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After the subprime mortgage crisis and the collapse of the U.S. housing market in 2008, lending standards tightened dramatically. Credit score requirements rose, and most borrowers were required to have skin in the game, in the form of a down payment.
Rules were also put in place setting a limit on how much debt a person could carry relative to their income. The rules were a reaction to a mortgage system that had gone off the rails.
Though the plan was not intended to keep consumers out of homeownership, apparently a lot of them got the wrong idea.
The majority of consumers now think it is much harder to qualify for a home loan than it actually is, according to a recent Fannie Mae survey of more than 3,000 people. Respondents thought they needed much higher credit scores and bigger down payments than necessary. They also didn't know much about the minimum debt levels lenders require.
With the proliferation of online credit monitoring sites and mortgage rate calculators, a growing number of respondents said they had seen their credit score recently, but nearly half couldn't remember what it was. Fannie Mae compared the results to a benchmark survey done in 2015.
The survey also found that while the use of online sources of mortgage information is much more common, consumers either didn't know or overestimated the minimum credit score needed to qualify for a loan. Half of those asked were unsure, 14% thought the FICO score needed to be higher than 680, and 32% thought it needed to be higher than 620. The minimum FICO score is actually 550. Both current homeowners and renters were equally uninformed.
Consumers also overestimated the required down payment on a mortgage. Most didn't know how much was needed, 13% thought the minimum was 20% and 1 in 5 thought they needed 6-10%. In reality, the FHA backs loans with a minimum down payment of 3.5%, and there are other programs through the U.S. Department of Agriculture as well as the U.S. Department of Veterans Affairs that offer zero down payment options.
As for debt levels, consumers can qualify for a mortgage with as much as 50% of their income going toward total debt payments, but 61% of respondents said they didn't know what the level was and most others said the limit was 40%.
"I think it's because it's a very infrequent transaction," said Doug Duncan, Fannie Mae's chief economist. "Most buy a house or refinance maybe four to five times in their life. It's not like your checking account which you check daily or your credit card account which are a regular part of your daily transaction of life."
But even those who one would think would be more knowledgeable, such as current homeowners, those actively planning to buy a home soon and those with a general financial literacy, were not much more knowledgeable than the rest of the population about mortgage requirements, according to the Fannie Mae survey. Just 33% of current renters said they thought getting a mortgage would be easy.
It is difficult to estimate how many renters are shying away from buying because they are uninformed, but it's safe to say there are some. About a quarter of those renters surveyed said the main reason they didn't think they could get a mortgage was because they didn't have the income to afford the monthly payment. The second most popular reason was too much existing debt, and the third was insufficient credit score or history.
"I do believe there are some people who don't recognize that there are programs available with lower down payments," said Duncan. "When you see an advertisement on a lender's website, it doesn't give you the details of special programs where there may be a credit score adjustment. Those are not the featured products, so consumers might not realize that there are special programs."
While consumers used to get all their information from their lenders, fewer and fewer are using their lender as a primary source, just 47% now compared with 58% in 2015. Now they are using websites instead.
Nearly two-thirds of total respondents to a survey by mortgage processing firm Ellie Mae said they expected to be able to apply for and complete a mortgage application fully online. Millennials were most likely to apply for their mortgage using a combination of online and in-person interactions.