Bias in mortgage lending is well-documented historically, and it continues today. The result has been lower homeownership rates and less wealth for Black and Latinx households.

Nationwide, Black mortgage applicants are denied nearly twice as often as white applicants. Here in California, mortgage denial by race is not as starkly unequal as on the national scale, but the difference in denial rates is still apparent. The share of mortgage applications denied by race is:

  • 16% for American Indian mortgage applicants;
  • 15% for Black applicants;
  • 13% for Latinx applicants;
  • 13% for Pacific Islander applicants;
  • 10% for white applicants; and
  • 10% for Asian applicants, according to a Zillow analysis of the 2020 Home Mortgage Disclosure Act (HMDA).

While the share of households unable to qualify for a mortgage is clearly skewed across race and ethnicity, it is not necessarily due to explicit discrimination. The high mortgage denial rates for non-white and non-Asian households can be traced to many observable factors, including:

  • down payment size;
  • credit history;
  • debt-to-income (DTI) ratios; and
  • job security.

For example, just over one-third of Black mortgage applicants who didn’t qualify were denied due to credit history. Further, the average Black mortgage applicant listed a 3.5% down payment, well below the 8.9% down payment from applicants averaged across all races.

In these cases, it’s not so much direct discrimination by the lender, but the residual effects of systemic racism on Black and Latinx communities.

For example, redlining and its ongoing impacts have reduced wealth in Black and Latinx communities, limiting generational wealth and reducing access to benefits like down payment gifts and inheritance. Redlining is the practice of denying mortgages and under-appraising properties in minority communities.

While redlining was outlawed in 1977, its impacts continue all these years later. Redlining led to a decline in both the quality and quantity of housing in communities lenders considered to be “risky” investments. Today, these neighborhoods that were subject to redlining have lower homeownership rates, home values and rents — and thus, less wealth.

In fact, parental transfers of wealth like down payment gifts account for 30% of the Black-white homeownership gap, as found in a study by the Consumer Financial Protection Bureau (CFPB). In the U.S., young white households are twice as likely to be homeowners as are young Black households.

The result: the homeownership rate for Black households in the U.S. is just 44% and 48% among Latinx households. By the same measure, the homeownership rate for white households is a whopping 73%.

Related article:

Down payment gifts and the bank of mom and dad

Proactive agents step in

Real estate brokers and agents are well positioned to open the doors of homeownership for all groups of people, including those who have historically been left out of homeownership. Often, a proactive approach is needed.

When a potential homebuyer wants to buy but is unable qualify due to common reasons like a lack of credit history, low down payment or high DTI ratio, their agent encourages them to keep trying.

It’s important for brokers and agents to take the extra step to help these potential homebuyers qualify when they are in a better financial situation, maybe a few months in the future. For example, brokers can inform unsuccessful mortgage applicants about special mortgage programs designed for first-time homebuyers. Some of these programs allow more leeway in qualifying or provide down payment assistance.

In other cases, the client will be able to gain mortgage approval after taking a few steps to pare down debt or build their credit history. Without being pushy, brokers may continue to check in every month or so to see where they are in the process. Clients may be discouraged or embarrassed about being denied a mortgage, but it’s the broker’s job to keep them motivated and on the path to homeownership.

Agents who want to break down the homeownership barrier will take positive steps to ensure they are reaching the broadest range of potential clients, removing obstacles and not leaving any group out of the potential for homeownership.

Editor’s note — firsttuesday’s editorial staff is hard at work preparing content for California’s new implicit bias course requirements. Want to get a head start on fair housing and implicit bias topics? Download firsttuesday’s Fair Housing continuing education e-book.