While most Americans state they believe owning a home is part of the American Dream, only about eight percent of the population reports having the basic knowledge to figure out if they can afford a home and obtain conventional financing in order to make the purchase. Ally Financial recently surveyed more than 2,000 U.S. adults about the mortgage lending process. The vast majority demonstrated a total and admitted lack of knowledge about rates, points, and debt-to-income ratios. This dearth of information is causing many would-be buyers to opt out of even considering buying a home, said Diane Morais, Ally Home’s president of consumer and commercial banking products.
According to the survey, 92 percent of the respondents said they had no idea how much mortgage they might be able to afford. Only eight percent were aware that they would not be considered for a home loan if the purchase would create a debt-to-income ratio of more than 43 percent. Both Millennials (ages 18-34 years of age) and Baby Boomers (55-65+) found the question “particularly difficult,” Ally researchers noted.
Education is Necessary
Interestingly, while most respondents are interested in buying a home, most do not know the difference between low points and low rates. The general consensus seemed to be that low points were best for short-term ownership, and low rates for long-term ownership, although both answers equated these mortgage characteristics with being key to low payments. Mortgage points are fees that a homeowner pays up front to a lender to drive down the interest rate on the loan, and may be applied in the form of prepaid interest on a loan (discount points) or directly to the mortgage lender to cover the costs of making the loan (origination points). These points may be tax deductible, and may also drive down your interest rates. However, paying points often takes years to pay off, making it a better option, in many cases, to pay points only if you plan to stay in place long-term – the opposite of what survey respondents believed.
Real estate investors can benefit, much as Ally is doing, by educating buyers on their options. An informed buyer is much more likely to be able to afford more home and make educated decisions about how to finance their home. This saves the buyer, the lender, and the seller (often you, the investor) both time and money by maximizing the odds of a good outcome on a deal.
Investor Insight: A working familiarity with mortgage lending will help you vet potential buyers and identify creative strategies to broader your buying, selling, or renting markets.
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