Americans are ill-informed when it comes to homebuying requirements, a new nationally representative survey found. Even as the homeownership rate has steadily risen over the past couple years, currently at 64 percent, people are still lacking knowledge when it comes to what they need to qualify to buy a home.
From minimum down payment requirements to qualifying credit scores, the more than 3,600 respondents in Fannie Mae’s latest “Consumer Mortgage Understanding Study” were largely unsure — or wrong — about homebuying basics, despite 91 percent favoring homeownership over renting.
The most obvious reason Americans are lacking key information is because buying a home is an infrequent transaction, says Doug Duncan, chief economist at Fannie Mae. However, he concedes, there’s also a fundamental lack of financial literacy across the country which contributes to the lack of homebuying knowledge.
“Much of the problem is that we don’t have consistent education on financial management. Half of American households don’t have $500 saved for unexpected expenses, which is just basic money management,” Duncan says. “In regard to buying a house, people don’t really think about it. If they’ve already owned a house, then the process is easier. But for first-time buyers, it can be intimidating.”
This knowledge gap is an opportunity, perhaps, for financial experts to educate people about homebuying requirements and other milestones on the path to homeownership, Duncan points out.
Mortgage myths busted
A down payment is not only a major part of the lending process, it also plays a significant role in whether people pursue homeownership. In fact, the inability to save up for a down payment is often cited as a barrier to accessing homeownership.
But more than 40 percent of people don’t know the minimum upfront amount to buy a house, which means qualified borrowers might be missing out because of bad information.
Only 17 percent of respondents knew the correct minimum down payment, which is between 1 to 5 percent; while 20 percent said it’s between 6 and 10 percent; and 13 percent believed the minimum is 20 percent.
On many conventional bank loans as well as FHA loans, borrowers can have 3.5 percent down or less to qualify for a mortgage. Bank of America, for example, offers a product called “Affordable Home Solution,” which includes a low 3 percent down payment option. For those who qualify for a USDA or VA loan, there is no down payment requirement.
There are also many state- and city-level down payment assistance and grant programs available for first-time and low-income homebuyers. Just one in four Americans, however, are aware of these low down-payment programs.
Most people, 30 percent, are getting mortgage information from lenders, while 19 percent are getting it from family and friends. Online websites and realtors tied for last place with just 10 percent of people going to them for information.
The reasons people were not confident about getting a mortgage were not enough income (23 percent), too much debt (17 percent) and poor or not enough credit (15 percent).
Credit score requirements lower than what Americans think
The majority of people are checking their credit score, 87 percent, which is wise for everybody, especially people who want to qualify for a mortgage.
Not only does your credit score help you get approved for a loan, but it can also be the key to a competitive interest rate. By knowing your credit score, you can determine whether you should get a mortgage sooner (if your credit is strong) or wait until you improve it.
Some 65 percent have viewed their credit score in the past six months, compared with 53 percent in 2015. However, 43 percent reported they don’t know their FICO score, down from 48 percent in 2015.
The most popular way to check credit scores was through a credit monitoring service, 25 percent of people responded; while slightly less, 23 percent, use credit card statements; and 18 percent use credit reports. More than half of respondents, 53 percent in both 2018 and 2015, don’t know the minimum FICO score requirements for a mortgage.
FICO score requirements vary by lender and loan type, but some lenders will accept FICO scores as low as 580. For FHA loans, FICO scores below a 580 require a 10 percent down payment. Fannie Mae and Freddie Mac-backed fixed-rate mortgages require a 620.
Where hopeful homebuyers should start
If homebuying seems like an overly complicated process designed to confound you, then it’s time to take a step back and start with the basics: a household budget.
“A household budget tells you where the money comes from and where it goes. It shows you if you have a demonstrated ability to save — these are things a lender will ask you,” Duncan says.
Part of budgeting includes making sure your debt-to-income ratio, or DTI, is balanced, if it’s too high (meaning you devote a large percentage of what you make to your monthly bills), lenders will view you as a risky bet. In order to get a qualified mortgage, most lenders require a DTI no higher than 43 percent. To lower your DTI, you can either make more money or reduce your debt.
“Usually banks look for a debt to income ratio below 43 percent, but all banks are different. This means that if you make $250,000 a year, you will need to have less than $8,500 a month in projected monthly liabilities or expenses,” says Deborah Ribner, real estate agent at Warburg Realty in New York. “Liabilities include auto loans, credit card debt, unpaid income taxes, home carrying costs like condo common charges and taxes, apartment monthly maintenance, and HOA fees, to just name a few.”
Once your budget, FICO score and DTI are in good shape, the next step is to talk to a few lenders about your borrowing capabilities. By shopping around, borrowers can compare rates, product offerings and other features before committing to one. It’s also a great way to negotiate closing costs, fees and even interest rates.
“I’ve had six mortgages in my life and I’ve never talked to less than three lenders and I always got a better deal when I had them negotiate,” Duncan says.
Research different types of lenders, like online lenders, community banks and credit unions, as they differ; so, while one lender might not meet your needs, another may.
Ultimately, borrowers should seek sound advice from financial experts who can offer objective opinions. Although lenders can be helpful, they also have a vested interest in giving you a loan. Make sure to weigh your options and get all the facts before you take out a mortgage.