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- Race shouldn’t be a factor in mortgage lending, but persistent high rates of loan denials and low rates of Black home ownership tell a different story.
- While an airtight mortgage application is not going to end system racism, there are ways to improve your chances of getting approved for a mortgage at a fair interest rate.
- Getting your credit report in shape, having plenty of cash on hand, shopping around for a loan, and looking for mortgage subsidy programs are all great places to start.
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“A dream deferred is a dream denied.” Langston Hughes wrote those words about America decades ago, and they ring true today — especially if you’re talking about a key part of the American Dream: home ownership.
A recent Northwestern University study found that racial disparities in the mortgage market haven’t declined much in the last four decades when it comes to discrimination in loan denial and interest rates. The study indicates that Black and Latino mortgage applicants are more likely to be declined than white applicants, and more likely to be offered high-cost loans if they’re approved at all.
According to a report from the Urban Institute, as of 2017, there was a significant gap in homeownership rates between whites and Blacks — 72% of white Americans owned homes compared to 42% of Black Americans.
In fact, there has been negative progress on home ownership rates in the 52 years since the Fair Housing Act was passed in 1968. The gap between Black and white homeowners has widened, and Black Americans saw a more dramatic drop in homeownership rates after the recession than white Americans.
Lenders seem to have no problem just saying no. Nearly 1 in 10 borrowers get denied a mortgage, according to a 2019 LendingTree report. That report also found discrepancies by race and ethnicity: African American borrowers have the highest denial rates, at 17.4%, and non-Hispanic white Americans have the lowest, at 7.9%.
“Race and ethnicity should not be a factor in determining lending decisions,” says Samuel Deane, a financial planner with Deane Financial Partners. “Yet, even with similar creditworthiness, whether face to face or online, the Black community is unfairly being charged higher interest rates and refinance costs — a practice that is deeply rooted in systematic racism.”
Though the odds are none too encouraging, they aren’t impossible to overcome. You need a strategy.
Options trading How to impress a lender
First, enroll in a pre-purchase home buyer education workshop offered by a HUD-approved housing counseling agency in your area. “Your proactivity will make you an attractive candidate for mortgage financing,” says Levar Haffoney, managing principal of Vedere, which offers financial planning and wealth management services.
Being “mortgage ready” means understanding the reasons mortgages are denied and addressing any potential issues before you approach a lender to the best of your ability. The LendingTree study included an analysis of factors that contributed to loan denial; debt and credit history are the biggest barriers.
Clean up your credit report and score
Realize that when you’re seeking thousands of dollars for a mortgage, the bar is going to be high for everybody. Make it difficult for lenders to give you a thumbs down.
Know that a credit score of 760 or higher is best, particularly in this environment. However, if your score is in the 620-700 range you may still qualify for a loan, but your interest rate will likely be higher. Consider improving your credit score. You can do that by paying off some debt and paying your bills on time, for example. Do check your credit report for mistakes and correct any errors immediately.
And you certainly don’t want a track record of late payments. “Late payments can be an indication of poor money management, and therefore a need for financial counseling instead of that mortgage acceptance you’re looking for,” says Teri Williams, president and COO of OneUnited Bank, the nation’s largest Black-owned bank.
Lower your debt-to-income ratio
“Have as little debt as possible,” says Tiffany Aliche, founder of the The Budgetnista, a financial education company. Your debt-to-income ratio is critical. If you’re stacked with debt and your income can’t sufficiently handle those payments, that’s going to count against you. Typically, 43% is the highest debt-to-income ratio that you can have to get a mortgage. If you want to make a lender smile, be 36% or lower.
Have cash on hand
There are other factors that matter to lenders as well. A lender wants to see that you have cash reserves for times like right now when the economy is upside down. So you don’t want to be in a situation where once you pony up your down payment, your bank account is busted.
Know, too, that a lender is looking for employment stability. Two years on a job is the bare minimum; five, 10, or more works in your favor.
Better still if you can exceed expectations. Say your lender wants three months of expenses in cash reserves and you can show six months, or you can put up a larger down payment than is required. “Play up these compensating factors because they can compensate for other areas where you might have some weakness,” says Khalfani-Cox.
Options trading Do the legwork
“The first thing I tell all my clients is to not make any large purchases before applying for a mortgage. I tell them to get all their paperwork together. For example, most recent bank statements, credit card statements, and pay stubs. If they’re taking a loan from their 401(k) or IRA, check on the timeline and what are the penalties. If they’re getting a loan from a family member, get a gift letter,” says Melvin Vieira, Jr., a real estate agent with The Vieira Group.
You should also dig for ways to increase your chances of securing a mortgage. As Aliche explains, “Some banks that had past discrimination sins have special discrimination programs.” M&T Bank, for example, has a $25 million fund for loan subsidies available to buyers in certain counties. “Google and ask realtors about these programs,” says Aliche.
Options trading Explore your options
When applying for a mortgage, shop around. “The benefit is two-fold — it will help you get the best interest rate as well as identify lenders that are discriminating with higher rates,” says Deane.
Think beyond the big banks, too. Renita Scroggins, an associate broker with Renita Scroggins Properties, says they can be too rigid and offer only limited products. She likes smaller, local banks that may offer better customer service and flexibility.
Include Black-owned banks in your search, says Aliche. For one thing, money deposited with those banks is often reinvested in the community at a rate that is higher than what is required by law. Since most Black banks are in Black communities, that’s a win-win.
And don’t forget credit unions. These nonprofit financial institutions often have better interest rates than big banks.
What about online banks? They’re worth checking out, but they’re not necessarily going to offer protection against bias. Even if you opt out of identifying your race on your application, “They can figure it out,” says Aliche. “Like the fact that we were buying a house in Newark — well, Newark is mostly Black.”
To be sure, the somewhat twisted reality is that, as a Black home buyer, you have to prove you’re not “guilty,” as the expectation may be that you’re not worthy.
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But there’s a solution for that, says Deane. “Make your financial credentials hard to reject. Believe it or not, discrimination often happens in borderline circumstances. The stronger your financial credentials, the harder it is for a lender to deny you. Focus on legitimate areas, such as credit history, debt-to-income ratio, and job stability, for better outcomes.”
Rooting out systemic racism — in mortgage lending and elsewhere — is going to take more than an airtight loan application, but increasing Black home ownership is an important step toward closing the racial wealth gap.
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