Refinancing During the Pandemic is Possible, It Just Looks a Little Different
Mortgage rates continue to fall to record lows, spurring many homeowners to begin refinancing their home loans. On May 18th The Mortgage Reports stated, “Mortgage rates in the 2s are here. And we’re not talking about a one-time instance of 2.99%, either. We’re talking about real, 30-year, fixed-rate mortgages starting at 2.5% from multiple lenders.”
Homeowners interested in moving forward with a refinance need to understand that the process looks a little different than it did prior to the pandemic.
If you want to refinance, you’ll have to wait in line because the rush to refinance has created a considerable backlog. USA Today reports that “During the first week of March, refinancing applications reached their highest level in nearly 11 years, and jumped 79% week over week, the largest leap since November 2008.” The rush to refinance has created a backlog that’s overwhelming lenders.
With the Federal Reserve cutting borrowing costs to near-zero, you can expect the refinancing backlog to continue. Homeowners that want to take advantage of low rates shouldn’t wait to start the process since many banks are trying to process loan applications in the order that they came in.
The four main areas of the refinancing process that face pandemic related changes are title searches, the application process, the appraisal process, and the closing process. Note that the differences you’ll experience with the refinancing process will vary geographically.
Title searches are done by lenders as a way to ensure their investment. A title search allows your lender to verify no liens or judgments have been placed against you since the time you received your original loan.
- The search process gets complicated: Some government offices are closed making the title search process challenging. Many of the closed jurisdictions are allowing titles up until the date of their closure to be searched online but other jurisdictions without access to electronic searches cannot offer title searches at all, meaning the borrower cannot refinance.
- Notarization moves online: A notary public is needed to authenticate signatures as a part of a standard title search. Several states are allowing Remote Online Notarization (RON) either by way of legislation or emergency orders. The process is completed entirely online and requires no direct contact. After verifying the signer’s identity, electronic signatures are obtained, the document is notarized remotely, and returned to the signer.
In cases where using RON is not possible, title companies are obtaining signatures with limited contact. Joe Gentile, president of Federal Title & Escrow Company, told WTOP News, “We’ll leave [the document] on their doorstep and step back to our car, and have them come outside and sign it so we can see them sign it. Then we have them leave it outside and we grab the document, having witnessed the signature so we can notarize it.”
Typically, when you apply for a loan, the potential lender will check your credit score and your employment status to protect themselves against the possibility of loan default. In normal times, these procedures are pretty straight forward, but in the uncertain financial times of COVID-19, the procedures have become stricter.
- Credit score minimums have risen: FICO scores help lenders determine how likely it is for a borrower to return a loan. Typically speaking, the higher the FICO score, the lower the risk to the lender and the more likely the borrower is to receive a loan. FICO scores range from 300-850; with 800 and above considered exceptional and 579 or less considered poor.
Normally, to qualify for a conventional mortgage, lenders require a FICO score of about 620. The article Mortgage Standards Get Tougher as Banks Face Greater Risks notes, “What has changed is that investors, in the face of epic uncertainty, have put pressure on banks to restrict their loans to only the most creditworthy borrowers.”
The Bank of America and JP Morgan both now require credit scores in the 700’s. And homeowners refinancing to pull cash from their equity will find, in addition to needing a higher credit score, that some banks’ loan-to-value ratio has been reduced by 5% compared to pre-COVID-19 ratios. This is due, in part, because of the strain mortgage companies are experiencing as a result of government relief programs granting homeowners forbearance as a result of COVID related financial hardship.
- Employment verification: The surge in unemployment since March has resulted in lenders taking extra steps to verify current work status for potential borrowers including homeowners looking to refinance. While lenders are accepting verbal verification of employment, this can often be difficult to obtain because many offices and businesses are closed.
If verbal verification can’t be obtained, some lenders are accepting emails from the employer’s work address along with pay stubs for the year to date of the pay period directly preceding the employers note.
Once verification has been obtained the application process can move forward. However, borrowers should expect a reverification just before their closing date.
- Length of the process: Although the length of the refinancing process varies by lender and in relation to each borrower’s unique situation, a typical refinancing takes between 20-45 days. You can expect the entire refinancing journey during COVID-19 to take a bit longer than usual given the additional challenges at nearly every step of the process.
Appraisals are completed by an independent licensed or certified professional to determine your home’s value, to protect the bank from lending more than your home is worth. Typically, appraisals are determined by a combination of the value comparable homes in the area and an onsite inspection of your home. The onsite assessment of the home is providing unique challenges to the refinancing processes during COVID-19.
- Appraisal waivers are possible: For low loan-to-value refis, Fannie Mae and Freddie Mac offer appraisal waivers, referred to respectively as Property Inspector Waivers and Automated Collateral Evaluation.
- Desktop appraisals can be completed remotely: Your lender can tell you if you qualify for a desktop appraisal. If you do, your appraiser will use comparables, basic research, MLS listings and public records to determine the value of your home. These appraisals may also include video conference interviews with you to virtually tour your home.
- Exterior appraisals may also be completed: Your lender can tell you if you qualify for an exterior appraisal, although relying on this alone is rare. More likely, your appraiser will use an exterior appraisal in conjunction with their desktop research. As you might expect, exterior appraisals, also referred to as “drive by appraisals” involve the appraiser viewing the exterior of your home from the street or sidewalk.
The closing process for a refi usually involves a lender representative, yourself and occasionally a notary public. During the meeting you are presented with the final documents and terms for the loan and provide your signature to indicate your agreement to those terms. Understandably, closing proceedings have been forced to change due to COVID-19.
- Closings involve less people and less contact: Similar to the title search process, lenders are using Remote Online Notarization to complete the notarization portion of the closing process. Your lender will have information about whether in person or online closing procedures are possible for you in your area.
When closing does have to be done in person, it is typical for the proceeding to happen at your home. Lending companies should be following CDC guidelines for social distancing and the use of personal protective equipment (PPE). You can expect to forego handshakes and plan to use your own pens to limit contact between you and the lender’s representative.
- Clean closing rooms may be an option: Some lenders, recognizing that homeowners may be uncomfortable hosting strangers in their homes during these unique times, have created “clean rooms.” For the Williston Financial Group that means using a room in their offices, which are otherwise closed, for the sole purpose of closings. They’re referred to as single-use clean closing rooms and are disinfected between each use.