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84% higher mortgage rejections for black applicants

(iStock/Artwork by Steven Dilakian for The Real Deal)

Black applicants are being denied mortgages at a significantly higher rate than white applicants – and the gap has widened during the pandemic, a study has found.

A Zillow data analysis of the Home Mortgage Disclosure Act found that the rejection rate was 84% ​​higher for black applicants than for their white counterparts in 2020. That’s 10 percentage points higher than the previous year.

Overall, 19.8% of black applicants were denied a mortgage in 2020, compared to 10.7% of white applicants.

Mississippi, by some measures the poorest state in the United States, had the highest rejection rate for black applicants: 31%.

“Homeowners have seen a plethora of housing gains during the pandemic, but the growing disparity between black and white homeownership rates and home values ​​paints a picture of who those gainers really are,” said Zillow economist Nicole Bachaud.

Insufficient credit is one of the main explanations for black applicants’ rejections. According to Zillow, more than 6% of black applicants were turned down for this reason. It was the cause of 37 percent of their rejections.

Traditional financial services are less prevalent in black communities, leading some borrowers to resort to expensive services like payday loans, which are difficult to repay and therefore can hurt credit scores. In 2019, research showed roughly one in seven black households were unbanked, making it harder to save for a substantial down payment. Larger down payments improve the chances of getting a mortgage.

Another problem is that black-owned homes are worth about 17% less than the typical American home. Disparities in appraisals lead to lower home equity and higher loan-to-value ratios, which increases the risk of rejection.

Homes in predominantly black communities often have higher property taxes, measured against their value. The uneven impact of the pandemic on earnings was another factor.

Obtaining a mortgage is vital for most potential homeowners. Home ownership promotes wealth accumulation and provides other economic and community benefits, so difficulty obtaining a mortgage can have a negative, long-term impact on a family.

The homeownership rate for black people in the United States is 44%, an improvement from 40.6% in the second quarter of 2019, but below a peak of 49.7% in 2004. But the gains of the 2000s proved illusory, as the bursting of the housing bubble wiped out billions of dollars. dollars in black homeowners’ home equity.

Solutions to close the gap are emerging, such as targeted policies to allow black Americans to own property. Government lenders Freddie Mac and Fannie Mae have begun allowing rental payments to count against credit histories, which could help more black renters qualify for mortgages.