Consumers continue to overestimate mortgage requirements

Could it be that the low mortgage uptake is as a result of lack of education and fear from on the consumer’s part about the whole mortgage application process? Could it be that consumers are actually intimidated by the whole process? These are some of the questions that we’ll be trying to answer. Lenders have an opportunity to help close the deepening knowledge gap.  According to a 2018 study by Fannie Mae’s Economic and Strategic Research team, consumers broadly lack an understanding of the basis thresholds to qualify for a mortgage, including down payment, debt-to-income ration and credit score requirements.

In an older survey carried out back in 2011, the Wall Street Journal wrote about a consumer survey related to the home-buying process and they asked the respondents what the hardest part of buying a home was. As you can imagine, a good number of people said that understanding the mortgage process was the hard part. It is a problem for many. Honestly, industry players, lenders specifically, have failed to educate consumers about the mortgage application process. In fact, many respondents cited confusion over the loan process as one of the top-three complaints among the respondents. We are in 2019 now and still, consumers are still not sure about the mortgage process.

This is where we come in. To put it into perspective, The Power Is Now first priority is to you as the consumer. Our mission is to make sure that you have all the information you need to make a financially sound decision when buying a home. This applies to home loans as well. We are partnered with First Bank to make sure that you get the best deals in the market, because believe it or not, the market is changing rapidly, and you want to be on the safe side. This is a series that we are doing trying to get into the root of this problem, uncovering it so that by the end of it, you will be very confident when shopping for your home and home loans. I will also provide some useful external link with additional information.

Consumers are still Afraid of the Mortgage Process

Fannie Mae’s research was conducted using a nationally representative sample of over 3000 respondents. The report notes that despite the increased exposure to credit scores and other sources of information, including but not limited to online information, consumers understanding of what it takes to qualify for a mortgage has not yet improved since 2015. However, consumer confidence about the mortgage process in the same time frame has grown exponentially.

One of the reasons why I think consumers knowledge and understanding about the mortgage process is that we have subjected a good number of applicants to super-strict underwriting standards, that they have to have record-high credit scores and hard-wired debt to income ratios. With such an environment, why would anyone bother with learning about the mortgage? I think the environment where the mortgage underwriting process works under is a little over the board. That scares consumers and consequentially, mortgage applications have gone down.

More and more organization have realized the trend in mortgage consumption behavior and they have investigated it and found it to be true that consumers nowadays think mortgage application is a major hassle. Freedandclear.com and Nerdwallet also conducted their research into the subject back in 2017 where Nerdwallet polled about 2,241 people. The results were perplexing since 42 percent of the polled people said that they found mortgage experience ‘stressful’ while 32 percent said that it was “complicated.” It gets even worse than that, 49 percent said that they regret how they handled the whole process, while some applicants, mostly the millennials and Gen X-ers felt that they didn’t end up with the interest rates they had hoped for.

The Fannie Mae report notes that more consumers reported to have accessed their credit score recently, unfortunately, close to half cannot recall what it was. We have to accept the role of technology in our lives and consumers have also taken up the challenge and are now more involved with online sources of mortgage information, nonetheless, they still overestimate the minimum credit score necessary to qualify for mortgage, or they overestimate the minimum down payment necessary to qualify for mortgage or they remain unfamiliar with low down payment programs. Interestingly, groups that you’d think are familiar with the process, such as the homeowners, the people who say they are actively planning to become homeowners in the next few years or the people that have demonstrated financial literacy are still in the dark when it comes to mortgage requirements.

I can’t help but think that maybe as lenders we have created awesome programs, very attractive and appealing but they have remained shelved, or, we are not doing so much to get these programs out there. Or maybe, it could be that consumers are just not interested in what we have to offer, after all in their mind, ‘the process is complicated.’ So many lenders have absolutely amazing mortgage programs, for instance, The Power Is Now and First Bank offers mortgage program where you are just required to pay as low as 5% down payment as well as other affordable programs, but not many people are aware of this.  Here’s the data from Fannie Mae’s Research;

What does this mean for lenders?

You don’t have to look too far for this, simply current sources of mortgage information and education are by far insufficient. How do I know this? Normally, you’d expect that the people actively looking to get into homes have a wide knowledge base of the process, but as it stands out, they have zero or little confidence in the process. That just shows how clueless most people are. In addition to that, the report also notes that most Americans have access to their credit scores, but they don’t know what to do with this information. Most Americans are confident in building and maintaining credit scores, however, monitoring a credit score, not as the same as understanding how the scores impact their financial situation. Lastly, most consumers have the wrong idea of what the mortgage process really entails and that alone is holding most buyers back. The fact is, most people want to get into homes, however, as much as they’d qualify for a mortgage, they assume that the homeownership process is a complicated process. It is far from possible. Thus, a good number avoid any further research or preparations.

Consumers have lost interest in the system

Let’s go back to the survey by Nerdwallet. The survey notes that one of every six people said that their application had been rejected. 52 percent of these said that the lenders claimed that their debt-to-income ratios didn’t meet current standards and 39 percent had been told that their scores weren’t good enough for the loan program that they were trying to get. 31 percent of the applicants rejected said that they were utterly surprised by the lender’s decision.

I think the problem is deep-seated within the system and when a consumer is exposed enough to it, they just lose the interest. 41 percent of the respondents said that they found the process ‘manageable.’  To most consumers, the mortgage process is a painful process and they rather avoid it than to face it. in fact, 75 percent of the borrowers surveyed by freeandclear said that it is ‘unpleasant but necessary’ activity.

According to the Freeandclear survey, excessive paperwork in the mortgage application process was the most overwhelming aspect of the process. “Although all the mortgage documents are intended to serve a specific purpose, usually legal or regulatory, the sheer amount of paperwork creates significant difficulties.” Other than that, the second hassle consumers noted is the strict qualification requirements for a loan.

Are tougher measures really necessary?

No matter the harsh consumer sentiments, stringent measures had to be taken to govern the mortgage market in the wake of the 2008 financial crisis. Between 2004 and 2006, the mortgage application process was so easy, all you needed was to be able to fog a mirror. No down payment was really necessary, the credit requirements had no implications, verification of income was not necessary, however, all this deregulation of the industry culminated in hundreds of billions of dollars in losses for the lenders and millions of Americans losing their homes to foreclosures. The ripple effects are still transverse in today’s market. I think tougher rules are necessary to avoid the reoccurrence of such a crisis.

So, can consumers be helped?

Tough measures or not, these have nothing to do with consumer education. Like I said before, most lenders have beautiful mortgage programs but the information is not out there. I think that more effective mortgage education should be emphasized in a more timely, convenient and simple way. Lenders should customize their information to fit different consumer profiles and then delivered at the right time. Buyers are actively looking to be ascertained whether to buy or not, how much money they should save, what they can afford, the mortgage programs available, if lenders can provide this information, I think there could be a real impact.

I would also recommend lenders understand that they are dealing with human beings. I think society is slowly programming us to believe that everything now is ‘digital’ and so you will find that the personal connection between lenders and borrowers has been lost. At the end of the day, we have to remember that these consumers need to connect with the lenders themselves, so I think mobile and online resources are not enough and sufficient to guide consumers through the complexities of the mortgage application process.

The Power Is Now strives to bring you the latest developments in real estate economics, mortgage lending, and the market. We are committed to making sure that you are updated with what’s happening around you and to be your resource acquisitions and sells.   We are partnered with great agents across the country and with First Bank to provide the products and programs that First Time Homebuyers need to buy a home or income property now because tomorrow it will be even more difficult. Go to www.applytobuynow.com and get started today.  The Power to buy is now!

Eric Lawrence Frazier MBA
Vice President and Mortgage Advisor of First Bank
NMLS 461807
President and CEO of The Power Is Now Media Inc.
CalDRE 01143484
www.thepowerisnow.com

 

Works Cited

Consumers Continue to Overestimate Mortgage Requirements Lenders Have an Opportunity to Help Close the Knowledge Gap. 2019.
Harney, Kenneth R. “Many Borrowers Say the Mortgage Process Is a Major Pain.” The Washington Post, 28 Feb. 2017, www.washingtonpost.com/realestate/many-borrowers-say-the-mortgage-process-is-a-major-pain/2017/02/28/c215d3ba-fdc2-11e6-8f41-ea6ed597e4ca_story.html?utm_term=.ae4f5cfb231d. Accessed 17 July 2019.
“The Mortgage Process Doesn’t Have to Be Confusing.” Homebuyinginstitute.Com, 2019, www.homebuyinginstitute.com/mortgageprocess.php. Accessed 17 July 2019.
“What Do Consumers Want Out of the Mortgage Process? Everything.” Elliemae.Com, 2019, www.elliemae.com/blog/trends/what-do-consumers-want-out-of-the-mortgage-process-everything. Accessed 17 July 2019.

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