Here Come the Overlays…

Here Come the Overlays…
Here’s a staggering statistic: There are roughly 160 million people that make up the workforce in the United States. Prior to the coronavirus, the unemployment rate was 3.5%, which represented about 5,000,000 people. Over the last 3 weeks we have had 22,000,000 first-time unemployment claims filed. That puts the national unemployment rate at just under 17%. If another 5 million people file next week, we will leap past the 20% unemployment mark. We have not seen those numbers since the Great Depression of 1929-1930.

In Hawaii, it is much worse. Our workforce measures around 660,000. The latest statistic shows 237,000 people have filed first-time unemployment claims since the government mandated shutdown. That would put Hawaii’s unemployment rate at 36%.

As you can imagine, the staggering unemployment not only affects the person not collecting their wages, but the ripple effect throughout the economy is huge. Without that influx of money, landlords can’t collect rents and the millions of the self-employed are not having their goods and services utilized either. Consumer spending makes up 70% of our economy. It is what drives the economic engine in the US.

If you have any thoughts of mortgage financing, Fannie Mae, Freddie Mac, and individual lenders have placed “overlays” onto the rules for lending. Overlays are restrictive rules placed over guidelines already in place that govern underwriting a mortgage loan application. Every day, we originators, are getting more and more notices of how lending will be affected by this cavern in our economy. Below are some of the new guidelines put in place. Many are not universal, so it is important you check with your lender of choice to see if your financial situation and your ability to borrow is impacted by their proprietary overlays.

If you have been furloughed or lost your job, you can’t use your past income to qualify, nor can you use unemployment compensation. Lenders are now calling to verify your employment prior to wiring the funds to escrow. If you’re refinancing to lower your monthly nut, get it done ASAP before you lose your job. If you are buying a home and will lose your job, maybe now is not the right time to buy.

If you’re self-employed, lenders are going to check before they release their funds if your business is still operating. If, like in Hawaii, we have a stay at home order, you’ll have to show proof that your business can operate while our state is locked down.

If you receive rental income on investment properties from short-term vacation rentals, you can no lender use that income to qualify. If you have long-term tenants, you can still use that income. Some lenders will require you to have additional liquid reserves for these properties, others will require you show proof of the most recent rent payment in order to use that income. If you don’t have proof of that rent payment, they will lop off 25% of the gross rent taken from your most recent tax returns.

Some lenders are increasing the reserves required. Typically, you don’t need any reserves for your primary residence. For a 2nd home you’re required to have 2 months of reserves. For investment properties, you are required to have 6 months of reserves. This week we received notice from one large national lender that they are requiring 3 months of reserves on your primary and adding 6 additional months on top of those required for 2nd homes and investment properties.

The takeaway from all of this is that every lender is handling the economic situation differently. I cannot stress that while “whose got the lowest rate” is important, the criteria of greater importance is “will they come through with the financing?”