Mortgage borrowers entered new mortgages in record numbers during the past two years. With rates at record-lows, many hoped those loans would be with them for decades.
Life, though, has its twists and turns. Some families will outgrow their home this year, others will move for work, Baby Boomers will downsize, and a portion of those under 40 will become first-time homebuyers.
In fact, Fannie Mae just raised its single-family home sales projections for 2023 to 4.57 million units. Home sales will still decline in 2023 though, compared to 2022, because of “affordability constraints and the fact that most mortgage holders continue to have rates substantially below current market rates, creating a strong disincentive to move,” according to Fannie Mae Chief Economist, Douglas Duncan.
So what do these borrowers need from lenders to help them select where they get their next home financing?
Fannie Mae has reported for years that the vast majority of Americans prefer homeownership over renting a home; however, many are uncertain or mistaken about the qualifications required to get a mortgage.
“Despite increased exposure to credit scores and online resources, consumer understanding about what it takes to qualify for a mortgage has not improved since our original study in 2015, potentially discouraging willing and qualified Americans from taking steps toward homeownership,” wrote Mark Palim, Fannie Mae’s Deputy Chief Economist. “We see an important opportunity for lenders and other mortgage market participants to work toward narrowing this knowledge gap, utilizing more effective mortgage education that is timely, customized, convenient, and simple.”
But, where is the opportunity in mortgage education exactly?
Many borrowers are worried about getting a higher rate, even though other costs dwarf the impact of rates. Non-mortgage costs like utilities, property taxes, and home improvement expenses cost homeowners more, according to Fannie Mae, than do typical 30-year mortgages.
Borrowers who want a home upgrade need to know not to wait. Making – or paying – for a home that does not work is not necessary the best financial decision. A home that fits them, has newer appliances, more space, or a better location can save more than an interest rate can hurt. According to Fannie Mae research, NOT having their forever home is hurting them more financially than not having their forever loan.
Home price is a blind spot for potential borrowers too. An interest rate can be changed, the price paid – and the amount borrowed – to buy a home cannot. A drop in local home prices – nearly half the major metro areas in the country have seen price drops, some by as much as 8% – can translate to meaningful savings on mortgage payments. Supposing rates rise to 5% from 3% on a home that was $330,000 at the beginning of 2022. The resulting payment at 5% is about $381 more than it was at 3%. But, if home prices drop 8% – as they have in Pittsburgh and New Orleans – borrowers save 38% of that payment increase. Rates might cause a $381 payment jump, but the home price takes the payment back down again by $145.
Borrowers want to know how their credit will affect their rate, what they can do to improve their credit, and if they are near a key delineation point for interest rate because of their credit score. The difference between credit scores of 780 and 680 can translate to as much as 0.5% in interest rate. In 2023, that difference will be material to borrowers.
Many “overestimate the minimum credit score and down payment necessary to qualify for a mortgage, and remain unfamiliar with low down payment programs,” said Palim. “They could qualify for a mortgage but may assume homeownership is not a possibility. As a result, they may avoid further research or preparations, such as saving for a down payment or improving their credit.”
These consumer unknowns are roadways to access segments of borrowers who remain on the sidelines of the real estate market because of a simple lack of information. The good news is that many of them are past customers of mortgage lenders, or if the lender is a financial institution they are a retail banking customer. Lenders have immense amounts of data about their financial sitution. Now all they need to do is harness that data and engage the right segments with the needed information to make financial goals possible.