Challenges with financial understanding and preparedness affect future homebuyers from all walks of life, as well as their families and communities. Increasing affordability issues like inadequate savings for down payment requirements, increasing housing prices not keeping pace with income, and housing stock shortages can frustrate a potential borrower’s home search. Combined with low levels of financial literacy, it’s clear that Americans—and our financial services community—have some work to do.

Lack of Financial Literacy

The U.S. has the highest individual wealth yet ranks 14th in financial literacy in the world, per Standard & Poor’s Global Financial Literacy survey, according to which only 57 percent of U.S. adults are financially literate. Financial literacy can affect individuals’ knowledge and potentially the choices they make, which can impact their financial health. As a result, it is a critical factor in homeownership and, ultimately, the wealth gap and variations in homeownership among underserved groups.

 

The National Association of Realtors 2018 HOME report found that 16 percent of non-homeowners believed they would have difficulty qualifying for a mortgage due to lack of financial knowledge, and 13 percent said they wouldn’t know the first step in the process.

Deficient financial literacy is an increasing problem due to the complexity of today’s financial marketplace. Consumers have more choices, more debt, and more serious ramifications from the financial decisions they make. 

At the same time, identity theft, financial fraud and cybercrime are growing concerns, adding to the complex environment that consumers must navigate daily.  

Financial Education vs. Financial Capability

Before or just after the financial crisis, education as a financial literacy tool often wasn’t immediately relevant (such as in high school), making the information too abstract and less likely to be retained. Since the Great Recession, the conversation has turned from financial education to “financial capability.”

Financial capability is a broader concept that encompasses the attainment of knowledge, skills and abilities, and coupled with access to financial products and services, could affect long-lasting behavior change. In other words, it’s less about memorizing facts and more about applying knowledge in decision making. A 2019 study highlighted that the combination of financial education and access to financial products and services allow individuals to apply their knowledge and skills to actual behaviors—enhancing their financial capability.

Who Benefits from Financial Capability?

Moving from a focus on financial literacy to financial capability helped pave the way for more effective interventions. But recognizing the size and scope of the gap in financial literacy is also important in finding real solutions. Standard & Poor’s financial literacy survey uncovered some important findings:

  • Women, the impoverished and lower educated respondents are more likely to have gaps in financial knowledge, both in developing and well-developed economies.
  • Homeowners have stronger financial skills than the average person. But there’s still work to do—30% of U.S. homeowners in the S&P study were not able to correctly answer a question on compound interest.
  • Access matters:  Adults who use formal financial services, such as bank accounts and credit cards, generally have higher financial knowledge regardless of gender and income.

Middle-income households are also affected—for American households earning $50,000 -75,000, financial literacy was one of the three main factors (family size and debt burden were the other two) that most impacted financial fragility.

A More Promising Framework Emerges

When the focus turned from learning facts about finances to applying knowledge in real-life situations, financial education saw better results, whether it was being taught in the private or public sector.

Three elements essential to the financial capability framework emerged:

  1. Effective, well-timed education

Educational tools that help build knowledge and skills are the foundation of creating financial capability, especially when they’re delivered “just-in-time” to have relevance in the individual’s life

  1. Financial confidence

A 2016 study found that financial education builds financial confidence, which is essential for achieving financial well-being.

  1. Access to financial products

Building knowledge and skills is only part of the equation—people must believe they have access to financial products to internalize learning and change behavior. This may explain why pairing financial education with access to financial products has proven effective.

Aspirations for Homeownership Are Strong

Recent data underscores that while future borrowers across several generations aspire for homeownership, both financial and homeownership education programs are much needed. For example:

  • While they have received financial education at home and are at least somewhat confident in their future financial well-being, 65 percent of Gen Z respondents (ages 14-23) report that they are not confident in their knowledge of the mortgage process, according to a recent Freddie Mac survey.
  • A 2019 Freddie Mac survey of renters revealed that 80 percent of millennials, 81 percent of Gen Xers and 71 percent of baby boomers perceive not having enough money for a down payment or closing costs as an obstacle to homeownership.

Lenders and other housing professionals can help advance financial education opportunities for potential homeowners with a comprehensive financial education curriculum. This can help them improve future borrowers’ family finances and open the door for wealth building through homeownership.  With the right education and access to products, services and informational resources, more people can attain and sustain homeownership.