A group of low- and moderate-income first-time homebuyers tracked in a Fannie Mae study did not properly prepare to get a mortgage, which created a prolonged and complicated purchase process.

"Some research participants did not realize the importance of building credit and saving until they wanted to buy a home," Mark Palim, Fannie Mae's deputy chief economist, said in a press release.

"Some had to delay their home purchase and spent another year in building or repairing their credit or adding to their savings before they could start again, making the whole home purchase journey last for more than two years. In addition to a lack of mortgage knowledge — as shown in prior studies — here, too, we see evidence that consumers engage with the mortgage market too late in their home buying journey and often fail to shop around."

Fannie Mae conducted an ethnographic study, following around 14 first-time home-buying households over a four-to-nine month period in the Boston and Knoxville, Tenn., metropolitan areas. "While the tradeoff in this methodology is a small sample size for far greater qualitative information, the results will inform our future survey work," Palim said.

Participants considered getting a mortgage to be a hurdle to be overcome to buy a home, rather than a focus for the process. They focused on the home search and things like the location and property features rather than the mortgage process — how to get a mortgage, what lenders to work with and when to get started.

Low-income homebuyers

The income ranges of the prospective buyers, who were recruited before obtaining a mortgage preapproval, were from $24,000 to $90,000 in Boston and between $15,600 and $58,000 for Knoxville.

Of the 14 households, six had a single head. By race, eight were white, four were African-American, one was Asian-American and one was Haitian-American. By the end of the study, seven of the 14 households successfully became homeowners.

The home purchase process was broken down into three phases. The preparation phase is where the household worked on improving its credit score or scores, saved for a down payment and gathered information. The second phase is the "cycle of decisions" around the search process, while the final phase is the purchase.

Among the barriers in the first two stages were changes in employment status, family crises and credit issues. Problems with finding an affordable property and qualifying for a mortgage were other barriers in the second stage.

In the purchase stage, the barriers included the lender of choice not offering the desired affordable mortgage program, the lack of responsiveness from mortgage professionals, and property needing more costly renovations than the potential buyer's budget.

If the barriers in the second or third stage were too high to overcome, the households returned to the previous stage and repeated that step.

"Research participants negotiated many facets of the home purchase, but not the mortgage terms. Their selection of lenders focused on who could get them a mortgage by the deadline, allowing no time for comparison shopping," Palim said. If anything, once the household selected a lender to obtain a pre-approval from, they rarely re-evaluated their originator or mortgage product choices.

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