The Mortgage Process Befuddles Many, Creating an Opportunity for Lenders
A survey from Fannie Mae’s Economic & Strategic Research (ESR) Group found that lenders are consumers’ most influential source of information on getting a mortgage.
According to Dr. Mark Palim, Fannie Mae’s vice president of applied economic and housing research, this is an open door for lenders to play an advisory role in the marketplace. “There’s a real opportunity,” he says, “for lenders to expand their business by improving consumers’ understanding of what it takes to qualify for a mortgage.”
“The body of ESR’s work on consumer understanding of the process of buying a home really highlights that consumers are putting off mortgage considerations until much too late in the process,” observes Dr. Palim. Lenders and the overall mortgage finance community need to “educate consumers to see the value in thinking about the mortgage as early as they are thinking about whether they should rent or buy.”
In making the case for slotting the mortgage earlier into the process, he points out that “the many steps consumers have to take to get ready for a mortgage take time.” It may be difficult to calculate how much to save for a down payment when you don’t know about the availability of 3 percent and 5 percent down payment programs. “Or you may be concerned about your credit score but not know what your score actually is, let alone the steps you can take to improve it,” he says. “Searching for the right-priced home in the right neighborhood might be somewhat futile if you get down the road and you can’t qualify for the mortgage.”
Consumers Fall Short on Down Payment Knowledge
About 40 percent of consumers completing the survey responded “don’t know” when asked about requirements for minimum down payments, and 54 percent and 59 percent, respectively, said they didn’t know required minimum credit scores and maximum back-end DTI ratios.
The dearth of knowledge was nearly as great for those who identified themselves as renters who plan to purchase within the next five years as for those in the general consumer population.
Those who did provide answers were furthest off, by far, on the minimum down payment, which received a mean response of 12 percent, four times the actual requirement.
“Many previous studies show that saving for a down payment is the top barrier for renters who want to own,” says Dr. Li-Ning Huang, ESR research manager. “But in this study, we show that not many people are aware that there are low down-payment programs in the market.” This presents an opportunity, she says, for lenders to use their marketing to let consumers know that they don’t have to save 10-20 percent of the sale price before they start looking at houses.
Resources geared to bringing consumers up to speed on the ins and outs of buying a home include the HOME by Fannie Mae™ mobile mortgage app, and an online homeownership educational course applicants for Fannie Mae’s HomeReady™ mortgage are required to complete.
Dr. Palim does not discount that the young Millennials who are poised to drive future housing demand do “face some real challenges, not imaginary challenges, around income growth, savings and accumulating enough savings to cover a down payment. Their concerns of being able to go from the aspiration of owning a home to actually owning one are in part well-founded.” The point of the ESR survey, he says, is to figure out which concerns can be addressed through consumer education.
“There’s not much we can do about people’s income or helping them save more money, but if in their mind they think they need to save 15 percent and really the amount they would need in their locality, including closing costs, is 8 percent, then they may be putting off buying for longer than is necessary.”
Lenders Score Well as Advisors on Mortgage Qualifying Requirements
The survey results suggest that lenders may be in a good position to help close the knowledge gap and familiarize consumers with mortgage qualifying requirements. Roughly 6 in 10 survey respondents viewed lenders not only as the most prominent source of information on the topic of getting a mortgage but also the most personally influential source of mortgage advice.
“When we ask both consumers in general and renters who want to move and eventually buy who they would go to for mortgage advice, lenders score really well,” says Dr. Palim.
Also, “it’s worth pointing out to lenders that it’s harder to change misperceptions among consumers than an absence of knowledge,” he says.
In the survey, the fact that we found a large number of “don’t knows” is actually a positive for lenders and housing counselors interested in financial literacy and housing stability, in the sense that you’re not trying to reverse misperceptions.”