Tag Archives: home loan

White and Asian Borrowers More Likely to be Approved for a Conventional Loan

Black and Hispanic applicants twice as likely to be denied mortgages

By Jeff Sorg, OnlineEd Blog

(November 3, 2016 – Zillow) White and Asian borrowers are more likely to be approved for a conventional loan than black or Hispanic borrowers, according to the latest federally released data from the Home Mortgage Disclosure Act (HMDA). The disparity persists despite improvements in mortgage access for borrowers over the last few years.

In 2015, 22.4 percent of black applicants were denied conventional loans according to HMDA data. In 2010, 30.5 percent of black applicants were denied. Among Hispanic applicants, 17.3 percent were denied in 2015, down from 25 percent in 2010.

By comparison, 10.4 percent of all conventional loan applications were denied in 2015, a drop from 14.2 percent in 2010.

“Even though conditions have improved over the past few years, getting approved for a mortgage is still a significant barrier for some would-be buyers,” said Zillow Chief Economist Dr. Svenja Gudell. “Owning a home is an important way for the middle class to build personal wealth. It’s encouraging to see more black and Hispanic borrowers getting approved for mortgages, but there’s still a lot of progress that needs to be made.”

The problem is so entrenched that last week Fannie Mae and Freddie Mac announced programs designed to improve access to credit for these groups, which have historically had the lowest homeownership rates even though they are more likely to place a higher value on owning a home.

According to the Zillow® Housing Confidence Index, 68 percent of Hispanic respondents and 65 percent of black respondents considered homeownership necessary to living the American Dream. By comparison, 59 percent of white respondents and 58 percent of Asian respondents felt the same.

Homeowners are becoming increasingly diverse, data from the Zillow Group Consumer Housing Trends Report show. Even so, the homeownership gap between black and white households is as wide in 2016 as it has been for the past century[iii].

Metro Denial Rates for All Conventional Applications in 2015 Denial Rates for Conventional Loans from Asian Applicants in 2015 Denial Rates for Conventional Loans from Black Applicants in 2015 Denial Rates for Conventional Loans from Hispanic Applicants in 2015 Denial Rates for Conventional Loans from White Applicants in 2015
United States 10.4% 11.1% 22.4% 17.3% 8.7%
Atlanta, GA 9.6% 9.6% 18.9% 13.1% 7.1%
Baltimore, MD 8.1% 10.0% 16.6% 11.9% 6.2%
Boston, MA 7.0% 7.9% 17.2% 14.9% 6.0%
Charlotte, NC 8.8% 9.1% 16.0% 16.2% 7.0%
Chicago, IL 9.7% 10.7% 24.7% 18.6% 7.6%
Cincinnati, OH 8.6% 8.1% 19.8% 11.9% 7.9%
Cleveland, OH 7.7% 8.8% 19.4% 11.8% 6.7%
Columbus, OH 9.0% 10.6% 15.6% 22.0% 8.0%
Dallas-Fort Worth, TX 8.3% 9.5% 16.6% 11.9% 6.3%
Denver, CO 6.7% 8.2% 13.3% 10.3% 5.7%
Detroit, MI 9.9% 11.1% 21.0% 11.1% 8.6%
Houston, TX 9.9% 12.0% 17.7% 14.6% 6.9%
Indianapolis, IN 6.9% 9.7% 16.5% 16.0% 5.8%
Kansas City, MO 6.3% 9.9% 16.0% 14.3% 5.2%
Las Vegas, NV 12.8% 15.6% 17.3% 13.3% 10.3%
Los Angeles-Long Beach-Anaheim, CA 11.0% 11.1% 16.6% 12.9% 9.9%
Miami-Fort Lauderdale, FL 18.1% 18.7% 25.9% 20.4% 13.9%
Minneapolis-St Paul, MN 5.2% 7.2% 14.5% 13.1% 4.4%
Nashville, TN 6.9% 9.7% 16.5% 14.4% 5.9%
New York, NY 12.8% 13.8% 24.0% 19.7% 10.5%
Orlando, FL 13.6% 17.5% 22.5% 19.0% 10.7%
Philadelphia, PA 8.2% 11.4% 20.2% 13.8% 6.3%
Phoenix, AZ 9.5% 9.9% 16.8% 13.2% 8.3%
Pittsburgh, PA 7.2% 6.6% 11.7% 6.5% 6.8%
Portland, OR 6.1% 8.9% 10.3% 11.4% 5.2%
Riverside, CA 11.6% 14.8% 15.3% 13.4% 9.0%
Sacramento, CA 9.4% 13.0% 14.9% 12.8% 7.8%
San Antonio, TX 11.5% 9.2% 16.1% 16.7% 8.3%
San Diego, CA 10.2% 10.4% 16.0% 14.6% 9.6%
San Francisco, CA 8.5% 10.2% 17.6% 13.1% 6.6%
San Jose, CA 9.0% 9.3% 7.7% 11.8% 7.2%
Seattle, WA 8.1% 9.8% 19.2% 11.8% 7.2%
St. Louis, MO 8.0% 11.2% 25.0% 15.2% 6.7%
Tampa, FL 14.2% 15.9% 26.6% 18.1% 12.4%
Washington, DC 7.5% 8.8% 15.4% 12.3% 5.0%

SOURCE Zillow

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For more information about OnlineEd and their education for real estate brokers, principal brokers, property managers, and mortgage brokers, visit www.OnlineEd.com.

All information contained in this posting is deemed correct as of the date of publication, but is not guaranteed by the author and may have been obtained from third-party sources. Due to the fluid nature of the subject matter, regulations, requirements and laws, prices and all other information may or may not be correct in the future and should be verified if cited, shared or otherwise republished.

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Loan Underwriting Approval: Collateral, Character, and Capacity

Qualifying ratios are only the beginning of the loan approval process. The three Cs of loan approval in lending are:

  1. Collateral,
  2. Character (credit), and
  3. Capacity.

Collateral – The lender will look to the collateral to hedge its loss if the creditor defaults on their loan. To help analyze the collateral, the lender will order an appraisal to verify the collateral value and then determine a loan-to-value ratio (LTV). For a new home purchase, the LTV ratio is calculated by dividing the requested loan amount by the lesser of the purchase price or appraised value. LTVs are also used when refinancing a mortgage or borrowing against equity. Different mortgage loan programs have different LTV requirements.

A $600,000 home with a $480,000 mortgage has a 80% LTV. Rationale: $480,000/$600,000=.80 or 80%

The equation for the LTV is: Current loan balance ÷ Current appraised value = LTV.

Character – Character refers to creditworthiness. Lenders use a combined credit report from the three standard national credit reporting agencies – Equifax, Experian, and Trans-Union. The information and scoring in the combined report provide the foundation for approval, which type of loan will be best for the borrower, the interest rate to be charged, or grounds for loan denial. The credit history of the borrower is the most crucial consideration in granting a mortgage.

Credit scoring considers a variety of components. While the element of how much a borrower owes and their payment history is one objective element, several subjective factors determine the credit score. These elements can include account balances that are 75% or more of the credit limit, which indicates high financial leverage and creates a higher risk to the lender. A large number of open accounts with zero balances is also a consideration since these can lower the credit score because they provide the potential for future excess debt, thereby affecting the borrower’s ability to service the loan debt. Most lenders who sell their loans into the secondary market use the following parameters when evaluating credit scores:

  • Scores above 720: Borrowers will receive better terms and interest rates on their loans.
  • Scores between 680 and 720: credit risk is good and can help compensate for other borrower profile risks.
  • Scores between 620 and 680: comprehensive review to look for potential risks.
  • Scores below 620: cautious review required; borrowers may find themselves locked out of the best loans and terms available.

Credit reporting agencies are required to investigate and correct borrower-reported errors in a credit report. They must allow borrowers to include statements of explanation for derogatory information in their report.

The Fair Credit Reporting Act (FCRA) requires credit reporting agencies to give borrowers denied credit a free copy of their credit report. Borrowers who have not been declined can also receive a copy for a nominal charge.

Capacity – Capacity refers to the borrower’s ability to repay the loan (to service the debt), emphasizing two ratios. The first is the borrower’s monthly proposed housing costs to total gross income. Total housing costs will also include PITI and homeowners association dues. Most conventional lenders look for a ratio that does not exceed 28%. FHA allows up to 31%.

The second ratio is the borrower’s total debt payments (inclusive of the proposed loan) to the borrower’s gross monthly income. Most conventional lenders do not allow this to exceed about 36%. FHA will allow up to 43%, and VA allows up to 41%. If a borrower qualifies comfortably on one of the ratios, a lender may allow a little leeway on the other.

The lender also considers the employment history of the borrower. Employment history evaluates such factors as the reliability and stability of the borrower’s income, length of time on the job, type of occupation, overtime pay and bonuses, and the probability of continued employment.

Another factor considered by the lender is the net worth of the borrower. To determine net worth, the lender will subtract borrower liabilities from borrow assets (Assets-Lisbilities=New Worth). Fannie Mae regards “an accumulation of net worth as a strong indication of creditworthiness.” By establishing net worth, the underwriter evaluates the borrower’s ability to cover the down payment and any additional costs for the purchase and is verifying adequate cash reserves.

Total Assets of $1,500,000 – Total Liabilities of $500,000 = $1,000,000 net worth. Rationale: Assets-Lisbilities=New Worth.

The equation for Net Worth is Assets-Lisbilities=New Worth.

After evaluating the collateral and the borrower, the underwriter summarizes their evaluation and sends it to a loan committee. The loan committee makes the final decision on whether to approve the borrower for the loan. If the committee approves the loan, they will issue a loan commitment letter to the borrower. A commitment letter is a written agreement by the lender to make the loan, subject to any specific terms and conditions listed in the letter.

Note: Qualifying ratios and credit score parameters change based on economic conditions. Always check with your qualified mortgage professional for the most current information for today’s market conditions.

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OnlineEd blog postings are the opinion of the author and not intended as legal or other professional advice. Be sure to consult an appropriate party when professional advice is needed.

For more information about OnlineEd and their education for real estate brokers, principal brokers, property managers, and mortgage brokers, visit www.OnlineEd.com.

All information contained in this posting is deemed correct as of publication date but is not guaranteed by the author and may have been obtained from third-party sources. Due to the fluid nature of the subject matter, regulations, requirements and laws, prices, and all other information may or may not be correct in the future and should be verified if cited, shared, or otherwise republished.

OnlineEd® is a Registered Trademark.