Mortgage lenders can fill the loan process knowledge gap: Fannie Mae

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Consumers' knowledge of the mortgage process and what it takes to purchase a home has not improved, and in some instances regressed, compared with a 2015 study, Fannie Mae said.

That is a sign current sources for teaching consumers are insufficient and remedying that is an opportunity for mortgage lenders.

Even with the homeownership rate increasing about two percentage points between the 2015 and 2018 consumer surveys, "one might have thought that was in line with an increase in consumer knowledge of what it takes to qualify for a mortgage, but it wasn't," said Mark Palim, Fannie Mae deputy chief economist.

But getting a mortgage is a "relatively infrequent transaction for most consumers, it has multiple dimensions," he continued. And even with the greater availability of consumer-facing financial technology, studies have shown most applicants want some level of human interaction because of their lack of knowledge about getting a mortgage.

And that was borne out in the results regarding knowledge of credit scores, down payment and debt. While homeownership remains a goal for most Americans, along with educational achievement, people are more proactive about the latter through studying and test preparation, Palim said. On the other hand, "these are really basic criteria around qualifying for a mortgage that people don't have a firm understanding of," he said.

In both the 2018 and 2015 surveys, consumers responded that the minimum median FICO score needed to get a mortgage was 650. In actuality it is 580 (based on Fannie's eligibility matrix along with the Federal Housing Administration handbook).

Given all the news about data breeches, identity theft and the resulting need to monitor credit reports, it was slightly surprising that consumer knowledge in this area did not improve, Palim said. The vast majority of respondents to the 2018 survey, 87%, said they saw their credit score, with 65% stating they viewed it in the month prior to the survey. Yet when asked if they knew what their FICO score was, four-in-10 responded no.

When it came to a down payment, both surveys had a median response of 10%. The actual down payment a consumer can get a mortgage with is 3%, although with certain programs like those offered by Veterans Affairs and U.S. Department of Agriculture Rural Housing Service, no down payment is required.

Consumers' perception of the maximum total debt-to-income ratio actually worsened. In the 2015 survey, the median response was 45%; that was down to 40% in the 2018 survey. In reality borrowers can get an agency mortgage with a 50% DTI.

A separate survey from NeighborWorks America found that saving for a down payment ranked sixth among respondents' financial goals for 2019, at 5% for the general population and 7% for minorities only. Meanwhile, 70% of all respondents said the home buying process was complicated, with eight out of 10 were not aware of any programs that provided information about it.

"There is a clear opportunity to help minorities bridge the wealth and attainment gap by supporting them in making good financial decisions," said NeighborWorks America President and CEO Marietta Rodriguez in a press release. "We want to make the opportunity to pursue homeownership more available."

When asked about likely sources for information, a question for which they could give more than one response, 39% of the whole sample said they would look to a mortgage lender; that is actually nine percentage points higher for the minority sample in the NeighborWorks survey.

"There is also an opportunity in here for the mortgage industry," Fannie Mae's Palim said. "What I get worried about is people who think they need to save up the 10% down payment — or more — and don't even start doing the things to get into position to own, because understandably given all the financial pressures that people are under, they're thinking 'that's going to be a really hard thing for me to do.' If they had more knowledge about the availability of low down payment mortgages, maybe more people would be doing the things they need to, to get financially ready.

"There may be a missed opportunity [for lenders] because of that lack of knowledge," Palim said. The inventory shortage is a main reason for the current sales doldrums, but consumers not being educated regarding the process could have a longer-term effect on the purchase market.

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Purchase Underwriting Credit scores Down payments Housing market First time home buyers Fannie Mae FICO