Real Estate News

Basic mortgage understanding eludes many first-time buyers

Published: 16 Jan 2018

One of the biggest issues in the housing sector today is the large share of the market taken up by first-time buyers who face unique challenges. Perhaps the biggest of these is the limited inventory of lower-priced starter homes for sale, but these shoppers will likely also face difficulties in the mortgage process - often because they simply don't understand the best practices to get a good deal on a home loan today.

For instance, despite the fact that many mortgage experts recommend shopping around as being vital to getting a good deal on a home loan, nearly 1 in 3 first-time buyers simply sought mortgages from their current banks, according to a new survey from FREEandCLEAR. About as many respondents also said they just went with whatever financial institution was recommended to them by their real estate agents.

Furthermore, about 20 percent of respondents thought they would not be allowed to make down payments of less than 5 percent, despite the existence of programs designed to let them do just that, the survey found. It should come as no surprise, then, that more than 4 in 5 respondents said they did not learn anything about how mortgages work in either high school or college. Moreover, nearly half of all first-time buyers polled said they rated their mortgage knowledge at a level of 5 out of 10 or lower.

First-time buyers still face numerous hurdles in the housing market.First-time buyers still face numerous hurdles in the housing market.

A tough market
The reason first-time buyers need to arm themselves with as much knowledge as possible when making what will likely be one of the biggest financial moves of their lives is that today's housing market isn't all that forgiving for people in their demographics. The latest data from Genworth showed that the number of first-time buyers in the market through the end of the third quarter of 2017 was up 6 percent year over year, while the share of single-family homes on the market slipped 1 percent to 1.5 million. In a historically average housing market, about 5.2 million such properties would be available.

At this point, first-timers make up about 40 percent of the total buyers' market, up from both a historical average of 35 percent and 2016's 36 percent, the report said. That amount of competition can create serious impediments for shoppers.

A little bit of help
Meanwhile, lenders are increasingly willing to give first-time buyers, who tend to be younger and carry more student loan debt, a break in certain ways, according to financial columnist Ken Harney in a column for The Washington Post. Generally speaking, it's still much more difficult to get approval on a mortgage application today than at almost any point prior to the economic downturn nearly a decade ago, but lenders continue relaxing their standards as the economy improves.

More recently, this has been particularly true when it comes to easing rules about debt-to-income ratios, which would have normally been a significant impediment to first-timers in particular, the report said.

With these issues in mind, would-be buyers who are getting into the market for the first time would be wise to do plenty of research about the best possible path to an affordable mortgage and getting a good deal on whatever homes they wish to buy.