Most African Americans experience some level of exclusion and racism at one time or another, either overt or subtle, intended or inadvertent. This often plays out in unfortunate ways and sets up barriers for obtaining an education, purchasing a car or landing a promotion. Buying a home is no different.
To begin with, look at the homeownership rate of African Americans. In fourth-quarter 2020, only 44.1% of Blacks owned their home, according to the Federal Reserve. That’s more than 30 percentage points lower than white Americans, as 74.5% of them owned homes as of the same quarter. Hispanic/Latino Americans and Asian Americans didn’t fare much better, with respective homeownership rates of 49.1% and 59.5% at this time.
Yes, blatant racism plays a role in this gap, but there is a complex combination of issues that has caused homeownership rates for people of color to stagnate over many decades. The homeownership rate among African Americans has created a generational belief system that contributes to the issue. Seeing your family renting instead of buying can create a belief that homeownership is not a possibility for you. In many families, wealth is directly tied to homeownership, and this gap can cascade over time to prevent generation after generation from improving their circumstances.
To close the gap between white and minority homeownership, mortgage originators and other lending professionals need to gain a better understanding of the issues involved when it comes to people of color, homeownership and personal finance. These issues can be, for the most part, broken into four main categories.
Mortgage originators and other lending professionals need to gain a better understanding of the issues involved when it comes to people of color, homeownership and personal finance.
Generational knowledge
Due to disparities in dependable and quality education, employment and opportunities, many minority families are still dealing with a series of firsts. You often hear people of color say, “I am the first in my family to go to college.”
While such statements should conjure up a feeling of pride and individual success, they also often come with a sense of shame at being the first, or guilt for having access to opportunities that did not exist for their family members. The same goes for being the first in the family to buy a home, set up retirement savings or build other forms of wealth.
Given this, many minority families don’t discuss how their great-grandparents, grandparents or parents invested in the market, using dollar-cost averaging and the tracking of price-earnings ratios to make smart investment decisions. The absence of such financial knowledge means that this information did not transfer from generation to generation to become a part of their DNA as adults. As a result, many minorities do not know how to invest or are fearful of the financial markets.
Lack of budgeting experience is another problem. If there are limited savings, no investments and no budgeting, there are rarely opportunities for homeownership. The only consistency is paying the rent. When you have generations absent from the investment and mortgage markets, the lack of knowledge and the failure to transfer knowledge leaves future generations working harder to break the cycle. Financial education must be made more accessible and readily available to all communities to combat this information gap and better empower people of color to build generational wealth.
Professional distrust
African Americans and other communities of color are comprised of multiple generations with firsthand knowledge of racism and exclusion. The concept of trust is a high-risk proposition. Black communities consistently reexamine the history of middle passage, the Tuskegee experiments and bogus Christmas club bank accounts. Predatory subprime lending led to a mortgage industry in crisis while disproportionately impacting African Americans and Hispanics.
Often, African Americans report that when they sit down to discuss options with an investment broker, insurance agent or mortgage originator, they are already suspicious about how they will be regarded. They wonder whether they will be treated differently or be charged more.
Reports about disparities between white and Black mortgage applicants can feed into this distrust. Earlier this year, the National Association of Realtors found that Black applicants were rejected for mortgages 2.5 times more than white applicants, with rejection rates of 10% and 4%, respectively.
It also hurts when you see very few people in the financial industry who look like you or who understand the challenges within your community. For banks and mortgage companies to be embraced by minority communities, they must start by fixing issues with hiring practices and their own company culture. Diversity is not just a word to be thrown around. It’s a commitment that every lender must make to help improve trust with minority applicants.
Intimidating experience
With limited or no generational knowledge transfer from family members regarding homeownership, there is no informal education on the mortgage process. A lack of understanding that planning and budgeting are step one in buying a home is a primary reason that many minority families experience setbacks during the purchase process.
They set their hearts on buying a home only to find out later that their credit score is an issue, they don’t have enough savings or they didn’t consider the upkeep of the home beyond the mortgage payments. The concept of a debt-to-income (DTI) ratio is new and they may not understand its role in the loan approval process.
A recent analysis by Zillow found that 26 million adults in the U.S. do not have a credit record, a condition often referred to as being “credit invisible.” A disproportionate number of these people are African or Hispanic Americans, with about 15% of these minority groups lacking credit histories.
This can lead to an intimidating experience and a distrust of mortgage professionals, which sets the stage for abandoning the idea of homeownership. Banks and other lenders must increase education around budgeting, DTI and the mortgage process (i.e., loan programs, downpayment assistance, credit, gift letters, etc.) in order to set up more minorities for success.
It will take patience and the willingness to go the extra mile to assist minority applicants who may need a bit more instruction during each step of the process.
Continuing bias
Racism or bias in the mortgage industry means lower appraisals for properties owned by minorities. It also equates to higher rejection rates or redlining, which involves the denial of mortgage applications (mainly to people of color in urban areas) and prevents applicants from buying a home in certain neighborhoods. In the past, banks and other mortgage lenders commonly rejected loan requests from creditworthy borrowers based strictly on their race or where they lived.
Troubling news stories came to light in the past year about Black families who received lower-than-expected home appraisals. These families sought second appraisals. In a Florida case, a Black woman removed pictures of herself and her child, and only her white husband interacted with the appraiser. In a Texas case, a Black family had a white friend show the home. In both cases, the second appraisals came back hundreds of thousands of dollars higher.
Although both cases involved refinances — not first-time home purchases — it’s these types of stories that give minorities pause. As negative stories are circulated, the anticipated disparate treatment discourages future family members or friends from even considering a home purchase.
Many Black families have stories about struggles with the mortgage process, lenders and loan originators. But many of these and other families of color are eligible for (and deserve) homeownership.
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The path to homeownership will require mortgage companies to better understand the history of the communities they serve. It will take patience and the willingness to go the extra mile to assist minority applicants who may need a bit more instruction during each step of the process. It is only through this understanding that relationships can be built, trust regained and communities empowered.
This type of support will not come from a digital mortgage or an online-only application. It will require knowledgeable and patient companies and originators who are committed to educating themselves about the four components that have led to a gap in homeownership, as well as a commitment to educating consumers so that they feel well-equipped and have the confidence needed to buy a home. ●
