Homebuyer Education: Is It Worth It?
Buying a home involves a lot of moving parts. You need to manage your credit score, save for a down payment, figure out what you can afford and then carefully follow the rules for applying for a mortgage.
The more you know about the process, the more successful you’ll be. The Urban Development Act of 1968 created the framework for homebuyer education, and numerous studies over the last 20 years have shown them to be effective.
Still, homebuyer education often costs money. The question is, is it worth it?
What is homebuyer education?
Many lenders offer low down payment programs for first time homebuyers, or for homebuyers wanting to purchase a home again after a foreclosure. These loan programs often require that homebuyers complete a homebuyer education course before making an offer on a home to be eligible for the lower payment benefits.
Down payment assistance programs offered by states and neighborhood nonprofits also generally require homebuyer education to ensure customers have the financial knowledge they need for successful homeownership.
These homebuyer education courses generally cover topics that directly relate to the homebuying process, like how to determine your best type of loan and what to include when making your offer.
What you’ll learn in homebuyer education
In most courses, you’ll learn a variation of the following.
How much can you afford
This is a different concept from finding out how much you can qualify for. Lenders look at your pre-tax income to determine the maximum you can qualify for, but they don’t evaluate your expenses beyond what shows up on your credit report.
Homebuyer education teaches you to look at your take-home pay and entire budget when determining how much you can afford. That means you calculate your food, gas, cell phone, internet, car insurance, childcare and other expenses you incur monthly to see how much room you have for your new house payment.
You also need to consider housing expenses like repairs, your water, electric and gas utility bills, as well as anything else you’ll need to keep your house well-maintained. Homebuyer education courses provide you with this information.
Who’s who in the home purchase process
There are probably a dozen professionals that you will be in contact with during the homebuying process, from loan officers to document processors. Homebuyer education will give you an overview of the mortgage, real estate, title, insurance and home inspection professionals that will help you on the journey to your new home.
How to choose your best loan
This is information you’ll also get from a mortgage loan officer, but it’s good to learn how the process works before you talk to lenders. You’ll be more informed and can ask questions about the lender’s loan costs and interest rates with the knowledge you get from the homebuyer course.
Fixing or improving your credit
Your credit score is a very important factor in your ability to get approved for a home loan. It also has a big impact on how much your monthly payment will be, and how much you’ll pay in closing costs.
Homebuyer education gives you tips on things you can do to fix and improve your credit score, so that once you’re ready to apply for a mortgage, you’ll have a better chance of getting approved at a lower interest rate with a lower monthly payment.
How to lower your down payment
The lack of a down payment can be a difficult obstacle to overcome. Homebuyer education can provide savings tips, or discuss ways to get a portion, if not all of your down payment from gifts, grants or public down payment assistance programs.
What to include in your offer
You may not know to ask for a seller to pay for your closing costs, and when to request that during the homebuying process. Homebuyer education courses can give you suggested questions to ask your realtor that help make sure you buy the home at a good price.
What happens at closing
The closing is one of the most important parts of the home buying process. That’s when you’ll need to pay the most of the money to buy your house, and when you’ll sign your paperwork to become the official owner of your new home.
What pitfalls to avoid before and after closing
A homebuyer education course also usually covers certain things you want to make sure you don’t do before your closing, like changing jobs or charging new debt. After closing, you need to know what do to set up your mortgage payment, and if you fall on hard times, how to have conversations with your lender about what’s going on.
How are first-time homebuyer courses administered?
Most homebuyer education courses are available online, but some may also offer the option to complete the course over the phone. However, local nonprofits or government housing agencies may require that you come and take an in-person counseling class over a period of several days.
Check with your local state housing agency or non-profit to find out the specific requirements for the homebuyers’ education courses taught in your area. You can also find a list of approved agencies on the U.S. Department of Housing and Urban Development’s (HUD’s) approved housing counseling agencies website.
Which mortgage programs require homebuyer education completion
These programs may require in person attendance at a class over the course of several days, so be sure you get enrolled in the class as soon as possible.
Fannie Mae HomeReady® homebuyer education requirement
The Fannie Mae HomeReady loan program allows you to purchase a home with as little as 3% down.
Homebuyers applying for the HomeReady program must complete the Framework® online education course, and the cost is $75. When the course is completed, you’ll need to provide a copy of the certificate to your lender.
FreddieMac HomePossible® homebuyer education
The FreddieMac HomePossible mortgage program is another first-time homebuyer program allowing for a 3% down payment. It has some unique features, such as the ability to use sweat equity to meet the down payment requirement.
The HomePossible program offers a homebuyer education course through Creditsmart, and the curriculum also includes a section on foreclosure avoidance. The course is free.
State and government homebuyer education programs
Homebuyer education requirements for down payment assistance programs vary depending on the state and neighborhood you live in. Housing and Urban Development provides a resource to search for approved counseling agencies in your area.
Some course are free, others can cost between $100 and $300, and many of the courses are offered online. For the programs that require in-person instruction, there are usually sessions you can attend as part of a group, or schedule individual counseling sessions.
Reverse mortgage counseling
The reverse mortgage (also known as a Home Equity Conversion Mortgage, or HECM) program is exclusively for homeowners 62 and older. Unlike a standard mortgage, there is no monthly payment required. Instead, homeowners either get a monthly check or a large lump sum advance.
The drawback is that instead of getting smaller every month, the loan balance goes up every month as interest accrues. Because of the complexity of the program, the federal government requires counseling before final application is made.
Housing and Urban Development provides a counseling agency link you can search by city, ZIP code or state. By inputting “HECM” as the counseling type, you’ll get contact information specific to your area.
Is homebuyer education worth it?
There have been a number of studies that indicate that homebuyer education does result in better homeownership outcomes in the long term.
Tennessee’s down payment assistance program created a natural experiment by not enforcing homebuyer education requirements during the first half of 2002. When the housing crisis hit six years later, the homeowners who had taken the course were less likely to have experienced foreclosure by 2009.
The Urban Institute conducted a study that showed a lower 90-day delinquency rate for its low-income borrowers who had taken pre-purchase counseling as part of the NeighborWorks loan program between 2010 to 2012 as the economy was recovering. While was more difficult to qualify, and the housing market was still trying to gain its footing, homebuyers who had used homebuyer counseling and education services were still found to be less likely to default on their loans.
A 2018 report by the Federal Housing Finance Agency indicates that borrowers who received homebuyer education counseling had an improved knowledge base for making informed home buying decisions. Some of the highlights include the following:
Better understanding of interest rates and APR
One important factor in comparing the costs of mortgage offered by different lenders is knowing the difference between an interest rate and an APR. Borrowers taking homebuyer education were 5% to 6% more likely to understand the difference.
Borrowers chose their lender based on costs
Closing costs can eat up a first-time homebuyers savings, and the study showed that buyers who took homebuyer education courses were more likely to select a lower-cost mortgage than those who didn’t take a course.
Homebuyer course-educated borrowers checked their final closing costs
Comparing closing costs to an original cost estimate is an important step to take to ensure that no additional charges were added. Borrowers who take homebuyer education courses are more likely to actually compare their final closing costs against the original loan estimate.
The bottom line: Yes, homebuyer education is worth it
One more statistic worth noting about the value of homeownership counseling: When the foreclosure crisis happened, more than 82% of homeowners were proactive about contacting their loan servicer. Why? Because the counselors they had spoken to explained how the loss mitigation process worked so they could at least have conversations with the right people to try to keep their home from foreclosing.
The U.S. doesn’t get good grades in financial literacy. Twenty-six states scored a grade ranging between a C and an F, according to a report by the Center for Financial Literacy at Champlain College in Vermont. Homebuyer education can help bridge that financial knowledge gap, and give you an information edge once you get to negotiating for the best terms to buy your home.