Wells Fargo and JPMorgan Chase are just two of the big banks that have put a temporary freeze on home equity loans and more may be joining them soon.
May 1st seems to have been the last day these banks took applications and will process those, however new applications are temporarily not being taken due to the current market conditions caused by COVID-19.
The big problem facing many banks is giving home equity loans to homeowners that may not have as much equity after COVID-19 as they had before the crisis. Will existing home prices drop?
When it comes to new home purchases including building loans many mortgage lenders have tightened credit standards as they brace for a surge of delinquencies, defaults and forbearance requests due to the COVID-19 economic slowdown.
Even if you have a steady income and a strong credit record. New home buyers will face even tighter requirements if their hours were cut and credit is weak.
Some mortgage lenders have raised minimum credit score and down payment requirements and stepped up income verification processes.
Many are now requiring a credit score of at least 700 and a down payment of 20% for new mortgages. Before the changes, borrowers might qualify with a FICO credit score in the fair range and a down payment as low as 3%.
A rapid rise in unemployment has caused risk for both borrower and lender. Lenders can make a loan, and then the borrower could unexpectedly become unemployed the next day and within a short period of time be unable to meet their monthly mortgage obligation.
On the bright side, community banks and credit unions are applying the same credit standards they always have for mortgages. The big worry for them is how long they can continue to offer mortgages if their borrowers become insolvent.