How mortgage applications have changed during COVID-19

Homebuying is a complicated journey no matter what's going on in the world, but buying a home or refinancing a mortgage during COVID-19 can feel a bit overwhelming. How do you apply for a mortgage when you're concerned about following social distancing or lockdown requirements?

Luckily, there are now banks offering online mortgage application options like Scotiabank's eHOME, an online mortgage hub, the impact of the Coronavirus on applying for a mortgage isn't as significant as you might think. In fact, applying for a mortgage during COVID-19 has become more streamlined with more online options to do so. You can now complete your mortgage paperwork in your pajamas before hopping onto a Zoom meeting or heading out for a midday stroll.

One thing that has changed is how to navigate qualifying for a mortgage. With many people experiencing unstable employment since the pandemic hit, you might wonder if that will make it more difficult to apply or qualify for a mortgage now or in the future. We’re here to provide both homeowners and homebuyers with the answers to their pressing questions about COVID-19 and mortgages.

There are all sorts of ways that COVID-19 has impacted mortgages. Right after the crisis hit, many banks like Scotia offered mortgage deferral program as part of their COVID response to help their customers who were experiencing financial hardship due to sudden unemployment. This allowed customers to defer payments of their mortgage without it impacting their credit scores. 

Online mortgage applications were another way that banks adapted to the ongoing COVID-19 crisis. While many banks already had online mortgage application processes in place, the COVID-19 crisis fast-tracked or streamlined their online application offerings. This has made applying for a mortgage both safer and faster.

For example, with Scotia's eHOME, you can be pre-approved, search for a home, and get a mortgage approval all in one place. That means you can complete your application when it's convenient for you rather than having to visit a branch for an appointment. As well, there are mortgage specialists you can connect with who can answer your questions in real time.

By getting your pre-approval before you begin your home search, you will also have a better idea of what you can afford. This way, you’ll have more time to focus on finding the home that's right for you and that’s within your budget.

One way that it might be more complicated to borrow in a post-COVID world is if you're self-employed and have experienced income disruption or had cash flow issues related to the pandemic. Many people who freelance or own small businesses saw much of their income reduced and have taken months to financially recover. Since mortgage lenders consider average tax returns from the last two years when lending to freelancers or entrepreneurs, COVID may impact amount that you can borrow over the next two years.

If you were laid off or began a new job at some point throughout the pandemic, there may not be as big of an impact on your ability to borrow. Typically, lenders look at your current income when adjudicating eligibility.

That said, a disruption in your income during the pandemic might have changed how much you're able to contribute towards a down payment. If that's the case and you're unable to put a minimum of 20% for down payment towards your new home, mortgage default insurance will be required for your mortgage. Your lender will automatically factor the cost for that mortgage default insurance into your mortgage amount or alternatively, could ask to make the payment in the form of a lump sum.

Another factor that might impact your mortgage application include the recent changes the CMHC made to its criteria for mortgage default insurance.  Mortgage default insurers provide mortgage default insurance that is mandatory when the down payment of less is than 20% of the purchase price of a home.

As of July 1, 2020, the following criteria were changed**:  

• The borrowers' gross debt service ratio must be under 35% – instead of 39%.
• The borrowers' total debt service ratio must be under 42 – instead of 44%.
• The borrower's credit score must be a minimum of 680 – instead of 620.
• Borrowed down payments are now prohibited

These measures were put into effect to ensure that people don't take on risky mortgages during a time of financial insecurity. These rule changes may mean that people qualify to borrow less money when applying for a mortgage. This might mean that you’ll have to wait to save up more before purchasing that dream home.  

While there are concerns that either applying for or receiving CERB will impact your mortgage approval or refinancing, the good news is that it isn't likely to have much impact once you have a new job or resume your old job. If you're still on CERB and would like to refinance your mortgage or obtain a new mortgage, you will likely have to wait until you have a job to qualify for refinancing options (or return to your old job). 

While COVID-19 has streamlined the online mortgage application process, the pandemic has presented a few barriers to accessing the housing market if you're a first-time homebuyer, own a small business, or work as a freelancer. Whether COVID-19 will have a significant impact on your mortgage application or refinance will ultimately depend on your financial, credit, and employment specifics.