The recent mortgage crisis has drawn attention to the salience of consumer decisions regarding mortgages, indicating that first-time, lower-income consumers may be relatively uninformed and vulnerable when making home-purchase decisions. The amount of new debt acquired through home purchases, and the ability to manage the new debt post-purchase is of particular concern. In this analysis, we leverage data collected through a field experiment involving low- and moderate-income homebuyers in Ohio to address the following questions: To what extent do lower-income homebuyers accurately perceive their overall borrowing constraints, and how does this understanding (or lack thereof) influence decisions regarding their mortgage? Are less knowledgeable homebuyers more or less likely to respond to offers for financial counseling post-purchase?

We match self-reported data on financial well-being to administrative data drawn from mortgage origination files and credit reports. This unique combination of self-report and administrative data allows us to construct measures of both perceived and actual borrowing constraints based on self-reported debt levels, payment amounts and payment difficulty, compared with credit report data on total debt, monthly payments and payment history. Through multivariate analysis, we first evaluate the effects of borrowing constraints (perceived and actual) on administrative mortgage characteristics, including full monthly payment (principal, interest, taxes and insurance), mortgage amount and home value at the time of purchase. Second, we estimate the probability that borrowers will respond to an offer of financial counseling post-purchase, based on their perceived and actual borrowing constraints. In both estimations, we include a robust array of demographic and household characteristics, as well as measures of financial confidence, financial literacy, financial support and time preferences.

We find that those consumers who underestimate their non-mortgage debt incur significantly higher mortgage debt relative to income. We also find that homebuyers who underestimate their debt are less likely to take up the offer of free, phone-based financial counseling after purchase. Similarly, those who perceive themselves as having more debt than they actually have are nearly twice as likely to enroll in the financial counseling service. These findings are timely given the ongoing housing crisis and policy debate over extending (or retracting) homeownership to lower income, and potentially less informed, consumers.