Hurdles to Refinancing Your Home Loan During the Pandemic

COVID-19 could impact your mortgage refinance—here’s what to expect

A couple looks over their refinancing documents.

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Mortgage rates have hit record lows several times this year, but refinancing activity has actually declined compared to one year ago, thanks in part to tightening lending standards. 

With high unemployment numbers and economic uncertainty due to the coronavirus pandemic, many lenders are raising the bar on borrower requirements to reduce their risk.

Besides making it harder to qualify, the pandemic also made it more complicated and expensive to refinance. The application, title search, and appraisal parts of the process were more challenging. Most notably, borrowers have been hit with a new “adverse market fee” implemented by Fannie Mae and Freddie Mac to cover their pandemic-related losses. The fee was effective on Dec. 1, 2020.

If you’re considering refinancing your home loan during COVID-19 and the recession, here’s what you can expect from the ever-evolving situation.

What to Expect If You Refinance Now

Unemployment surged due to the pandemic, and many Americans have lost wages or jobs entirely. As these trends continue, borrowers are more prone to falling behind on their mortgages or, worse, defaulting altogether.

This was the case during the financial crisis more than a decade ago when the rate of foreclosure starts quadrupled.

To offset this extra risk, lenders are adopting stricter lending standards, requiring high credit scores, larger down payments, and extra employment checks, among other things. According to Steve Kaminski, head of U.S. residential lending at TD Bank, lenders are getting particularly strict with cash-out refinancing options.

“The economic impact of COVID-19 has caused many lenders to take steps to reduce repayment risk for all types of loans, particularly for cash-out refinance transactions at higher balances and loan-to-value [LTV] ratios,” Kaminski told The Balance in an email. “Borrowers may be asked to take extra steps, such as verifying employment again closer to their closing date or making sure documents to verify income are more current.”

Here are some of the ways refinancing may be harder during the pandemic.

Higher Credit Scores

Most lenders have begun requiring higher credit scores amid COVID-19. According to the May 2021 Housing Finance at a Glance Chartbook from the Urban Institute, the median FICO score of a mortgage borrower is 745. As the report explains, “Access to credit remains tight, especially for lower FICO borrowers. The median FICO for current purchase loans is about 45 points higher than the pre-housing crisis level of around 700.”

Lenders are even raising credit limits on Federal Housing Administration (FHA) loans, which technically allow for scores as low as 500. According to data from mortgage technology provider ICE, the average score on an FHA refinance was 670 in April 2021. That’s up from 660 in February 2020, before the pandemic. Across all types of refinances, more than 65% of all borrowers had a score of 750 or above in April 2021. 

Additional Fees

Refinancing also comes with a new fee. Called the Adverse Market Fee, it will amount to 0.5% of the loan amount (as long as the loan is $125,000 or more). 

Though this fee will technically be paid by mortgage lenders, it will be passed down to borrowers through higher interest rates and other fees. The fee took effect on Dec. 1, 2020.

Fewer Cash-Out and Jumbo Options

As Kaminski noted, cash-out refinances are harder to come by in light of the pandemic. With cash-out refinances, which allow borrowers to take out a larger loan and then keep the difference in cash, lenders face extra risk.

As a result of tougher rules from secondary mortgage market makers that buy and bundle individual mortgages, borrowers may come across lenders that have reduced their cash-out offerings or eliminated them altogether.

Jumbo loans (loans above $548,250 in most U.S. counties) were also more difficult to find in the pandemic-influenced market. Jumbo loans are more available now, but they haven't returned to pre-pandemic levels.

Possible Delays Along the Way

The pandemic slowed down many parts of the mortgage process, and refinance loans are taking significantly longer than usual to process. In April 2021, the average refinance loan closed in 53 days. That’s up from 45 days in December 2019.

According to an analysis from the Brookings Institution, the pandemic might delay any or all of these steps in the process:

  • Title search: This requires access to public records offices that may have been closed in certain areas.
  • Employment verification: This could be hindered by remote work arrangements, making it hard to reach employers and HR departments. Some lenders might require extra layers of verification as well.
  • Appraisals: Appraisers may be less inclined to enter properties, given the health crisis.

The exact delays will depend on the lender and jurisdiction of the home, but data from ICE shows that closing times for refinances have been on the rise since the start of the pandemic in March 2020.

Self-Employed? More Document Requests Possible

With unemployment high and pandemic-related layoffs common, lenders may also require extra documentation, particularly regarding a borrower’s income and employment. This is especially true for self-employed borrowers, whose income is sometimes more difficult to verify than it is for traditional W-2 employees. 

In summer 2020, both Fannie Mae and Freddie Mac instituted extra documentation requirements for self-employed borrowers.

“Self-employed professionals should be prepared to provide income documentation, such as business account statements and unaudited year-to-date profit and loss statements,” Nilay Gandhi, a senior financial advisor at Vanguard, told The Balance in an email. “Like W-2 employees, lenders are looking to verify that the homeowner can make their payments on time, and [the lender] will prioritize credit history, business stability, and income.”

Lenders will also be looking to make sure business accounts are consistent with profit-and-loss statements and that the borrower’s income is stable, so be prepared if this applies to you.

You Might Be Communicating Digitally

Because many workplaces transitioned to operating remotely, including mortgage lenders and other vendors involved in the refinancing process, communications during a refinance are most likely to be “contactless,” often via email, phone, or through some sort of internal portal.

“The first thing you have to come to grips with is that during a pandemic, most people are working from home, which means you can't always count on reaching them over the phone,” Domingo Perez Jr., a real estate agent with Warburg Realty, told The Balance in an email. “Most correspondence happens via emails. This can make it seem like it’s all moving at a snail’s pace, so you'll have to be persistent and patient."

How Can You Make It Easier?

Though refinancing will be more challenging during the pandemic, there are ways borrowers can ease the process. According to Kaminski, talking to a lender is the first step.

“Borrowers will have a better experience if they enter the process with appropriate expectations,” Kaminski said. “They should speak with a lender early in the process to understand what they can expect when it comes to documentation requirements, loan options, and timing.”

Checking your credit report and fixing any errors is also a good move, experts say, and getting your documents organized and ready is key.

“Make sure you've created a digital folder on your laptop where you'll place all your financial statements, checking, savings, retirement funds, pay stubs, and tax returns ready to send at a moment’s notice,” Perez Jr. said. “Make certain they are the most recent across the board. Think as recent as this week.”

Despite the challenges it may come with, it’s still a smart time to refinance. Mortgage rates are among the lowest they’ve ever been.

New Programs Could Help

Fannie Mae and Freddie Mac are rolling out programs to make refinances more readily available to low-income borrowers. The programs include:

  • A requirement that lenders provide a savings of at least $50 per month on the borrower's monthly mortgage payments, and at least a 50-basis point reduction (0.5%) in interest rate
  • Up to a $500 credit from the lender to cover the appraisal if the borrower isn't eligible for an appraisal waiver
  • A waiver of the adverse market fee for borrowers with a loan balance of $300,000 or less

To qualify, borrowers must:

  • Have a home loan backed by Freddie Mac or Fannie Mae
  • Have a single-family, owner-occupied home
  • Have an income at or below 80% of the area median income
  • Not have missed a payment in the past six months
  • Not have missed more than one payment in the past 12 months
  • Have a mortgage with a loan-to-value ratio of less than 97%
  • Have a debt-to-income ratio below 65%
  • Have a FICO score of 620 or higher

Fannie Mae's program is called RefiNow, and it was available as of June 5, 2021. Freddie Mac's program is called Refi Possible and will be available in August 2021.

Key Takeaways

If you're considering a refinance:

  • Get a good handle on your credit picture.
  • Talk to a lender.
  • Gather your financial documents.
  • Work on improving your credit score or taking on a side gig for extra money—both could make the process easier once you apply.
  • Remember that lenders are trying to reduce risk, so any step you can take to improve your financial health and stability will only help.