Tag Archives: consumer tip

CFPB report finds less than 50% of borrowers shop around for mortgages

Last week, the Consumer Financial Protection Bureau issued a breakdown of an important consumer behavior report. The National Survey of Mortgage Borrowers was completed by over 1900 homebuyers last year. These surveys asked approximately 100 questions covering the entire mortgage process, from when the consumer first started shopping for a mortgage, all the way through closing. Findings of the survey say that the overwhelming majority (77%) of first-lien mortgage purchasers only ever fill out one application.

Survey Key Findings:

  • Almost half of consumers who take out a mortgage for home purchase only seriously consider a single lender or mortgage broker before choosing where to apply. Shopping is somewhat higher among first-time homebuyers, but not by much.
  • Borrowers rely primarily on their lenders, brokers and real estate agents for information on the mortgage lending process. Far fewer consumers obtain information from outside sources, including friends, family, co-workers, housing counselors and even the web.
  • Most consumers report being “very familiar” with types of mortgages, available interest rates, and the process of taking out a mortgage. Those who are “unfamiliar” with the mortgage process are less likely to shop are more likely to rely on real estate agents and personal acquaintances.
  • A large number of borrowers report that factors NOT directly related to mortgage cost – including a previous relationship with a particular lender or broker, the lender or broker’s reputation, or even geographic proximity – are “very important” in their decision-making. Borrowers who express these preferences are “much less likely” to shop.

How much do consumers shop?

Apparently, not much. 77% percent only applied to one lender. First-time homeowners are slightly more likely to apply to more than one. The survey found the most common reason for shopping was to find the best deal. 5% of consumers that applied to multiple lenders did so because they had been turned down elsewhere. CFPB concludes in the report that a large amount of consumers ARE NOT getting the best mortgage possible due to lack of shopping.

How familiar are consumers with the mortgage process?

51% of consumers say they are “very familiar” with the process, start to finish. 14% say they are not at all familiar. Most consumers were most familiar with their own credit score and history, while only 49% said they were “very familiar” with the amount of money they would need for closing. 14% said they were “completely unfamiliar” with closing amounts. 25% of first-time homebuyers said they were “completely unfamiliar” with the process. The report found that the less familiar the consumer is with the process, the less likely they are to shop. For example, consumers who had researched available interest rates were almost twice as likely to shop as those who were unfamiliar.

Where do consumers go for sources of information on getting a mortgage?

The study found that 70% of consumers used their lender or broker as their main source of information on taking out a loan. 33% said they used their real estate agent as the primary source. Only 20% of borrowers said they used the web as a source of information “a lot.” Even fewer used friends, personal contacts, or financial planners. Less informed consumers tend to rely on personal acquaintances and real estate agents far more often than consumers who called themselves “very familiar” with the process. CFPB speculates this might be because those types of sources can provide information in laymen’s terms.

What do consumers look for in a lender/broker?

The three most important characteristics for the borrower are:

  1. Having an established relationship with the lender/broker. (42% said this was very important.)
  2. “A local office nearby” is very important for 40% of borrowers.
  3. Reputation of the lender/broker is very important for 41% of borrowers.

Consumers who had a prior relationship with a bank or lender – or were located near one – were much less likely to shop around than those who did not.

CFPB caveat:

This analysis doesn’t attempt to evaluate the extent to which shopping improves outcomes – like fewer delinquencies and foreclosures, for instance. But they’re working on getting that data as well.

Conclusion:

So, why do so few people shop around for a mortgage (even though it might benefit them financially), preferring instead to borrow from a bank or institution they have an established relationship with, or one that is conveniently located?

A recent piece on National Public Radio suggested this pattern in consumer behavior may be explained by consumer math skills. Specifically, many consumers may not understand how compound interest accrues over the life of the loan.

Link to story: http://www.npr.org/2015/01/13/376836545/consumer-agency-launches-tool-to-help-you-find-a-cheaper-mortgage

The CFPB report suggests a simpler explanation – people simply prefer going to their neighborhood lender/broker, or going to the bank they’ve already established a relationship with.

What does this data mean for brokers, lenders, and banks?

Solidifying a presence in your community may be the best way to drum up business. Making yourself available to the consumer as an resource for information can be an invaluable tool – the report clearly suggests consumers prefer this method of deciding on a mortgage provider to any other.

What does this data mean for consumers?

Shopping around may be in your best interest, especially if you are new to the mortgage process, and finding someone who will take the time and effort to get you the best loan available may require more than one pit stop.

Link to report: http://files.consumerfinance.gov/f/201501_cfpb_consumers-mortgage-shopping-experience.pdf

Developing Your Business – Tip No. 4 – The Government offering No Down purchases?

In the midst of a collapse in the mortgage and financial markets and a tightening of credit underwriting guidelines, is it possible a true No Down Payment opportunity still exists, and is one you can actually get closed?  As far fetched as it may sound, the answer is a resounding – yes, maybe!

The American Recovery and Reinvestment Act of 2009 created an incredible opportunity for a group of home-buyers, one that could allow them to purchase a home with ultimately no money invested in the transaction.  No down payment or closing costs, as long as the real estate agent and mortgage lender understand the new rules.

Under ARRA, first-time home-buyers are given a tax credit of up to 10% of the purchase price not to exceed $8,000, or $4,000 for married filing separately.  This tax credit, unlike the tax credit provided in 2008, does not require the home-buyer to repay the credit, as long as they remain in the home as their primary residence for at least 36 months post closing.  Additionally, as of February 25th, the IRS will allow this credit to be taken in either the 2008 or 2009 tax year.  The only requirements to receiving the tax credit are, they must purchase the home prior to December 1, 2009 and their adjusted gross income does not exceed $75,000 for single or $150,000 for joint filers. 

So what about the No Down Payment and closing costs I spoke about?  If you’re working with someone who qualifies as a first-time home-buyer, someone who hasn’t owned a home in the previous 3 years, and you can place them in an FHA mortgage, here’s how it could go together.   FHA requires a minimum down payment of 3.5% of the purchase price (must be paid by the buyer), plus they need money for closing costs, unless the seller agrees to pay those costs.  If you negotiate the right transaction, your buyer will have no money invested in the transaction, compliments of the government.

Here’s a scenario:  You have a buyer purchasing a home for $140,000,  they will need $4,900 in down payment and an estimated $2,900 in closing costs (may vary slightly in different areas), for a total of $7,800 invested.  If they purchase the home , having the money necessary to close the transaction, they would after closing, immediately file tax return form number 5405 with the IRS (either with their original tax filing or in an amended return, depending when they purchase).  The will receive the $8,000 tax credit funds, making their investment in the property zero.

Now you have ability to help many people buy their own home, using this government assistance program, in a time when home buying opportunities are at their highest level.  This becomes a win-win-win situation for everyone, go help you community!

Developing Your Business – Tip No. 2

Today’s economy may provide your customers wealth building opportunities they may never have considered in the past.  With traditional investment sources, such as the stock market, falling to 15 year lows, many consumers should consider moving their money to “Their Own Bank.”  No not the bank down the street, but rather they should become their own bank.  Many people who have liquid assets continue to buy big ticket items, like cars, boats and furniture, and end up borrowing the purchase from their local bank.  If they became their own bank, the interest they would pay these institutions could go to benefit themselves and build wealth along the way.

Here’s what I’m talking about, let’s say Joe has $10,000 in his stock fund, and he wants to buy a car that requires a $10,000 loan.  If he were to get that loan from his bank, it would be at 7.5% interest over 4 years, and he would have payments of $241.79 per month.

If Joe took the $10,000 from his stock fund and bought the car; then executed a loan to himself from the “Bank of Joe,” for $10,000 at 7.5% for 4 years, at the end of the 4 years Joe would have paid himself $11,605.92.  This would mean his $10,000 returned him 16.05% over 4 years TAX FREE, potentially much better than the stock market would have done over the same period of time.

With a falling stock market and uncertain financial times ahead, your customers need to change how they view money and how they utilize debt to their advantage.