Community Reinvestment Act (CRA) & How It Relates To Mortgages

In this article:

• What is CRA?
• How does CRA Relate to Mortgages?
• Income Thresholds

One common term you'll hear when it comes to mortgage lending in low- to moderate-income areas is 'CRA.' But what is CRA? Let's answer that question and explain how it relates to the mortgage process.

What is CRA?

CRA is an acronym for the Community Reinvestment Act, a U.S. law encouraging banks to help meet credit needs in communities where they take deposits, with specific emphasis on helping meet credit needs of low- and moderate-income neighborhoods.

CRA was enacted in 1977 and underwent revisions in May 1995 and August 2005. A bank's CRA performance is evaluated by various bank regulators, including the Federal Reserve and the FDIC, among others.

Banks are incentivized to focus on strong CRA performance because these regulators consider a bank's CRA engagement when approving applications for new bank branches or for mergers and acquisitions.

All banks, regardless of size, must report their CRA lending activities to their regulators, such as:

• Economic development by making small business loans
• Community Development loans, investment, and services for the purposes of affordable housing
• Supporting home ownership in low- to moderate-income areas by making mortgage loans

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How does CRA Relate to Mortgages?

That last activity -- mortgage lending under CRA -- warrants some further clarification. Technically, there isn't any one specific 'CRA mortgage' for low- to moderate-income borrowers.

This is because CRA isn't a loan program. It is a body of rules that encourage banks to focus on making loans -- including mortgages -- to low- and moderate-income borrowers.

This is an important distinction because you might see promotions for 'CRA Mortgages.' That's simply a marketing label. The kinds of loans you get if you're a low- to moderate-income borrower and/or buying in a low- to moderate-income Census tract are standard bank programs like:

• FHA and VA loans, which allow for low down payments, and lower credit scores
• Fannie and Freddie loan programs that allow for lower down payments

And if you meet the low- to moderate-income standards specific to your area, you might also qualify for local city or county housing incentive programs, like:

• Being able to buy specially designated below-market-price properties
• Down payment assistance from the city or county
• Second mortgages from the city or county that don't require payments

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Income Thresholds

Your city will usually have a housing office associated with its mayor's office that will provide details. Generally speaking, those programs will have income thresholds to define whether you qualify.

Income thresholds are created by comparing the median family income of lower income areas to the median family income of a broader area.

Income is generally considered low when you're earning less than 50 percent of the median family income for your region. It's generally considered moderate when you're earning 50-80 percent of the median family income for your region.

If you think your income places you in these categories, the CRA rules in this country push banks to have loan products that will fit your needs.

The best and clearest way to determine your options is to make contact with a local lender in your area, and ask if they have special programs for low- to moderate-income home buyers.