Nearly one third of homebuyers don't have the mortgage mindset necessary to compete in today's market.
A recent survey says more than 32 percent of homebuyers incorrectly answer rudimentary questions about mortgage information. It's the kind of information that can make or break a mortgage application and increase or reduce the cost of a mortgage. Zillow's recent Mortgage Marketplace survey reveals home buyers are misinformed about down payments, lending regulations, mortgage interest rates and basic refinancing.
"Home loans vary in length, rates, up-front fees and long-term costs. By not understanding your options, you could be setting yourself up for a more costly loan than you need," said Jessi Hall, a real estate writer with Veterans United Home Loans in Columbia, MO.
That is, if you can land a home loan at all. What's more, misinformed buyers have the additional misfortune of competing against professional cash-only investors, move-up sellers who've been there done that and other buyers who've taken the time to learn the financing ropes.
"All too often, buyers focus on negotiating a lower home price and ignore the importance of finding the right loan. If a home buyer can lower their interest rate by even half a percentage point, they can not only increase their purchasing power, but save thousands of dollars over the life of the loan," said Erin Lantz, director of mortgages for Zillow.
Zillow's survey found:
- More than one in four homebuyers (26 percent) incorrectly believe they are obligated to close their loan with the lender that pre-approved them.
- Nearly a quarter (24 percent) of homebuyers incorrectly believe that the best interest rates and fees can always be found through their current bank.
- More than one in three homebuyers (34 percent) believe all lenders are required by law to charge the same fees for credit reports and appraisals.
Why buyers are misinformed
Lori Hartjoy, owner of Blue Mountain Rentals in Walla Walla, WA says too many media stories generalize about mortgage requirements and that leads borrowers to believe the worst.
"Stories float around about minimum requirements that cause confusion to those who don't take the time to do their homework. While it is possible to find lenders that will require less, many first time buyers believe they will need a hefty amount in order to qualify," Harjoy explains.
She added, "Because of their own uncertainty, buyers don't bother to even begin the process of finding out that there are better offers out there."
But it's not just a shoot-the-messenger proposition. Homebuyers also need to educate themselves because the mortgage process of the home buying ordeal often is a once- or twice-in-a-lifetime event.
Even for those who've purchased a home before, by the time they move up, over or down, the mortgage market, mortgage rates, rules and regulations and underwriting guidelines have all changed.
"It's not something they do every day so a lot of people do have major misconceptions," said Laura Oatley, co-owner of The Oatley Team in Louisville, KY.
"A lot of people think they have to use who they have their existing loan with or they have to use their bank. Contact someone you trust, whether it's asking a friend who has recently gone through the process or contact a professional. There are so many great loan programs out there that they may not be aware of," Oatley said.
Zillow also found that too many current homeowners don't get it when it comes to basic refinancing.
- One in five homeowners (20 percent) said they did not believe underwater borrowers could refinance. More than 2.2 million underwater borrowers have refinanced through the federal Home Affordable Refinance Program (HARP), which was recently extended through 2015.
- More than one-third (34 percent) of current homeowners incorrectly believe that you can only refinance your home every 12 months. Almost half (47 percent) believe they must wait at least one year between refinancings. As long as it's personally financially feasible and the lender approves, homeowners can refinance as often as they like.
"What they need to understand is if they spent a little bit of time on this, they could save thousands a year or buy more house than they originally thought," said Oatley.