In an effort to prevent the widespread economic contraction which they knew would inevitably follow a global shutdown, the Federal Reserve lowered benchmark interest rates to zero in mid-March of 2021. At the time, mortgage lenders were inundated with rejoicing homeowners eager to take advantage of what they assumed would be rapidly falling mortgage rates. However, not only did those bargains not materialize, mortgage lending has become far tighter in the weeks that followed.

Whether you’ve been thinking about refinancing your home or are a buyer beginning the mortgage process, you’ll find yourself navigating an unusually challenging market. Below are insights into the current lending landscape, along with tips to help you prepare for your own home financing or refinancing journey.

Why didn’t mortgage rates fall along with federal rates?

While mortgage rates are down slightly over a year ago, they are nowhere near the expectations many homeowners and buyers had when rates were first cut in March 2020. There are a variety of reasons for the discrepancy, including the following factors:

Demand went through the roof and outstripped supply.

In order to meet the unprecedented demand that was generated in the days after the Federal Reserve dropped rates, lenders would have needed months to ramp up, staff up, and train new underwriters. Instead, they faced work from home shifts and interruptions to the appraisal and approval processes because of the quarantine. In order to artificially suppress demand, many lenders actually raised rates or stopped taking new applications altogether.

Lenders were on the hook for early payoff penalties.

In cases where mortgage companies sell their loan portfolios to loan servicing companies, the first 6–12 months carry a payoff penalty. In the face of huge numbers of refinanced loans—and equally huge payoff penalties—many lenders put the brakes on new refinancing.

Lenders began reacting to anticipated higher risk.

Uncertainty is the enemy of low rates and easy financing, and COVID-19 has generated unprecedented uncertainty. Lenders are responding to the threat of recession, widespread unemployment, and months without a clear idea of when the economy will return to normal. In addition, they are bracing for loan holders who suddenly can’t pay their mortgage and may eventually go into foreclosure.

In order to avoid further credit tightening, the Federal Reserve subsequently purchased $251 billion in mortgages, helping to alleviate some of the risk to the lenders and bringing rates in line with February levels. Since then, we’ve continued to see rates return to more or less normal. Now, however, much of the contraction in the market is coming from more stringent application and underwriting requirements.

What’s happening with refinancing now?

Refinancing is still very much in demand, though homeowners should consider how much of a bargain they’re really getting. The super-low projected interest rates have not manifested, so it’s a good idea to do the math and consider how much longer you’ll be in the home. In addition, more stringent underwriting may make it tough to refinance for all but the most qualified borrowers.

If you plan to move within the next five years, or if you have any concerns that COVID-related job loss could become a problem for your household, it’s important to hold off on refinancing your current home.

How are new mortgage starts affected?

In order to counteract their risk, lenders are significantly raising requirements for new mortgages. Starting April 14, Chase raised their minimum credit score to 700 with a required down payment of 20%. For comparison, according to the National Association of REALTORS®, the average down payment for first-time buyers was previously 6%.

In order to facilitate the mortgage approval process while still managing exposure, Fannie Mae has released a number of changes to their underwriting guidelines, including:

• Providing flexibility for Powers of Attorney
• Extending the appraisal window to 120 days
• Modifying age of documentation from four months to two months
• Verifying self-employed applicants have a viable business within the prior 10 days
• Offering flexibility for verbal verification of employment
• Extending deadlines for financial statements and records
• Providing expansion of online and remote notarization

While many of these changes are designed to enhance the lender’s protection, others are designed to simplify the process for borrowers, reflecting Fannie Mae and Freddie Mac’s emphasis on returning liquidity to the mortgage market.

What can I do right now to prepare to buy or refinance?

Here are some best practices to help you prepare for the requirements of financing or refinancing your home. While experts disagree on everything from consumer demand to the short-term and long-term economic effects of the quarantine, there are some things you can do to make any process more effective.

Practice patience.

The most important thing you can do right now is to prepare for the unexpected and for unusually long processes. Everything from contacting employers to facilitating no-contact closings will be more complicated in the days ahead. In addition, with different states making separate determinations about when they’re ready to cancel stay-at-home orders, your process will be impacted by where you are, where your property is, and where your lender operates.

Communicate consistently.

Check in with your real estate agent, lender, and any other professionals you’re working with during the process and understand that they are reacting in real time to changes in the markets and in the underwriting requirements. They won’t always have the ability to predict what’s next since things are changing every day, but they are your best resource for understanding and navigating changes as they occur.

Limit additional loans.

It may be tempting to run up your credit card with online shopping during quarantine, but using credit can affect your debt-to-income ratio. Avoid major purchases once you’ve entered into the application process, especially since lenders will be more stringent than usual. With extra high credit score requirements and increased down payments, any big changes to your credit picture could significantly decrease your chances for approval.

While no one can predict what’s going to happen next, solid communication and a focus on the long term can help you navigate the present mortgage moment and prepare for what’s to come.