Homebuyers Confront Credit Crunch as Coronavirus Puts Lenders on Edge

Nearly half of all Americans financed their home purchases with down payments of less than 20% last year, according to a new analysis by Redfin, Seattle.

And as the coronavirus pandemic sends shockwaves through the U.S. economy and banks fight financial uncertainty with tightened mortgage lending standards, roadblocks have been created for house hunters hoping to lock down home loans.

Redfin noted the Mortgage Bankers Association’s Mortgage Credit Availability Index fell by 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. Redfin said 25% of its loans written 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,” said Redfin senior economist Sheharyar Bokhari. “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.”

Redfin said 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 as well, as JPMorgan Chase and Wells Fargo have raised their credit score minimums to 700 or higher and began requiring applicants to have enough savings for a 20% down payment.

“As unemployment continues to skyrocket and more homeowners default on their mortgages, other banks may follow suit,” Redfin said.

Redfin 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. 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.

For example, Redfin said 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. Camden, N.J., came in second, at 58.5%, followed by Washington, D.C., at 58%.

“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.”

The report can be accessed at https://www.redfin.com/blog/stricter-mortgage-lending-requirements-impact-homebuyers.