A new report found major racist differences in mortgage approval
A recent report from LendingTree revealed a strong inequality in mortgage qualification.
It was found that black borrowers are 12.64% more likely to be denied a mortgage than 6.15% for the rest of the borrowers, who are significantly more likely to be denied a mortgage than other groups.
The reasons for this inequality are complex. Housing discrimination has a long history in the United States, the effects of which are still widespread to this day.
We'll take a quick look at this story here.
We also explain the reasons for refusing mortgages at an individual level – for each applicant – and what you can do to improve your chances of being admitted.
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New data on race denial of mortgage
LendingTree's new report analyzes data on mortgage and refinancing denials that lenders are required to report under the Home Mortgage Disclosure Act.
It turned out that BIPOC people were denied mortgage or refinancing more often than whites – in some cases almost twice as often.
There are deeply rooted, complex reasons for these differences, a discussion that we briefly address at the end of this article.
But there are also shallow reasons for refusing mortgages: The actual number (s) to which a lender can refer and say, "For this reason, we have not approved the application."
If you have had problems getting a mortgage or refinance in the past, it is helpful to understand these reasons so you know how to improve your chances in the future.
Check your mortgage eligibility (July 22, 2020)
Why Do Underwriters Deny Mortgages?
The Consumer Financial Protection Bureau (CFPB) has broken down the reasons for refusing mortgages and refinancing by race in 2019.
CFPB found that across all populations, creditworthiness and a problematic debt-to-income ratio (DTI) are the main reasons why borrowers are denied home loans.
The figures look similar for refinancing applications that were rejected in 2019.
Reasons for refusing the mortgage explained
It is clear that a history of discriminatory measures has created and maintained the home ownership gap between black and white borrowers.
However, it is helpful to understand what the different reasons for rejection mean so that you can make yourself a competitive applicant, especially when lenders and institutions are forced to review their policies:
Debt to Income Ratio (DTI):: DTI refers to how much you earn and how much you pay monthly for debts such as loans and credit cards
Credit history: Your credit history shows all of your credit accounts, including credit cards, personal loans, auto loans, and student loans. Lenders look for a history of on-time payments and like to see accounts that have been open and in good condition for several years
Safety: Collateral is an asset that you can use to hedge a loan. When you take out a mortgage, your home serves as collateral that the lender can take back and sell if you are in arrears with your payments. If you want borrow against the equity in your homeThe house will also serve as security
Incomplete loan application: Lenders can reject an application if you haven't filled out all the information about your employment history or your finances. Typically, a lender will try to fill the gaps and then refuse the loan if it receives no or insufficient response. You can also decline if they don't have enough credit information in your file to determine your risk as a borrower. according to the CFPB
Insufficient cash: When you apply for a loan, lenders make sure that you have enough cash in your accounts to cover your down payment plus closing costs and fees. If there is insufficient funds in your account, your application may be rejected
Employment history: Lenders want to see a history of consistent employment and income. They usually want to check if it was you employed for two years
Non-verifiable information: Loan officers and insurers are meticulous when considering your application. If they cannot check details such as your income, address history and employment, they can reject your application. You will also look for inconsistencies such as large withdrawals to accounts that do not appear in your credit report. Suppose you have a payment schedule for a medical bill and the payment is automatic every month. If this invoice does not appear in your credit report and you do not disclose it when you apply, the lender can reject you because your transaction history does not match the information it contains
These are the main reasons why a lender would reject a mortgage or refinancing application.
With that in mind, here are some things to do that can improve your chances of success when applying for funding if you are able to.
How to improve your chances of getting a mortgage
1. Maintain a low debt-to-income ratio
Most lenders prefer a DTI of 36% or less (including your potential mortgage payments) for conventional loans.
Government-backed loans like the FHA can be much more forgiving and, in some cases, allow debt to income ratios of up to 45% or 50%.
The best way to prevent your DTI from being affected is to keep your debts as low as possible. Some concrete ways to do this are as follows:
Accept a longer term of your car loan and / or buy a cheaper car
Keep your credit card balance low. You will receive the minimum monthly payment, which is usually a percentage of your current balance.
Consolidate student loans. Get the monthly payment as low as possible.
Fortunately, lenders do not consider utilities, cell phone bills, or other non-recurring monthly recurring costs when calculating the DTI.
2. Keep an eye on your credit
If you are unsure of your credit rating or which accounts appear in your report, request a copy of your credit report before applying.
Every year you are entitled to a free copy of your report from the three credit bureaus – TransUnion, Equifax and Experian.
Due to the burden on the economy from COVID-19, everyone is now entitled to free weekly credit reports until April 2021.
Even if your credit card company offers a free credit check, you still want to request your full report. The score shown in the report is more accurate, and you can review all of your accounts to make sure that all the information a lender sees is up to date and accurate.
If you see an account that you haven't opened or a fraudulent activity, report it to the credit bureau immediately.
3. Build up collateral
When buying a home, insufficient security means that the home you have bought does not meet the minimum standards for FHA or another home loan agency.
For example, the roof has to be replaced or there are dangers on the property such as a defective electrical system or a deteriorating aft deck.
In this case, you should look at a FHA 203,000 loan that allows you to buy and repair the property in one transaction.
If you refinance yourself, the lender needs to make sure you have enough equity. Some loans require up to 20% equity to refinance. However, newer loan types such as the High LTV Refinance Option (HIRO Loan) allow you to refinance at a lower interest rate, even if you have no or negative equity.
If one day you want to convert your home's equity into cash, make sure you make additional payments each year. When you repay your mortgage, you increase the equity of your home. The more equity you have, the more credit power you have if you opt for a payout refinancing or a home loan or line of credit.
Avoid taking out loans against your home unless you need to provide funds for larger expenses such as renovations.
4. Save cash reserves
In addition to the money you saved on a down payment, it is helpful to have savings that show that you can cover your monthly payments. The longer the money is in your account, the more secure and stable your finances will appear (this is known as "experienced money").
5. Be thorough when completing your application
It's easy: Before submitting your mortgage application, double and triple check that all fields are filled out. And make sure you respond to all of your lender's requests for more information.
Data shows that over 10% of mortgage applications – and nearly 20% of refinancing applications – were rejected across all populations simply because the loan application was incomplete.
Check your mortgage eligibility (July 22, 2020)
FAQ: Mortgage Refusal and Underwriting
What causes a mortgage to be rejected?
Lenders refuse mortgages for several reasons, but the most common are bad credit scores or a "thin file", which means the borrower has a limited credit history.
Sometimes a thin file is a good thing because some people prefer not to use any credit at all and instead pay everything in cash. In other cases, they may be too young to build credit or have been denied credit and credit cards in the past, effectively preventing them from building a credit profile.
Depending on the reason for the thin file, lenders may be willing to use alternative documents such as utility bills or rent payments to qualify you.
A high DTI is also a key factor in refusing a mortgage, as is the history of late payments or late payments. If you have ever filed for bankruptcy or were excluded, this can also affect your chances.
However, there are lenders who work with borrowers who are trying to rebuild after a financial crisis. Even if you've had these problems before, you may still be able to buy a house.
Why should refinancing be refused?
As with mortgages, refinancing applications are often rejected based on the DTI or the borrower's credit rating. Refinancing can also be refused if you do not have enough equity in your home or owe more than the home is worth.
What can you do if your mortgage is rejected?
You can apply to other companies (and you should – it is advisable to apply to at least three lenders to make sure you get the best deal).
You may want to look for lenders that specifically work with people in similar financial backgrounds to you.
For example, some lenders specialize in helping borrowers with low credit scores, poor credit ratings, bankruptcy or foreclosure, or the self-employed or seasonal workers.
If multiple lenders reject your application, ask numerous questions why you were rejected and how you can improve your chances of qualification over the next few months or years.
Some lenders will work with you to find out exactly how much debt you need to pay to meet your required DTI or minimum credit rating. You always want to find out the next best steps towards qualification.
How often are mortgages rejected?
Most mortgages are approved, although MarketWatch rejected about 11% in 2018. In the same year, every fourth refinancing was refused.
Does a Declined Mortgage Hurt Your Credit?
A rejection doesn't hurt in and of itself, but lenders do a tough credit check when they run your application. This can lower your score. A tough credit check or a tough move stays in your credit report for two years.
However, if all of your accounts are in good condition, make your payments on time and your credit usage (the amount of credit you use compared to the amount at your disposal) is less than 30%. The hard check should only be done a small dent.
What is a good DTI for a mortgage?
Most lenders want a DTI of 36% for a standard mortgage. However, some accept higher DTIs and the criteria often vary depending on the type of loan programs they offer.
What is a good credit rating for a mortgage?
Generally, you need at least 580 to qualify for a government-sponsored FHA mortgage. Lenders can offer loans with lower credit requirements or tighten lending criteria, depending on how the overall economy is doing.
But 580 is the minimum number that must be sought. The higher your score, the more money you qualify – and at better interest rates.
How high should your credit rating be when refinancing?
Lenders typically look for a 620 credit score for conventional refinancing. But like mortgages, they can accept lower values due to the loan options offered at their institution.
Why are there racial differences in mortgage and refinancing approvals?
The home ownership gap between black and white Americans is caused by a number of factors, the detailed analysis of which is beyond the scope of this article.
However, it is unfair to look at differences in credit, income and debt without at least mentioning the story behind it.
Although the reasons for refusing mortgages may seem individual at first glance – a person's creditworthiness, a person's debt ratio – they cannot be separated from a larger history of discriminatory measures.
Housing discrimination in the United States
As Wealthsimple detailed in 2019, the roots of the problem go back to the 1930s, when the Federal Housing Administration (FHA) introduced discriminatory lending standards known as redlining.
The problem worsened in the 1940s, when many lenders did not offer low-interest mortgages to black veterans, even though they were entitled to benefits under the GI Act.
Black people denied government-backed mortgages often looked for alternative loans. However, these were marketed specifically with predatory terms and interest rates that, according to Wealthsimple, made it extremely difficult to build up equity and long-term assets.
Today's differences are based on past policies and discriminatory practices and are maintained by inequalities in access to credit and other financial opportunities.
Mortgage Refusal Rates
Nowadays there are fair living and equal credit laws to protect home buyers from the types of discrimination codified in the past. However, the applicable laws cannot erase this story.
Take another look at the mortgage denial rates.
The LendingTree study shows that:
The biggest differences in mortgage approval were among borrowers in the Midwest. In Milwaukee, Cleveland and St. Louis, their mortgage applications were most likely denied. In Milwaukee, the rejection rate for potential black home buyers is 17.73%, while the overall rejection rate is 5.57% for refinancing In Phoenix, the difference between rejection for black refinancing applicants and the general pool of applicants was more than 22%.
However, the reasons for these sentences are complex.
ProPublica found that blacks were more likely to be convicted and seized of their money if they were in arrears with their electricity bills than whites.
Not only could this wipe out a person's bank accounts and affect their creditworthiness, it could also result in them not having enough money to pay off other debts or save on large expenses like a mortgage.
CNBC also reported that BIPOC employees are often classified as "credit invisible" under current credit rating models, possibly due to the lack of frequently tracked credit accounts. It is very difficult to get a mortgage without a documented credit rating.
Black college graduates are also significantly more likely to have student debt than their white counterparts, and student debt is an important reason why potential home buyers may have a high DTI.
These are just a few of many factors that affect the racial wealth gap in the United States.
A note on accessible mortgage programs
There are a number of mortgage programs designed to help anyone facing tougher credit and debt hurdles.
If you have had problems getting a mortgage in the past, or if you anticipate that it will be more difficult for you to apply, you should consider all loan options.
A traditional, conventional loan with 20% less is not the only thing available. look at it
FHA LoansUSDA LoansVA LoansFreddie Macs Home Ready LoansFannie Maes HomePossible LoansThe Conventioanal 97 Loan
These and other mortgage programs are aimed at borrowers with lower credit scores and / or lower incomes and / or higher debts.
If you are facing one of the problems that often lead to mortgage denial, one of these programs can make buying your home a lot easier.
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