Will Homebuyer Counseling Help with My Mortgage?
Are you considering purchasing a home? Just how familiar are you with the mortgage market and terminology? FRM, ARM, PTM, MI, PMI, DTI, LTV, FICO, and the list goes on. Taking a home purchase mortgage is a complex and complicated process.
Homebuyer counseling is designed to equip the mortgage shopper with more knowledge and better tools to both buy a home and evaluate their financial alternatives. Hopefully, this will lead to a better consumer and more effective shopping experience.
A Home Education and Counseling (HEC) program is not required for most mortgage programs. For example, most Housing and United States Department of Housing and Urban Development (HUD) programs, including FHA loans, do not require an HEC,
However, housing counseling is still highly encouraged by FHA, particularly for first-time home buyers
Home counseling programs are required for first time home buyers in conventional loan programs such as Fannie Mae’s HomeReady® Mortgage, and Freddie Mac’s Home Possible® Mortgage.
Several research papers have been published regarding the benefits of homebuyer counseling. The Federal Housing Finance Agency (FHFA) published a working paper in March 2018 (NMDB Staff Working Paper 18-02: First-Time Homebuyer Counseling and the Mortgage Selection Experience in the United States: Evidence from the National Survey of Mortgage Originations) regarding the benefits of homebuyer counseling. One of their main findings is:
Homebuyer education and counseling (HEC) is believed to improve the home buying process for potential homebuyers
Preliminary findings from a HUD report published in 2016 show that there were three major benefits: improved mortgage literacy, a greater appreciation for communication with lenders and improved underwriting qualifications (help borrowers increase credit score). The report did not show that the counseling helped improve budgeting practices.
Reasons Home Counseling is Beneficial
Before the Housing Crash of 2007 and the demise of the subprime market, many borrowers were taking out interest-only loans, or adjustable rate mortgages with teaser rates. It is likely that many borrowers were not aware of the risks involved and were falsely led to believe that with rising home prices the worst-case scenario was to sell the home and pay off the loan. In today’s market, credit is much tighter and regulation and lender behavior have changed to help protect borrowers from irresponsible lending practices.
One of the main reasons lenders and the government are interested in providing homebuyer and mortgage counseling is to improve the performance of the loans. The assumption is that the more the consumer is informed and educated, the better choice they will make. Hopefully, consumers will take mortgages that they can afford and lower overall mortgage delinquency and default rates.
The second benefit of HEC is to increase borrower’s mortgage knowledge and help improve the mortgage choice and shopping experience. According to the NMDB report, 14% of first-time homebuyers received Homebuyer Education Counseling. Their main findings are that “first-time homebuyers who reported receiving HEC also reported better mortgage knowledge, higher incidence of comparing final costs to the Good Faith Estimate (GFE), higher incidence of selecting a mortgage based on cost, and a higher level of satisfaction with mortgage terms and the mortgage process.
The authors of the paper mention two possible problems with the results. First, mortgage knowledge was self-reported. It is possible that those with less knowledge were inclined to participate. Also, many consumers overrate their self-knowledge.
Can Homebuyer Education and Counseling Help You?
How often do you take a mortgage? Are you familiar with basic mortgage terms? Do you know how to compare mortgage offers? Should you take a Fixed Rate Mortgage or an Adjustable Rate Mortgage?
While homebuyer education and counseling are mandatory for select mortgage products, it can be beneficial for many other borrowers. According to Fannie Mae, some of the topics covered in a Homebuyer Education class are:
Understanding the mortgage process and required documentation, Home inspections, insurance and what to expect at closing, Budgeting for home repairs and maintenance.
Research shows that being a more informed borrower will help you make better choices. Even if you are not required to take a homebuyer education or counseling class, consider taking a class from an approved HUD counselor.