How to Help Your Clients Improve Their Financial Literacy: A Guide for Brokers

Financial literacy. Just the sound of it can make a person lose interest. But what seems boring is actually incredibly important to not just home buying and homeownership, but to living a smart and savvy life. This is where your role goes beyond “broker.” You’ve got to get to know your clients on their level in order to make your knowledge of mortgage lending accessible and practical. Building their financial literacy goes beyond defining the terms and makes the connection to their everyday life—making them customers for life. If you want to help your borrowers gain financial literacy, here are a few things you’ll want to relay to them:

10 Tips That Build Financial Literacy

1. Understand credit. Your borrower should know what a credit score is and how credit scores work. It might seem like common knowledge to you, but don’t forget that you’re an expert in the financial industry. Sure, borrowers likely have a general sense of credit, but might not know the intricate factor their score plays in their financial standing. They should be familiar with their score and aware of what can affect it.

More importantly, you can help your client understand why credit is important to obtaining a loan, specifically a mortgage. Creditworthiness is a concept they may not understand soup-to-nuts, and explaining that it plays a large role in determining their eligibility for a mortgage (or any loan for that matter) will be invaluable.

2. Know why a big investment can pay off. Your clients may not be convinced that buying a home is even worth it. Maybe they think, “Why buy when I can just rent?” But buying a home is a big investment that can pay off in many ways. Here are just a few worth sharing: homeownership establishes and/or builds generational wealth, it’s a stable investment that’s both a place to live now and an asset they can pass down, it’s financially beneficial in terms of tax breaks and property value appreciation, and they’ll never have to worry about rising rent prices again.

3. Don’t believe the down payment myth. Interestingly, a good portion of financial literacy is debunking common myths. Maybe you’re familiar with the 2019 Freddie Mac survey that found that 77% of renters think lack of funds for a down payment or closing costs is an obstacle to homeownership. However, a down payment is not as big of a hurdle as they may think.

Twenty percent is old hat, but your clients might not know that. They may be surprised to find out that, right now, they can put down as little as 3% on a conventional mortgage, 3.5% on FHA, and 0% on VA or USDA.

4. The market is the market. Your clients should pay attention to the market and stay up to date with it. But, help them understand that it changes every day and that means they shouldn’t react to everything. So, then, what changes should they act on? That’s where your expertise comes in. When things like rates change, that’s the time to let them know that they could benefit if they act fast.

5. Understand rates. To your clients, the interest rate on a mortgage could mean everything or nothing at all. It’s important to explain how even the slightest difference in interest rates can end up saving them quite a lot of money in the long run. Walking them through several accrued interest scenarios can be very powerful.

But it’s not all about interest rates. When they see the APR on a loan (and realize that it’s higher than the interest rate) they might freak out. Explaining that APR is the total yearly cost to borrow expressed as a percentage, and includes the interest and finance charges, should put them at ease. To simplify, APR prevents lenders from hiding any fees, and that goes for any type of lender. This will help your clients’ financial literacy tremendously. Like understanding credit, making sense of rates is beneficial for more than just home buying.

6. Amortization sounds more complex than it is. Talk about saving money in the long run. Amortization—the process of paying off your mortgage in planned, incremental payments—helps your borrower understand what they will be paying now and for years to come. The amortization table (or, amortization schedule) you’ll provide in their closing documents isn’t something to gloss over. Show them how to read the table so they’ll know how the amount of principal and interest they pay will change over time, when might be a good time to refinance (hello, repeat business!), and how to budget for the future.

7. Get familiar with your debt-to-income ratio. Ah, more math. But don’t let the word “ratio” trip up your borrowers. Beyond explaining what DTI is, you should also tell them why it’s important to getting a mortgage, and to their financial literacy as a whole. They should care about DTI because it indicates how much they can afford and can help determine what mortgage they qualify for.

Arguably the key to DTI is the “sweet spot”—hovering around 36%. But what if your client wants to max out their DTI? Most lenders set a 50% limit because higher DTI means increased risk, and lenders are always looking to mitigate risk. Avoiding the max DTI benefits your borrower, too, as it ensures they’ll be able to live comfortably while paying back their debt. Taking the time to understand how much income your borrower needs for the rest of life’s expenses will ensure they trust you and greatly increase the likelihood that they’ll come back for their next mortgage (plus, it’s just the right thing to do).

8. Loan-to-value is more than “just another ratio.” While DTI is the measure of debt to income, LTV is the measure of your borrower’s loan amount to the appraised value of their property. And although we’ve already established that they don’t need to put down 20%, this is a good place to discuss that the more they put down, the lower their LTV will be. And that’s a good thing because higher LTV may require your borrower to take out mortgage insurance, which adds to their monthly payment amount.

In a transaction where many factors are set once they come to the table, this is where they have some control. Understanding LTV improves their financial literacy by giving them the confidence to make the best decision.

9. Harness the power of a budget. Creating and tracking a budget can not only contribute to your borrower’s ability to buy a house but to their overall financial health. You could show them a sample budget and explain how to do it themselves. Or point them to any of the countless budgeting resources available to them—and many of them free! Just remind them that living by a budget can be easier said than done. The key to budgeting (and the hard part) is sticking to it, but the financial freedom they’ll gain is worth it.

10. I’m not your only resource. Financial literacy resources are abundant. And while you should be a key resource, it’s good to point your clients to the hundreds of others that are out there. If financial literacy fosters independence, knowing where your clients can turn to for help and education is key.

It’s important to know what resources are available to your borrowers so they can make confident financial decisions and navigate home buying and homeownership well. Financial literacy is forever. Not only can they benefit from your guidance now in the home buying process, but also for years to come as homeowners.