• 12.3 percent of the U.S. population is black, but only 2.7 percent of conventional mortgage applications are submitted by black applicants.
• 17.1 percent of the U.S. population is Hispanic, but only 5.5 percent of conventional mortgage applications are submitted by Hispanic applicants.
• Once submitted, applications from black and Hispanic borrowers are 2.7 and 2.1 times more likely, respectively, to be denied a conventional mortgage than applications from white borrowers.

Homeownership doesn’t happen in a day. Even for those with the most advantages, successfully buying a home can be challenging and is often the result of years of saving and planning. For those with few advantages, particularly those with lower incomes and fewer employment opportunities, those same challenges can be borderline insurmountable.

Despite all the progress we’ve made toward social equality over the past century, the inherent socio-economic divides between different racial and ethnic groups undeniably and substantially affect homeownership and the home buying experience.

“What State Do You Live In? Denial.”[1]

In a nation where 12.3 percent of the population is black, only 2.7 percent of conventional mortgage applications[2] were submitted by black applicants. Likewise, 17.1 percent of the U.S. population is Hispanic, but only 5.5 percent of conventional mortgage applications are submitted by Hispanic applicants. Once submitted, applications from black and Hispanic borrowers are 2.7 and 2.1 times more likely, respectively, to be denied a conventional mortgage than applications from white applicants (figure 2).

The racial composition of loan applications submitted through the Federal Housing Administration (FHA) better reflects the nation’s diversity. Of all FHA mortgage applications, 17.3 percent were submitted by Hispanic applicants and 10.3 by black applicants.

Critical Differences

There are many reasons why black and Hispanic minority groups are left out of the conventional mortgage market. The persistent racial divide in income is at least partially to blame. The median annual household income in black and Hispanic households ($35,000 and $42,000, respectively) is significantly less than white households ($58,000). Likewise, minority unemployment rates are higher (figure 3).

These differences are critical in the conventional market. The market for conventional loans, compared to loans guaranteed by the FHA or Department of Veterans Affairs (VA), is largely focused on households with higher credit scores and more savings, which help enable the kinds of larger down payments favored by conventional lenders. Savings and good credit are themselves bolstered by steady employment and an income that stretches well beyond everyday expenses including housing, food and clothing.

There is reason to believe, however, that even controlling for standard underwriting variables, black and Hispanic borrowers have different experiences in the mortgage market. In some cases it comes down to the kinds of lenders who are more visible and active in black and Hispanic communities. The propensity to get an FHA loan among these groups could be explained by the greater outreach of, and exposure to, FHA programs – even when the candidate would be eligible for a conventional (and often less expensive) loan. In other cases, racial discrimination is possible, though difficult, to prove.

Regardless of the why, the implication is still important. Access to real estate among black and Hispanic households is worse than it is for other groups. And even when they do own homes, home value growth in communities where blacks or Hispanics are the largest group is disappointing relative to the home value growth in white and Asian neighborhoods. Both of these trends combine to further widen the racial and ethnic gap in housing wealth.

[1] http://www.goodreads.com/work/quotes/2244438-the-essential-calvin-and-hobbes

[2] The composition of loan applications, which includes only mortgage applications for a first lien on the applicant’s primary residence, is sourced from a Zillow analysis of 2013 HMDA records. To be categorized by race, we include only same-race co-applicants when present.