A Powerful Resource for Lenders

A Powerful Resource for Lenders

By Rebecca Steele, NFCC

It is true. You don’t know what you don’t know, and that lack of knowledge can stand in the way of renters who aspire to become homeowners. Pre-purchase counseling has been an instrumental resource that has made the dream of homeownership a reality for countless individuals and families. As a result, counseled individuals who achieve their goal of homeownership are less likely to experience delinquency or foreclosure, according to research by the Department of Housing and Urban Development (HUD). Such an outcome is mutually beneficial for homeowners and lenders alike. The challenge is that while so many more could benefit from pre-purchase counseling, they don’t know it exists. Worse, many have made a conscious decision not to enroll in a pre-purchase counseling program because of myths and misinformation they have heard from uninformed sources close to them.

A 2016 survey conducted by the National Foundation for Credit Counseling (NFCC) found that 65 percent of renters hope to own a home in one to three years, yet many are held back due to perceived barriers based on misunderstandings or misinformation that could otherwise be addressed through interactions with a HUD-certified pre-purchase counselor. Consumer education programs supporting sustainable homeownership can only be successful if people know they exist, yet other studies have shown that many of those not participating were unaware that such counseling existed.

For those not familiar with the process, buying a home can be complicated and intimidating. But it doesn’t have to be. There are numerous trustworthy resources and organizations available to help navigate the complexities of buying a home. One just needs to know where to go and how to identify the right ones. A 2019 Fannie Mae survey indicated that 64 percent of younger homebuyers look to lenders for guidance related to the homebuying process. As the market increasingly depends on new generations of aspirational homeowners, lenders have a powerful resource to help fill the need for homebuyer education.

Working with a HUD-certified pre-purchase counselor provides prospective homeowners with a significant advantage versus going it alone. By making the conscious decision to work with a HUD-certified counselor, the prospective homeowner enlists the aid of a subject matter expert who then acts as a coach. This coach then steers them through the minefield and potential pitfalls associated with buying a home. All the while taking the time to explain the process and connecting the prospective homeowner with invaluable resources that also offer the potential to reduce out-of-pocket expenses.

Further underscoring the benefits housing counseling provides to consumers and lenders, the HUD “Pre-Purchase Counseling Outcome Study” found that about one-third of the study participants had become homeowners 18 months after seeking pre-purchase counseling. This is very encouraging as low-to-median-income borrowers and first-time homebuyers are finding it particularly challenging to buy a home. These challenges are exacerbated by consumer misunderstandings related to down payment requirements: prospective homebuyers think they need to put more down than lenders require, access to credit at reasonable rates to purchase a home can be a real hindrance for many, and the high levels of home price appreciation reduce home affordability making it more difficult for communities of color and first-time homebuyers to become homeowners.

Here is what we know. Homeownership has long been the primary asset-building mechanism in the U.S. economy. Unfortunately, a century of redlining, mortgage loan discrimination, and preferential housing subsidies have created major barriers to homeownership for black Americans and communities of color. Black homeownership rates have declined to levels not seen since the 1960s. What this means is that a large and growing homeownership gap corresponds with the wealth gap. Understanding the relationship between wealth accumulation and homeownership shines a spotlight on the importance of leveraging those resources to level the playing field for all prospective homeowners. When utilized, HUD-certified pre-purchase counseling is the resource that serves this critical need. This is particularly true now given the situation brought about by the onset of COVID-19.

Although it may seem counter-intuitive, despite the financial turmoil currently occurring in the market place, for any buyer who has the financial means, an appropriate down payment, stable income, good credit, and looking to purchase an affordable property, now can be an ideal time to purchase a home. Feedback from counseling agencies from around the country indicates there are numerous “hot markets” evidenced by significant home buying activity across many income levels including the LMI segment.

This activity would likely be even more robust if more consumers took advantage of prepurchase housing counseling. As was mentioned previously, some consumers don’t know housing counseling exists. Additionally, many consumers could either qualify for a mortgage right now or would be qualifiable in a relatively short time if they just took the time to invest in themselves and their financial future by taking advantage of pre-purchase counseling. Here is the best part. Pre-purchase housing counseling and housing counseling, in general, do not only benefit prospective homebuyers, but it also benefits lenders as well.

For example, through its Envisioning Homeownership Pre-purchase Counseling Program, the NFCC is working to create a pipeline of informed prospective homeowners that understand the home buying process, have realistic expectations of how much house they can afford, and have had their financials reviewed and organized to allow for more efficient underwriting by the lender.

Driving this process is a dedicated coach who walks consumers through extensive counseling that assesses their credit scores, maximum qualifying ratios, and residual income as methods for verifying consumer mortgage readiness. As part of the counseling process, each counselor develops a customized action plan for their client that addresses credit, savings, and debt management challenges. This comprehensive review enables clients to become adequately prepared for successful, long-term homeownership. Ultimately, the knowledge gained through participation in the counseling process can create a more qualified borrower and a more financially resilient homeowner.

One thing is clear. Whether looking to purchase a home or working to address financial struggles related to keeping a home, HUDcertified Housing counseling is a proven and effective resource to meet the challenges of homeownership. The CFPB recommends that you only work with HUD-approved agencies, such as those affiliated with the NFCC.