For the unprepared, the mortgage process can be a whirlwind of unfamiliar terms and procedures followed by stacks of confusing paperwork. Were you truly ready for the process when you bought your first home – or, if you are a prospective first-time homebuyer, are you ready now?
A recent survey by FREEandCLEAR suggests that while the majority of homebuyers find their mortgage lender knowledgeable and trustworthy and are satisfied with their performance, many homebuyers lack basic knowledge about the mortgage process. This implies that trust is based at least in part on blind faith.
According to the survey, 90% of borrowers thought that they received a good deal on their mortgage – but if you didn't shop around for mortgage offers and don't understand basic mortgage terms, how can you have a basis for comparison?
Several survey findings show that too many homeowners are unprepared to evaluate mortgage options. While 84% of borrowers correctly noted that monthly payments can change on an adjustable-rate mortgage, 18% of borrowers believe that the monthly payment on a fixed-rate mortgage can also change. In addition, 20% of survey respondents assumed it was not possible to buy a home with a down payment lower than 5%, apparently unaware of the many low-down-payment programs that allow down payments of 3.5% or below.
Over one-quarter of survey respondents (28%) did not know that, when comparing loan terms, you pay the least interest over the life of a mortgage with the shortest loan term – showing a fundamental misunderstanding of how interest works. For a humorous topper, 11% of respondents identified the mortgage-backing agency Fannie Mae as an actual person (choices included the first female U.S. Senator or Alexander Hamilton's wife).
At least one bit of mortgage misunderstanding lands on the positive side. When asked to choose the percentage of gross income that should be spent on housing expenses and other debts, half of respondents chose 34%, the lowest value offered. Perhaps respondents are being conservative with their cash, but it's more likely that they were unaware of the suggested upper limit on debt-to-income (DTI) ratio of around 43%-50%.
Many borrowers understand that they could improve their knowledge of the mortgage process. On a scale of one to ten, with ten as the highest level, 45% of borrowers assessed their knowledge of mortgages at five or below. That's an understandable outcome, given that only 14% of borrowers learned about mortgages during high school and 17% learned about mortgages in college.
An equal percentage of borrowers (24%) learned about the mortgage from internet resources (like MoneyTips) and from lenders – good choices as long as multiple sources are used to avoid being misled by unscrupulous or inexperienced sources. Only 2% of borrowers got their mortgage education through the Consumer Financial Protection Bureau (CFPB), an agency founded in the aftermath of the housing crisis, in part to provide mortgage education resources.
Thankfully, it's easy to correct a lack of knowledge about mortgages given the many resources available. First-time homebuyers or previous homebuyers who have lost touch with the mortgage process can get an initial feel for the process by researching the steps through multiple sources and reaching a comfort level for what to expect. They may then embark on the initial process with some baseline confidence.
Casey Fleming, C2 Financial Corporation Mortgage Advisor and Author of The Loan Guide, suggests, "If you are buying your first house, I think the most important tip is to start the prequalification or preapproval process as soon as possible. Most people are surprised once they start the qualification process that certain things are different than what they expected." Given the level of preparation implied by the FREEandCLEAR survey, that's not a surprise.
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