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Income, Credit Scores Lead to Most Mortgage Loan Denials

Published: Wednesday, April 9, 2014 2:27 p.m. CDT

By S.E. Slack

Homeownership is in reach for millions of Americans, says real estate firm Zillow, but only if you meet mortgage lending standards. Income and credit scores weigh most heavily in mortgage lending decisions. But while homeownership is a dream for many, the experience on the way to reaching that goal can vary, depending on the individual's background, economic situation and even race.

Zillow recently studied trends in minority access to housing. Using information from the Home Mortgage Disclosure Act and an independent survey, the report states that there is not sufficient information in the HMDA data nor in the survey data to determine if any of the findings reflect illegal discrimination. But the report found that obtaining a mortgage was more difficult for black and Hispanics than it was for Asians and whites.

According to HMDA records, blacks and Hispanics are much more likely than whites to have their mortgage application denied. When applying for a conventional loan, black applicants are 2.4 times and Hispanic applicants are 1.98 times more likely than white applicants to be denied. When applying for an FHA loan, black applicants are 1.75 times more likely and Hispanic applicants are 1.47 times more likely than white applicants to be denied.

Skylar Olsen, economist for Zillow, says that’s primarily because of unequal education levels among races, differing income brackets and varying credit scores. Lower educational achievement typically results in lower incomes, which often leads to lower credit scores.

“The differences are primarily seen within the conventional mortgage market,” she says. “The racial and ethnic composition of FHA loan applications is much more similar to the racial and ethnic composition of the nation as a whole. Blacks and Hispanics are much more likely to apply for an FHA mortgage than a conventional loan when purchasing a home as more than half of black applicants (57.4 percent) and 60.3 percent of Hispanic applicants applied for an FHA loan. In contrast, less than one-third (30.1 percent) of white applicants apply for an FHA loan.”

Blacks and Hispanics put 5 to 6 percent down on a home while Asians often place 20 percent or more down. These differences drive the decisions mortgage lenders make, says Olsen. The more money put down on a home, the more confident lenders are that a buyer will not default.

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