A new tool for assessing the financial well-being of homebuyers in need of mortgage financing is now available for use on the Consumer Financial Protection Bureau (CFPB) website.

Financial well-being is defined by the CFPB as the monetary security and freedom of choice provided a person by their financial capacity. In relation to the real estate market, financial well-being exists when a homebuyer’s savings, income and expenses allow them to take out a purchase-assist mortgage with the peace of mind and confidence they will have money to fall back on as common necessities demand it.

The well-being assessment tool is a point scale. With a homebuyer’s response to ten questions regarding their current financial state, the tool determines their ability to financially manage a mortgage and personal expenditures – their financial well-being. The ten questions cover:

  • factual indicators of well-being, like whether the homebuyer has money left over each month; and
  • emotional indicators of well-being, such as whether the homebuyer feels they are unable to enjoy life due to financial restrictions.

Real estate licensees working with a homebuyer on their finances or financial education use the scale to help their client determine where they stand in light of a major transaction, such as buying a home using savings and a purchase-assist mortgage.

The CFPB provides a user guide for the scale, as well as full and abridged versions of the questionnaire for use by homebuyers and their agents. Once the questionnaire is completed, the response value for each answer is added on a scoring worksheet to generate the user’s financial well-being score.

Higher scores indicate more advanced financial well-being. However, the CFPB iterates that no particular score constitutes a cutoff into poor financial well-being. Thus, all homebuyers using the tool receive a score they may consider when buying a home.

Is the financial well-being tool useful?

Only one question remains following a buyer’s completion of the questionnaire: Is this new tool for determining financial well-being useful?

Although lenders may be able to use the scale, they receive little benefit from it themselves. Lenders and mortgage loan originator (MLO) professionals may recommend the scale to potential borrowers, but are unlikely to use it in daily practice. Rather, the scale serves the purpose of assisting a homebuyer and their agent in deciding whether the homebuyer is in sufficient financial condition to make major purchases or take on considerable debt.

The CFPB states the scale will assist not only homebuyers and agents, but also researchers looking to analyze connections between financial well-being and homeownership. The scale is designed for use with survey research, which facilitates data collection for homebuyer analyses.

For now, buyer’s agents can make use of this scale. Most homebuyers lack sufficient knowledge of the total expenses involved in purchasing a home. This questionnaire may help them figure out if they are actually able to commit to the investment. In turn, the agent is better equipped to select clients who are ready, willing and able buyers – not earnest hopefuls or casual viewers.

The agent using the financial well-being tool saves time and money by identifying qualified buyers and avoiding prospective buyers unable to follow through on a purchase due to insufficient financial conditions brought to light by the questionnaire and point score.

Re: “CFPB releases tool to help measure financial well-being,” from the CFPB Newsroom