Over the years in the United States, mortgage lenders have unfortunately been as guilty as other parts of American society in denying equal rights to minorities. This practice in mortgage lending was known as “redlining.” And while redlining has been labeled as illegal, these practices often still have a significant impact on real estate. But programs do exist to help counteract this ongoing problem.
What is redlining?
As defined by Investopedia, “redlining is an unethical practice that puts services (financial and otherwise) out of reach for residents of certain areas based on race or ethnicity. It can be seen in the systematic denial of mortgages, insurance, loans, and other financial services based on location (and that area’s default history) rather than an individual’s qualifications and creditworthiness. Notably, the policy of redlining is felt the most by residents of minority neighborhoods.”
Redlining began in the 1930s, when mortgage companies outlined or shaded-in hazardous areas of lending with red ink on city maps and good areas for lending with green ink.
The Fair Housing Act of 1968 made it unlawful to refuse to rent, sell, or provide financing for a dwelling based on race, religion and national origin, and the 1977 Community Reinvestment Act further contributed to helping erase this problem. However, as a result, since these acts made housing discrimination illegal, they also haven’t helped create specific programs to help minorities either. And that is another concern.
For example, lack of access to credit, discrimination against minorities buying homes in green-lined neighborhoods, high interest rates, and being prevented from buying homes in their own red-lined neighborhoods led to significantly lower homeownership rates for black families than white families, even for people with good credit profiles. As of 2017, the national homeownership rate was still lower for black families than for white families – 44.0% versus 73.7%.
It’s one major reason why black families today have less money than white families to qualify for home loans and purchase homes either as first-time or move-up homebuyers. It’s also important to note that other factors play a role in lower homeownership rates for black families, such as employment discrimination preventing black workers from earning fair and equitable income.
But while there are not many specifically minority-driven loan programs for buying homes there are programs to help lower-income families obtain a mortgage.
Federal Housing Administration (FHA) loans, which you can get with as little as 3.5% down, are loans for people with low to moderate income. You need to live in the house you’re buying as your primary residence, you also need to buy a home that meets livability standards and move in within 60 days of closing. For a 3.5% down payment FHA loan, you’ll need a credit score of at least 580.
You’ll also need to pay for mortgage insurance throughout the life of the loan, if you have a down payment of less than 10% of the sale price of the home. It’s also possible to get an FHA loan, build 20% equity in your house and then refinance to a conventional loan as a workaround. This will eliminate the lifetime-of-the-loan mortgage insurance requirement.
Section 184 Indian Home loans
The 1992 Section 184 Indian Home Loan Guarantee Program was passed by Congress to help Native Americans become homeowners. Section 184 is a residential mortgage program “specifically designed for American Indian and Alaska Native families, Alaska villages, tribes, or tribally designated housing entities.”
The Department of Housing and Urban Development (HUD) guarantees Section 184 home mortgage loans, meaning that the lender can be assured that its investment in the mortgage will be repaid in full if the borrower fails to make payments and foreclosure results. Most Native Americans qualify, but loans are limited to single-family houses (1-4 units) and for a maximum term of 30 years. These mortgages are available for new construction, purchase of an existing home, refinancing, or rehabbing. They can be used on or off native lands.
The US Department of Veterans Affairs (VA) allows active-duty service members, members of the National Guard, veterans or the spouses of deceased veterans to qualify for government-backed VA loans for $0 down also. You get a loan through a private lender, and then the VA guarantees it.
VA loans are backed by the Department of Veterans Affairs and are another option if you want to buy a home with no down payment. VA loans also necessitate that you pay a one-time VA funding fee that’s 2.15% of your loan value, instead of paying mortgage insurance.
In order to qualify for a VA loan, you must meet any one of the following service requirements:
- 90 consecutive days of active service during wartime
- 181 consecutive days of active service during peacetime
- 6 years of service in the National Guard or Reserves
- Be a service member’s spouse that died either in the line of duty or from a service-related disability
- And then in addition to one of the above service requirements, you need a credit score of at least 640.
Fannie Mae’s HomeReady mortgage program was designed to help lenders serve credit-worthy low-income borrowers.
Ideal HomeReady borrowers:
- Low income
- First-time or repeat home buyers
- Limited cash for down payment
- Credit score equal to or better than 620
- Borrowers with credit scores equal to or better than 680 may get even better pricing
- Supplemental boarder or rental income
- Looking to purchase or refinance
- And there is also an additional homeownership education requirement too
If all borrowers are first-time homebuyers, then at least one borrower is required to take homeownership education, regardless of LTV.
The curious case of digital lending
Digital mortgage lending solutions are doing more than just adding online convenience for any kind of borrower. According to a new study from the National Bureau of Economic Research, “Consumer-lending Discrimination in the FinTech Era,” they’re also reducing discrimination against minorities – as well as the interest rates they receive.
According to the findings in this study, black and Latinx home-buyers currently see interest rates with non-digital lenders that are 0.079% higher on average than other borrowers. Altogether, because of this, black and Latinx homeowners pay about $765 million in additional interest per year.
For loans originated using online or app-based programs, black and Latinx home-buyers pay just 0.053% more than other groups — a reduction of 0.026%. They also pay less to refinance with digital than with a face-to-face process.
Overall, the study finds that algorithmic, online lending reduces discrimination by roughly 40% when compared to face-to-face mortgage lending options. It also encourages borrowers to shop around more which increases competition among lenders.
Finally, algorithmic, online lending also removes discrimination in accept-or-reject decisions on home mortgage lending, according to this study. Black and Latinx borrowers are typically rejected 6% more than non-minority ones with non-digital lenders, even with the same financial profiles. The study found that online mortgage solutions have changed this equation, accepting and rejecting comparable candidates evenly.
Some examples of all digital mortgage lending companies are Better.com, Rocket Mortgage, Reali, and so on.
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None of these mortgage solutions are perfect, and obviously some are not available to everybody, but there are at least some options that are available in the present day to assist home ownership in traditionally low-income, red-lined areas. Additionally, when you research your mortgage opportunities, make sure you do your research and due diligence to see if the lender you wish to work with has a history or not of discrimination, intended or unintended.
Saving any amount of money while protecting your hard-earned finances is critical. Prospective buyers and home-owners can minimize costs working with equitable and fair lenders like Gemtrago that don’t charge origination, application, or appraisal fees while still offering the lowest rates and highest level of service. They can definitely help you find the right mortgage loan to meet your needs. And Signloc has some of the lowest title and escrow rates in the country.
Christopher has been been in the Real Estate industry for 8 years and has had the opportunity to close over 1,000 deals while acting as the Managing Broker for thousands more. Christopher is passionate about continuing to find ways to simplify, maximize, and serve Trelora’s clients exceptionally well and spends his time building teams to deliver high levels of service. When not doing real estate Christopher can be seen training for marathons and ultra relays with his 2 year old daughter, eating pizza, and drinking a steady stream of Diet Coke.