 came to the U.S.A. was bank statement loans. These loans use a different path towards qualification than a traditional mortgage product. Instead of using typical income documents like tax returns and paystubs, these loans are based on a borrower’s bank statement, using this financial information to qualify the loan.
These loans can be useful for borrowers who are self-employed, as these types of professionals usually earn an inconsistent income, even if that income is extremely high. They may earn $2,000 one month, then $30,000 the next. Paystubs, in this case, are not a reliable source of information. Also, many business owners use tax write-offs to boost their profits; this practice can make tax returns unreliable, as the stated numbers may not accurately show their total earnings.
But for a variety of reasons, bank statement loans can have higher risk, so they were pulled when COVID-19 became reality. But they are now available once again.
Acceptable deposits for business bank statements will be adjusted by a profit factor, but self-employed borrowers must own at least 50% of the business. It can be combined with wage or secondary earnings, and the most recent 12 months of bank statement data will be used. You’ll need to bring last year’s profit & loss statement, and you can use multiple bank accounts for qualification.
Assets for Income Products
Some borrowers may not have a large income (or a typical income), but instead have multiple assets, often worth millions, that can help them qualify for a loan. In this case, the traditional methods of income qualification will not be useful, and we need to instead look at assets.
Retirees and business owners are two groups that are often wealthy with assets despite not having a large or consistent income. Fortunately, there are mortgage products that can use these assets for qualification, but these were also pulled in the early spring. But like many other options, they are now returning to the market.
To help borrowers get qualified, lending professionals use a formula based on the total assets, downpayment, closing costs, and other factors. The calculations will also take into account your age and other important factors.
Loans for second homes are also risky compared to traditional lending. While there are statistics and figures that can support this notion, the basic principle is simple. Suppose someone owns two properties, a primary home, where their family lives, and a secondary home, where they go on vacation. Now suppose that person, who has mortgages on both properties, comes across financial difficulty. Because of money problems, they can only make one payments on one property: the primary home or the vacation house.
Which would you make payments on? Like most people, you would likely protect your personal home and, if no other option exists, let the vacation home go into default.
This risk caused lenders to pause many loans for single homes, but they are not returning to the market, creating new options for borrowers who wish to purchase a second home for work or play.
Using Common-Sense Underwriting During You Application
We would love to help build your future! Contact our staff today to learn more about returning mortgage products like jumbo loans, bank statement loans, and loans based on personal assets.