Off the top of your head, how much would you say is needed for a down payment on a home loan? Ten percent? Fifteen? Twenty?
If you’re not sure, you’re in good company. A survey by Fannie Mae’s Economic & Strategic Research (ESR) Group found 40 percent of consumers admit they don’t know what a minimum down payment could be. Their average guess of 12 percent was four times what they might actually need, given the availability of 3 percent down payment loans.
That lack of understanding could be delaying decisions to buy, said Fannie research manager Li-Ning Huang.
“Studies show that renters who want to own see saving for a down payment as the top barrier to homeownership,” Huang said. “But in this study, we found that many people were unaware of low down payment programs.”
That’s Not the Only Knowledge Gap
When asked about their knowledge of key mortgage qualification criteria such as credit scores and debt-to-income ratios, about half of the respondents were either unable to answer or, in the case of credit scores, provided an answer outside of the 300-850 typical range. Fifty-four percent of consumers said they didn’t know what credit scores were required for a home loan and 59 percent didn’t know maximum debt-to-income ratios.
Surprisingly, the lack of credit knowledge was nearly as great for renters who plan to purchase within the next five years as for the general population, Huang said. In effect, those renters may be waiting too long.
“The results of this survey suggest that many consumers are putting off mortgage considerations until much too late in the process,” said Mark Palim, Fannie Mae vice president of applied economic and housing research.
Despite the fact that many consumers are unaware of the steps needed to transition to homeownership, a recent survey of prospective homebuyers conducted by Redfin found they want to buy. As of February, one in four prospective homebuyers said high rents are their primary reason for buying. That’s an increase from one in five in November and from one in eight in August.
When asked how their perspective on home buying has changed, 33 percent of respondents said they’re more inclined to buy now than they were a year ago. Given the increase in homebuyer demand due to rising rents and the fact that home prices continue to rise, awareness of low down payment mortgage options is particularly important for these buyers.
Think You’re Ready? Here Are Three Tips to Get You Started
- Understand your credit report and credit score. By law, you can request a free copy of your credit report annually at AnnualCreditReport.com or by calling 877-322-8228. You can also request your report for free if you’ve been denied credit (within a certain time period). Just note: this is your credit report only and does not include your FICO score. If you find an error on your credit report, you can file a dispute by going to the website of any credit bureau.
- Talk to a credit counselor if you need help. Free or low-cost credit and credit and pre-purchase counseling is available through HUD-approved housing counseling agencies nationwide. You can find an agency near you using HUD’s website. However, not all credit counselors are the same. Make sure the company you work with is HUD-approved and be wary of companies or individuals who promise to instantly “fix” your credit — for a price.
- Get pre-approved. A lender can use your documentation (pay stubs, the last two years’ W-2s, your last two federal returns, two months’ worth of bank statements of all types of accounts, and your credit report) to tell you how much home you may be able to qualify for so you can decide if you’d like to move forward sooner rather than later. Plus, a preapproval letter helps real estate agents and sellers know that you’re a credible buyer and able to act fast when you find the home you want to buy,” said Staci Titsworth, a regional sales manager and vice president at PNC Mortgage.