HUD: Counseling Helps Keep First-Time Home Buyers Out Of Default


A “rigorous, large-scale” study conducted by the U.S. Department of Housing and Urban Development (HUD) reveals what many people in the mortgage industry already know: Counseling helps first-time home buyers better understand the mortgage process and, thus, helps keep them out of default.

HUD conducted the study between September 2013 and January. More than 5,800 prospective first-time home buyers across 28 metro areas participated.

The study involved three large national lenders, 63 HUD-approved housing counseling agencies and two remote service providers.

Each first-time home buyer who participated was randomly assigned to one of three treatment groups: remote (online education and telephone-based counseling), in-person (group workshops and individual counseling), and a control group that was not offered any services.

Interestingly, about 65% of participants who were offered remote home buyer education and counseling ended up initiating those services, whereas only 25% of those who were offered in-person education and counseling initiated services.

What that likely demonstrates is that borrowers are more likely to accept and utilize counseling services if they are engaged in an online mortgage process, but they are less likely to do so if they must meet with bank staff in person.

Although there have been numerous recent studies documenting the effectiveness of housing counseling, HUD says its study is “groundbreaking in its scale, experimental design, elimination of any selection bias and expected length that the families will be followed.”

“The early findings of this study underscore the need to continue supporting housing education and counseling programs and the particular importance of making remote education and telephone counseling easily accessible to prospective home buyers” says Katherine O’Regan, assistant secretary for policy development and research for HUD. “Over the next four years, we expect to produce long-sought answers about the impact of home buyer education and counseling on mortgage literacy and preparedness, home buyer outcomes and loan performance.”

The study shows that getting first-time home buyers into counseling services early in the mortgage process helps improve their mortgage literacy. According to HUD, participants in a treatment group performed better on a four-question mortgage literacy quiz than their control group counterparts.

Counseling also fosters greater borrower appreciation for communication with lenders, HUD says. The results show that borrowers who complete counseling are more likely to proactively contact their mortgage loan officer or broker in the event they are about to fall behind on payments.

Counseling also leads to better underwriting qualifications for borrowers, the study reveals. First-time borrowers who participate in counseling are more likely to have higher FICO scores.

Interestingly, the study reveals that first-time home buyers who underwent counseling are no more likely to compare their budget with their actual spending.

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