Editor: David Reiss
Brooklyn Law School

January 19, 2016

Know How to Get a Mortgage?

By David Reiss

"Einstein blackboard" by decltype

Fannie Mae’s Economic & Strategy Research Group posted research findings titled What Do Consumers Know About The Mortgage Qualification Criteria. The findings are sobering:

When asked to identify accurate key mortgage qualification criteria (down payment, credit score, and DTI ratio), about one half of consumers were unable to provide an answer.

o The lack of understanding is more pronounced among those with less education and lower income as well as among renters (as opposed to homeowners with mortgages), African-Americans, and Hispanics.

o Regression analysis shows that education, income, and age are most highly associated with mortgage qualification understanding. Lower-income consumers, less-educated consumers, and seniors are more likely to say “don’t know.” Ethnicity accounts for 2 to 9 percent of model explanation.

o Only 23 percent are aware of the 3 percent and 5 percent down payment programs.

o Although more than eight in 10 consumers (81 percent) indicate that they have seen their credit score, when asked what their score is, nearly half consumers (49 percent) say “don’t know” or provide a number outside of the score range (300-850).

And, among those who did provide an answer, only 5 to 16 percent of them chose an answer with the correct range.

o The “over-estimate” is more pronounced among less-educated and lower-income consumers, African-Americans, and Hispanics. When asked about the maximum DTI ratio, these consumer groups are more likely to “under-estimate” the ratio.

o Their mean responses about the minimum down payment and credit score requirements are higher than Fannie Mae requirements.

Lenders are cited as the most influential source of information for getting mortgage advice (33 percent most influential; 64 percent top three most influential), followed by family and friends (20 percent most influential; 47 percent top three most influential).

Regression analysis shows that ethnicity and age are most highly associated with differences in the influence of various information sources. For example:

o Older and Caucasian consumers are more likely to cite lenders as the most influential source of information.

o African-Americans and Hispanics are more likely to cite real estate agents, government agencies, and non-profit housing counselors.

o Younger consumers and Asian-Americans are more likely to cite family and friends as the most influential source of information. (5, emphasis in the original)

The authors identify a lot of important implications that arise from this study, the main one being — “Do not take consumer confidence at face value — there is a need and opening for educational efforts surrounding primary underwriting principles (credit score, down payment/LTV, DTI ratos, and low down payment mortgage programs.” (6)

The big open question is, however, does financial education really work?

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