They don't know what they don't know

How much financial literacy can originators expect buyers to have?

They don't know what they don't know

In addition to educating borrowers on the ins and outs of the mortgage process, the best mortgage originators take a lot of pride in improving their clients’ financial literacy.

Chad Lubben is a branch manager with Summit Funding, and says that he wants to see borrowers bring to the table a basic knowledge of real estate appreciation and an understanding that a home is also an asset. The most important piece of knowledge, however, should be the lost art of budgeting.

“I think it’s really good when people have a concept or idea of what their budget is. It’s always surprising people how little of planning people have done with their own finances and it’s ‘I make this and I’m not really sure what I spend and I’m not really sure what I save,’ and just live day to day and month to month,” Lubben said.

Nicole Rueth agrees. She’s a branch manager at Fairway Independent Mortgage, and says that buyers would ideally have an awareness of their budget, as well as acceptance of it.

“I would say that a better experience is going to be supported when somebody comes in with the basic knowledge of budgeting, as well as financial acumen around a simple payment structure for a loan,” she said. “You might love that $800,000 home but that $450,000 home is really the one that matches your budget and your current financial structure.”

As more mortgage originators move to an advisory role in order to stay competitive, it can be tempting to expect less from borrowers. If their mortgage originators and lenders have everything in hand and can just tell them what’s best, why bother?

The risk, Lubben says, is that borrowers will assume that all originators and lenders have their best interests at heart, which is a faulty assumption at best. Automation can also encourage borrowers to take a passive role in the process. Mortgage technology should be made available to those who want it, but the financial literacy aspect of the process could be in danger of falling by the wayside if originators don’t encourage borrowers to take the reins.

“If you’re going through an automated mortgage process, what are you really learning about your finances? What impact do you really have on your budget?” Lubben asks. “I find people too trusting that the banking industry is taking care of them by setting certain parameters, and one of the things I tell clients a lot is, the mortgage companies and the banks don’t care if you can afford the mortgage; they care if they can sell it on the secondary market and profit off of it. I do care if you can afford the mortgage.”

Moving towards technology as a first line of defense means that more people are going to get further in over their heads than they should be, Rueth adds, and there are mortgage professionals out there who are more than willing to take advantage of that.

“You have mortgage professionals that, to some degree, are less professional than others, regretfully. Or you have some people that are just more transactional, or—I hate to put it this way—but you do have those people that are needing a deal,” Rueth said. “They need that transaction more than they need to tell [borrowers] that [they] shouldn’t be doing this.”

Most borrowers don’t necessarily have the time or the will to improve their financial literacy on their own, either because the topic itself overwhelms them, or because they don’t have the time. If they need to strategically make a decision to pass off that task, that’s fine, Rueth said, as long as they’ve properly vetted someone and have a full level of trust in them, because that level of trust is very easy to take advantage of.

Even those consumers who attempt to improve their financial literacy before getting a mortgage have to sort through a lot of misinformation. Lubben said that consumers come to him now more frustrated and sometimes less educated than they used to be because of the conflicting information that they find. But once they get on the right track, they’re engaged.

“I find once you get them involved and you can break things down basically, that they want to know more. They just don’t know what they don’t know,” Lubben said.

Millennials especially crave information. “They do want the advice, they do want the face-to-face interaction. They just want the tools on how to get there. So they want to leverage technology to get to a certain point but they’re not scared to take the advice, and take the face-to-face meeting and take the mentorship, so to speak, of how their finances should be structured,” Lubben said.

Originators have a professional responsibility to provide the best financial advice and financial education for their clients, especially when it comes to their mortgage options. Ultimately, though, borrowers have to take responsibility for understanding their own situation. The more educated originators expect borrowers to be, the more protected borrowers are against those who would take advantage of that trusted partnership.

“The client has their own fiduciary responsibility to own their understanding of what is being told to them and whether or not it actually fits into their current financial paradigm,” Rueth said. “Even I can go to a financial planner and if I don’t understand the back and forth of, say, a whole life policy, I might get sold into something that’s completely not apropos to my situation. At the same time, if I don’t do my own self-education then it’s really my fault, not theirs.”