As demand continues to pick up from home buyers, the mortgage lending market can expect gains from purchase loans. There’s just one snag: a third of home buyers are ill-prepared for the mortgage process, and can’t answer basic questions about down payments, interest rates and lender rules.
A survey released by Zillow last week found that home buyers answered basic questions about mortgages wrong 32.5% of the time.
Some of the misinformation out there includes:
- 34% of first-time buyers surveyed aren’t aware that it’s possible to get a mortgage with less than 5% down.
- Home buyers also don’t understand how to secure the best possible interest rates and loan terms. 26% incorrectly believe they are obligated to close their loan with the lender that pre-approved them. 24% incorrectly believe that they’ll get the best rates and fees through the bank they currently do business with. And 34% of buyers believe all lenders are required by law to charge the same fees for credit reports and appraisals.
- Further misinformation and beliefs exist in refinancings, with 25% saying it’s not possible for underwater borrowers to refinance. In fact, 2.2 million underwater borrowers have refinanced under the federal Home Affordable Refinance Program, which was recently extended through 2015. And almost half (47%) of current homeowners believe they must wait at least one year between refinancings.
Why is this story significant?
A number of reasons. For one, as the market picks up speed, we need more savvy buyers among our ranks to keep it moving. Understanding the mortgage process enables a borrower to navigate it better and more quickly, which we’re seeing is really important in markets where inventory moves fast.
In hot markets that have tight supply, buyers who’ve gone through pre-approval and/or better prepared themselves for the loan process will be the more attractive offer for sellers. They’re more likely to qualify for financing and close faster than their unprepared counterparts.
In addition, as we saw with the financial market collapse, recession and housing downturn five years ago, the unsavvy borrower is not only a danger to himself, but to our economy as a whole.
So, how do you educate yourself if you’re in the market to buy? You can read up on the basics at the Mortgage Professor, a site with great information from a non-interested third party (i.e., it’s not your bank giving you advice). You can engage in discussions with your Intero Real Estate agent, who can recommend local sources.
This is an important piece of the housing recovery that until now hasn’t received much attention. How can we expect a healthy purchase market if buyers don’t know how to navigate their loans? Maybe borrower education will (or should) be the next big area of innovation in our market.