Addressing the Changing Needs of First-Time Homebuyers

This post first appeared in The MReport.

Today, first-time homebuyers make up a significant segment of homebuyers, accounting for more than half of all purchase mortgage borrowers. For the third consecutive year, the number of first-time homebuyers exceeded 2 million. The size of this group is unprecedented, and this segment of the market simply cannot be ignored. As large as the actual first-time homebuyer market has been over the past decade, a thoughtful and concerted effort by the housing industry to better reach, inform and interact with potential buyers could make this segment of the market even larger.

With the number of first-time homebuyers in the market today, anyone in the mortgage lending industry can expect to encounter them on a daily basis.  To provide some perspective, in 2019, growth in the low-down payment mortgage market was driven by conventional loans backed by private mortgage insurance, especially loans with a three percent down payment. To take it a step further, 90 percent of three percent down payment conventional purchase loans went to first-time homebuyers. Growth in that particular market has made the private mortgage insurance industry the leading source of mortgage credit enhancement for first-time homebuyers for the second consecutive year. Translated, the private mortgage insurance industry allowed lenders to finance 720,000 first-time homebuyers in 2019[1]. With that said, it’s important to know how each segment of the industry can best serve first-time homebuyers.

We’re currently living through times we haven’t experienced before, and working together as an industry to continue to support first time homebuyers entering the market is very important.   With that in mind, it’s critical for mortgage professionals to deliver products and services that cater to those buying a first home.  First time homebuyers are very focused on the overall experience and need to feel confident in making perhaps the biggest financial decision of their lives. The role of a mortgage originator as a trusted advisor is huge for this segment of buyers.

Early Homebuyer Identification, Outreach and Education

The first step on the way to better serving first-time homebuyers is starting early. For example, different software companies tout the capability to learn your customers’ internet behavior to strategically place ads and pop-ups to point them toward a mortgage. Mortgage lenders can develop partnerships with other industry players to analyze and leverage the data at their disposal to help identify potential first-time homebuyers. The proliferation of sites like Zillow, Trulia, and Realtor.com, make looking for a home without actually looking a thing—and while perhaps more comfortable for potential buyers, are less helpful for lenders trying to build relationships separate from those sites.

Once lenders target their outreach, they should use those efforts to educate potential buyers on the homebuying process and loan qualifications to associate their firm with feelings of support and partnership in this new experience. Lenders should take an active role in ensuring potential clients truly understand how the numbers work before you put them all on a piece of paper for them. One piece of low-hanging fruit for lenders’ marketing efforts: according to a recent survey by Bankrate, 1 in 4 or 28% of Americans still believe that a 20 percent down payment is the only way to achieve the dream of homeownership, which is simply not true. A 20 percent down payment is beyond what most first-time homebuyers can save before their peak household formation age of early to mid-30s. That is why, historically, a large majority of first-time homebuyers (80 percent) have used some form of low-down payment mortgages[2]. On average, it would take the typical borrower at least seven years to save for a 20 percent down payment, which is understandably discouraging. While it is true that each individual situation may differ based on salary and credit as well as financial history, there are many finance options available to first-time homebuyers that don’t meet the mythical requirement of a 20 percent down payment. From the Federal Housing Administration to Private Mortgage Insurance to Veterans Affairs and USDA loans, first-time homebuyers have more financing options and fewer financial obstacles to becoming homeowners than they realize.

Building Affordable Homes

Affordability has been a big topic of discussion for a number of years, as the cost of materials has increased, job growth has been up along with home prices, and housing supply has only recently begun to expand. For builders, a focus on building affordable homes must remain at the forefront of every affordability discussion. Adding to the inventory of homes in the $200,000 – $300,000 price range provides more opportunities for first-time homebuyers to enter the housing market without waiting for existing homebuyers to move to their next home.

At  the end of 2019, lower interest rates and slower growth in home prices helped improve housing affordability more than any other factor, but affordability challenges still exist[3]. Lower rates mean significant savings for first-time homebuyers, but the number of homes in that magical $200,000-$300,000 range still lag the demand. Coupling this reduced supply with the Pinterest-influenced expectations that many first-time homebuyers have for their first home—yard size, design features, neighborhood amenities— can make a loan originator’s role challenging to help these buyers have realistic expectations and avoid making a poor financial decision.

Streamlining with Millennial Expectations

It also is important that industry professionals understand what first-time homebuyers are expecting of them. Since Millennials are the primary generation in the first-time homebuyer category, it is key to understand what they value and what they expect in dealing with real estate agents, mortgage lenders, homebuilders and other process participants.

Paramount among these expectations is user experience. Millennials have grown up with more access to technology than former generations and expect it to be involved in virtually every aspect of everyday life. Take a moment and think about how many tasks you accomplish simply through the use of technology; ordering grocery delivery and pick-up services, hailing a ride, updating vehicle registrations, participating in group exercise, the list goes on and on. Having grown up with this type of technology and ease of access, entering a process that predominantly depends on in-person interactions and highly-regulated processes can be jarring and undesirable for Millennials. So many brands Millennials interact with have conditioned them to expect a seamless experience out of everything they do. This means a few things for the housing industry for creating a positive homebuying experience:

Each interaction must be fast and simple

With Millennials feeling busy and starved for time, they do not want to spend hours of their day on tasks that they feel could be expedited through the use of technology. Efficiency is the target here. Examine your current processes and procedures and see how you can enhance the efficiency of those processes as a whole or in segments to create a more streamlined and painless process.

Communication must be frequent and transparent

Millennials have grown up in a highly connected world and they want to know what’s happening as soon as it happens. They do not want to feel like they are being misled or that information is being withheld. It is important to make sure first-time homebuyers are informed every step of the way through regular check-ins or, more ideally, the use of technology platforms that enable text and email alerts.

Knowledge sharing is key

With this being their first journey into homebuying, they also will highly value professional expertise, so be sure to share your knowledge every step of the way. Many are looking for professional guidance as they make their first homebuying decisions. Let’s not forget that many first-time homebuyers are not as informed as they’d like to be, so leaning on your expertise will not only ease their anxiety, but also will create a smooth path from start to close.

Make sure they are able to self-serve as much as possible

Having technology options available helps Millennial borrowers do things on their own terms and timetable and feel more directly involved in the process. Many loan origination systems are heavily focused on their self-serve capabilities, so now is a good time to see where your system stacks up against the competition.

Be flexible

While the influence of the Millennial generation on our daily lives is unmistakable, your presence and processes need to be flexible enough to support a range of expectations when it comes to helping someone buy their first home. Maybe they want their hands held through every step of the process. Maybe their parents will be heavily involved in the purchase process. Maybe they want to conduct all interactions via video calls without leaving their couch.  Lenders need to be ready for all of it. The saying “different strokes for different folks” has never been more applicable.

Continuing to reach, inform and interact with first-time homebuyers requires new ways of thinking and working, along with accommodating the generational shifts in expectations. If the industry is up for the challenge, though, we could bring the dream of homeownership to many, many more people.

[1] Liu, T. (2020). 4Q & FY’19 First-Time Homebuyer Market Report (12th ed.). Raleigh, NC.

[2] Liu, T. (2020). 4Q & FY’19 First-Time Homebuyer Market Report (12th ed.). Raleigh, NC.

[3] Liu, T. (2020). 4Q & FY’19 First-Time Homebuyer Market Report (12th ed.). Raleigh, NC.

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