on Thursday, March 9, 2017
Obstacles in the path to homeownership have reached mythical proportions, preventing many would-be homebuyers from even starting the journey. Loan originators are in a unique position to help cut borrowers’ concerns down to actual size and give them confidence that they can achieve their goals.
Myths about mortgages abound in the minds of many homebuyers. Loan originators must be aware of the presence of these myths and, armed with the facts, provide potential borrowers with a better understanding of the realities and possibilities of the loan-origination process. Let’s take a look at some of the most common myths, along with the facts originators can use to dispel these fairy tales.
The notion that downpayments have to be in the 20 percent range is the most persistent myth out there, and we need to debunk it. The average downpayment among first-time homebuyers in 2016 was 6 percent, and for repeat buyers, downpayments were between 13 percent and 14 percent, according to the National Association of Realtors. Some mortgage products let eligible borrowers put down as little as 3 percent — or even less, in some cases.
Many people believe that the best — perhaps only — low-downpayment option is a Federal Housing Administration (FHA) loan. It’s worth checking into other offerings. A conventional product might prove more affordable for some borrowers. Loan originators can help spread this word to real estate professionals and consumers.
A survey of real estate professionals conducted for Freddie Mac by market-research company, GfK, found that 50 percent of potential borrowers trust real estate professionals to educate them on mortgage products that best meet their needs. Eighty percent of respondents were extremely or moderately familiar with FHA products, yet only around one-quarter knew about low-downpayment products from Freddie Mac or Fannie Mae (the government-sponsored enterprises, or GSEs).
More importantly, loan originators need to know that the return of low-downpayment loans does not mean we’re about to repeat the housing crisis. The eligibility requirements on these new loans set a higher creditworthiness bar and aim to expand homeownership responsibly.
Many borrowers believe that their entire downpayment must come out of their own funds — from their savings. In reality, downpayment funds may come from many other sources. Financial gifts from family and friends as well as other grants often can be used for downpayments and closing costs.
“ Research shows that housing counseling makes a positive difference. ”
In addition, many state, county and city governments, for example, offer financial assistance to people in their communities who are well-qualified and ready for homeownership. Requirements vary, but depending on individual needs and qualifications and property location, eligible borrowers could receive substantial downpayment assistance. Downpayment assistance comes in three main flavors:
- Grants. Borrowers don’t need to repay these funds as long as they own and occupy the home for a certain period of time.
- Second-mortgage loans. This is the most common downpayment source. Many state and local governments offer second-mortgage loans. These loans often have low or zero interest rates, and even offer deferred payments for specified time periods. In certain cases, the loan can be completely forgiven.
- Tax credits. Some state and local governments issue mortgage credit certificates. These reduce the amount of federal income tax paid by homeowners, allowing borrowers to put more money into downpayments and closing costs.
The U.S. Department of Housing and Urban Development (HUD) funds many of these programs through grants to state and local organizations via the HOME Investment Partnerships program and the Community Development Block Grant program. Originators can find these programs in their state by using HUD’s online listings or the handy tool at downpaymentresource.com.
State and local housing-finance agencies (HFAs) administer many of these programs, so originators should get acquainted with their local agencies. The National Council of State Housing Agencies offers a state-by-state listing of HFAs, and the National Association of Local HFAs provides local-level program information.
Many borrowers today believe you must have a pristine credit report to secure a mortgage, but many mortgage products require only moderate credit scores. It is important for originators to understand the range of products available for their borrowers and what it takes to qualify for each.
Lenders ultimately set these borrower requirements, so be sure to understand your company’s policies. The GSEs have strengthened their underwriting standards and tools recently, and have revised the representation and warranty framework several times, to give lenders more certainty. Lenders, in turn, should feel confident to roll back or eliminate overlays.
“ Rising student debt weighs on many people, but a variety of research has concluded it might not be a major obstacle for many borrowers. ”
But what about the potential borrower who doesn’t have a traditional credit score? This is the case for a growing number of households, especially for millennials, immigrants and others who culturally prefer to use cash when possible. The industry is working toward solutions that make sense for all involved, and in some cases, nontraditional credit histories can be used to qualify a borrower.
Charting a course through the loan-origination process to reach homeownership can be daunting, especially to first-time homebuyers, but help is available. HUD- approved, nonprofit housing counseling agencies offer services that can help potential borrowers prepare for successful homeownership, at little or no cost.
Using workshops or one-on-one sessions, these counseling agencies offer guidance on financial skills, suitable mortgage products, and downpayment and closing-cost assistance programs. To find approved housing counseling agencies in your state, go to the listing on HUD’s website. For those who prefer an online approach, My Home by Freddie Mac offers information and tools that guide potential borrowers through the homebuying process.
Research shows that housing counseling makes a positive difference. A report from the Federal Reserve Bank of Philadelphia stated that completing a pre-purchase workshop helped boost credit scores 8.5 points on average. Add individual counseling and credit scores jumped a total of more than 16 points on average.
According to a HUD study, 35 percent of borrowers who received housing counseling bought homes within 18 months of completing the course. Research conducted by Freddie Mac found that pre-purchase counseling could lower the risk of becoming seriously delinquent on a mortgage by as much as 34 percent on average.
Rising student debt weighs on many people, but a variety of research has concluded it might not be a major obstacle for many borrowers. Student debt can impact borrowers’ debt-to-income ratios (DTI) and their ability to save money. It also can lead to defaults, which damages credit scores. It is important to remember, however, that other factors also may be at play, such as employment challenges, stagnant wages, high housing prices, low inventory and changing attitudes toward renting.
According to a Zillow report, a household with $50,000 in student loans where one partner has a master’s degree has a 75 percent chance of owning a home. A household with $30,000 in student debt and at least one bachelor’s degree has a 67.7 percent chance of owning a home. Remove that debt and the chance of that same couple owning a home only improves to 69.8 percent. Remove the degree but retain the $30,000 student-loan debt, however, and the odds drop to less than 40 percent.
This study suggests that student debt only slightly affects the probability of homeownership for those who earned a degree. Understandably, a higher student-debt balance lowers the odds for homeownership, especially for those who didn’t graduate, but by the time student-loan borrowers reach their 30s and move into prime homebuying age, many have paid off their debts.
Putting money aside still can pose a challenge. But, as mentioned earlier, certain mortgage products, like FHA loans and Freddie Mac’s Home Possible program, allow downpayments and even closing costs to come from sources other than the borrower’s savings.
Student loan defaults do pose a problem, however, due to the damage they can do to borrowers’ credit scores. Again, these issues may be tied more to job availability than debt load. Borrowing for graduate school accounts for around 40 percent of federal student loans and involves the highest loan balances, but these loans have a default rate of just 3 percent. The default rate among borrowers at the undergraduate level is 21 percent.
Finally, some borrowers still believe if they get rejected for a loan once, no one will ever give them a loan. This isn’t a one-strike-and-you’re-out game. Make sure borrowers know the reasons for a rejection so they can work to fix those issues.
If they need help, recommend one of the housing-counseling resources mentioned previously. Staying in touch with these potential borrowers and offering encouragement could lead to shared success down the road.
In many cases, it’s simply a pervasive belief in the mythical obstacles present in the mortgage industry that keeps would-be homebuyers on the sidelines. Equipped with the facts, loan originators can help clear path to responsible homeownership.