Here's What Mortgage Lenders Might Do if a Recession Hits

Will a recession hit in 2023? In April, the Federal Reserve warned that we might be in for one. And other financial experts have been sounding similar warnings for months.

The reality is that we don't know if we're in for a recession this year or not. While unemployment is currently low, a decline in consumer spending has the potential to fuel a recession and drive more people out of a job. Hopefully, if that happens, it will be a mild one. But either way, a recession could impact mortgage borrowers -- for better and for worse.

How mortgage lenders might react to a recession

A recession could result in a decline in home buyer demand. Granted, that would be unlikely to happen right away, since there's a massive lack of inventory in the housing market today. But if a prolonged recession strikes, in time, buyer demand could wane. And mortgage lenders might opt to lower their borrowing rates in an effort to drum up more business.

Right now, elevated mortgage rates are making it expensive to buy a home. So buyers might get some relief in that regard.

On the other hand, mortgage lenders might also opt to tighten their borrowing requirements in a recession. The reason? People's financial situations tend to be more precarious during periods of economic instability. That could cause lenders to get stricter about who they give a mortgage to.

Lenders might, for example, insist on higher credit scores than usual, or impose higher interest rates on borrowers with credit scores that aren't so great to compensate for the added risk they feel they're taking on. So while a recession could benefit some home buyers, it might also result in some buyers struggling to get mortgage approval -- or approval at a favorable rate.

We'll have to just wait and see

At this point, it's questionable as to whether we'll experience a recession in 2023. But even if an economic downturn doesn't strike this year, at some point, we're apt to see economic conditions decline. That's because recessions are actually a somewhat normal, recurring part of the broad economic cycle.

It's important to understand how a recession might impact home buyers -- both generally speaking and in the context of today's market. It's also worth noting that while a recession does have the potential to drive home values downward, that may not happen if a near-term decline comes to be. Again, that ties directly into real estate inventory, or the current glaring lack thereof.

If you're looking to buy a home in the next year, it could really pay to do what you can to boost your credit score. Doing so might put you in a stronger position to borrow and snag a better rate on a mortgage.

You can raise your credit score by paying all bills on time and eliminating some credit card debt so your total balance is fairly low relative to your total credit limit. It's also worth checking your credit report for errors that might need an immediate correction. Credit report mistakes can happen, so the simple act of being vigilant could help your score increase.