Expanding access to credit could shrink the homeownership race gap

Limited access to credit-building products and services disproportionately cuts off Black and Latinx Americans from the wealth-building advantages of homeownership that can last for generations, a new Zillow® analysis shows, shedding light on a prime barrier to entry for prospective homeowners of color.

Twenty-six million Americans do not have a credit record and around 12.5 million adults live in "credit insecure" counties, characterized by a high number of residents with poor or no credit history, as well as relatively limited structural access to formal credit products and services. A disproportionate number are Black or Latinx.

One of the many consequences of restricted credit access is the inability to secure homeownership—nearly three-quarters of home buyers (72%) obtain a loan to help pay for their home, and an even higher rate of Black (78%) and Latinx (77%) home buyers do. As counties become more credit secure there is a direct and meaningful correlation with higher homeownership rates, outlining a possible path to bridging the racial homeownership gap. Potential drivers could include adjusting the way credit history is recorded and expanding the reach of small lenders that are less likely to deny applicants based on their credit history.

"Lower homeownership is just one of many negative results borne out of poor credit health in communities nationwide," said Nicole Bachaud, economic data analyst at Zillow. "For many, walking into a bank or going online to apply for a loan or open a new credit card is simple. But for those excluded from the formal credit market in this country, it is a far more daunting task, and Black and Latinx households are especially vulnerable. A shift in credit reporting might be a first step to reducing the systemic barriers into homeownership and the financial market overall."

Currently, credit history, or lack thereof, is the number one reason mortgage applications are denied to Black applicants, underscoring the potential for progress in this area. About 15% of Black and Latinx Americans are "credit invisible," completely lacking a record of credit, compared to 9% of white and Asian Americans.

Being credit invisible can create a catch 22 that's difficult to break out of—opening new lines of credit is often conditional on having an existing credit score—and can bleed into future generations, as lack of access to credit now will limit future wealth accumulation and the amount of generational wealth available to pass on.

President Biden's administration has proposed restructuring the current credit system to accept non-traditional sources of data like rental payments and utility bills as an alternative path to establishing a credit history. The goal of such a restructuring would be to bring many credit invisible individuals into the system they are currently locked out of.

Not only are Black and Latinx individuals more prone to being credit invisible, they are also more highly concentrated in counties with higher credit insecurity. Almost one in 10 Black households (9.7%) and 7.9% of Latinx households live in counties considered credit insecure, compared to 2.7% of white households and 3.5% of Asian households.

The presence of smaller, more localized banks in a community could improve access to credit in these types of areas where credit insecurity is high. The overall mortgage denial rate at small banks—those with less than 1,000 applications received—was 7.4% in 2019, less than half the rate (17.2%) at large banks with more than 100,000 applications. And only 2.6% of all mortgage applications at small banks were denied based on credit, again less than half the rate (5.7%) at large banks. Small banks are currently less prevalent in counties that are considered credit insecure.

—Zillow

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