Survey: Prospective Home Buyers Lack Basic Mortgage Education

For overrnthree years the news has been filled with discussions of foreclosures, mortgagernfraud, derivatives, the failure of Freddie Mac and Fannie Mae, mortgage backedrnsecurities, tranches, and robo-signing yet Tuesday the results of a surveyrnconducted by Zillow Mortgage Marketplace reveal that nearly half of the homernbuyers it surveyed were unable to answer basic questions about mortgages or thernmortgage process. </p

Zillow and Ipsos a global survey-based market research company asked 1,005rnrandomly selected U.S. adults to gauge the level of their knowledge aboutrnmortgages and to answer questions about the costs, eligibility, and processesrninvolved in obtaining financing. A subgroup of 168 respondents within the grouprnwas identified as prospective homeowners.  Respondents were given a series of eight true or false questions aboutrnmortgages, for example:</p

“Only first-time homebuyers are eligible for FHA loans.” </p

“Your annual percentage rate (APR) is a yearly rate that reflects therntrue cost of your mortgage and includes your interest rate, points, mortgagerninsurance, and other fees.” </p

More than half (57 percent) of prospective homernbuyers who were polled did not understand how adjustable rate mortgages (ARMs)rnwork. When asked if interest rates on 5/1 ARMs always reset higher after fivernyears, the majority of home buyers incorrectly answered yes.   </p

More than one-third (37 percent) ofrnprospective home buyers believed that pre-qualifying for a loan means they havernsecured financing when it is merely the first step in the process where thernlender estimates the size of a loan for which a buyer can qualify. Nearly halfrnbelieved that they should always buy mortgage discount points rather than recognizingrnit as a decision based on factors such as how long the buyer plans to stay inrnthe house.</p

More than two in five (42 percent)rnof the polled prospective home buyers do not understand that Federal HousingrnAdministration (FHA) loans are available to ALL buyers. Instead, theyrnbelieve only first-time buyers qualify. Additionally,rnone-third (34 percent) of the prospective home buyers believe lenders arernrequired by law to charge the same fee for credit reports and appraisals ratherrnthan their being a negotiable item from lender to lender. </p

“Most people wouldn’t jump out of a planernif they didn’t know how to use a parachute, yet each year many buyers commit tornthe largest loan they will take out in their lifetimes without understandingrnessential information about mortgages,” said Zillow Mortgage MarketplacernDirector, Erin Lantz. “By simply spending a few hours researching how arnmortgage works, and by shopping around for the most competitive rates and fees,rnbuyers can save a lot of money.”</p

Interestingly, the survey responses provided by Zillow include only thosernfrom the subgroup of 168 prospective homebuyers. rnFor this small sample the margin of error is +/-7.6 while for the grouprnas a whole the margin is +/-3.1 percentage points 19 times out of 20. It would have been instructive to know how thernanswers of the prospective buyers measured up against the answers from the non-buyersrnin the survey.  That they consideredrnthemselves buyers should indicate a level of involvement in the process that mightrnmake them more knowledgeable than non-buyers. rnIf that is indeed the case then the other answers must have been trulyrnappalling. In any case, lenders should keep in mind that many borrowers lackrnbasic financial literacy and accept the responsibility of educating them beforernclosing the loan.</p

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