Wells Fargo Survey Shows Gap in Homebuying Knowledge

Despite record low homeownership rates consumers have not soured on the American dream.  The second annual edition of "How American Views Home Ownership" report by Wells Fargo & Company details results of a survey conducted for the bank by Ipsos Public Affairs that found attitudes toward it are positive, but consumers have many misunderstandings about what it requires to become a homeowner.

The survey found that 65 percent of respondents view homeownership as a dream come true or as an accomplishment of which to be proud and 72 percent think that now is a good time to buy. They also see the financial benefits of homeownership, with 43% saying it's a good way to build equity or more assets.

Only one out of ten renters said they would prefer to rent over owning.  Higher proportions of African-Americans (37 percent) and Hispanics (31 percent) say they're considering buying a home in the next two years compared to the general population (17 percent). In fact, the percentage of African-Americans considering buying within two years was up 15 points from the survey last year.

But respondents' assumptions about what it takes to become a homeowner and the barriers they perceive to doing so show, Wells Fargo said, a need for homebuyer education.

The first misconception centers on credit scores.  Two-thirds of respondents believe they need a "very good" credit score to qualify for a mortgage but 45 percent defined a "good" score as over 780 which is actually considered excellent by most scoring models while a score over 660 is considered good.  Further, respondents appear to overemphasize the importance of the credit score in determining their credit worthiness

Franklin Codel, Head of Mortgage Production for Wells Fargo Home Mortgage said, "Creditworthiness isn't determined based on a single factor, so potential homebuyers should find out what options may be available before excluding themselves based on credit score alone."  He said the applicant's entire financial picture, including income, assets, debt-to-income ratio, credit history, credit scores, and the amount of the loan compared to the value of the property are all part of the equation.

Twenty-one percent of all respondents and more than a quarter of African-American and Hispanic respondents identified a lack of funds for a downpayment as a barrier to homeownership and they overestimate the amount of down payment needed to qualify for a home loan.  Thirty-six percent of all respondents and over 50 percent of minority respondents assume a 20 percent down payment is always required even though there are programs that require downpayments as low as 3 percent.

Debt is also a homeownership barrier for some. When asked to identify factors that are or could potentially be their biggest barriers to buying a home (they could select up to three), 13% of all respondents chose "My existing debt."  Of those who identified a type of debt as a barrier 69 percent cited credit cards, 45 percent said student debt, and 44 percent said car loans.

Despite their misconceptions 80 percent of respondents say they know and understand the financial process involved in buying a home.  While millennials presumed knowledge increased from 61 percent in last year's survey, only 69 percent now claim to understand the process.  Knowledge is lower among renters than homeowners (64% of renters, 89% of owners), but renters have improved year over year (55% in 2014, 64% in 2015).

However, awareness of different types of mortgages decreased from last year. Respondents were asked to select all the types of mortgages they'd heard of, and almost all the mortgage types listed (that were also tested last year) were recognized by fewer respondents (ranging between 2% and 17% fewer).

Other aspects of the homebuying process are well understood by many consumers with 90 percent being aware that there are other costs associated with homebuying such as attorney's fees and insurance premiums.   Only 39% believe "As long as you can afford the monthly payments, you can get a mortgage" - so the majority understand that it's important to also have funds for other living expenses and a savings cushion.  Most were also aware they could accept help from parents or other relatives in qualifying for a mortgage.

Consumers say when they are ready to buy a home they want a high-tech experience combined with a human touch.  Most respondents are open to using technology in the mortgage process but nine in 10 said they want a personal connection with their lender - someone to answer their questions and walk them through the process. Most people say they want to see each step in the process so they can understand what's happening (92 percent); that completing the mortgage process online would be convenient (79 percent); and that they would be comfortable completing the mortgage process online as long as they knew they could speak with someone when needed (73 percent). While many people prefer to interact with their lender and submit paperwork in person, more than a quarter want a mix of in-person, phone, mail, online and mobile interactions.

"The American aspiration for homeownership is alive and well," Codel said. "Homeownership has traditionally been the vehicle through which many people build wealth and financial stability. Homebuying and its downstream financial benefits strengthen the U.S. economy with strong neighborhoods and vital local businesses. For the millions of consumers who express a desire to own a home, it's essential that lending and housing professionals provide clear, simple information to build consumer confidence about buying a home."