Are Online Mortgage Lenders Less Discriminatory?

Despite the rate of homeownership amongst black Americans rising to a record high 44% in the first quarter of 2020, the figure is still 30% lower than the rate for white Americans. A study by real estate giant Zillow demonstrated that white applicants are rejected for mortgages far less (8.1%) than black (20.9%) or hispanic (15.5%) applicants.

The situation is even worse for same-sex couples, who are 73% more likely to be rejected than a heterosexual couple. A survey has shown that nearly 50% of the LGTBQ community fear discrimination when applying for a mortgage. 

Many states in America don’t offer housing protections under the law for the LGTBQ community. While it’s clear that being accepted for a mortgage loan in America relies on far more than a credit score or your debt-to-income ratio, mortgage discrimination is still a real and current issue.

Why Online Lenders Discriminate Less

A study published in The National Bureau Of Economic Research titled “Consumer-Lending Discrimination in the FinTech Era" sheds light on the difference in approach when lending online and offline. Most importantly, its findings show that online mortgage applicants are likely to experience 40% less discrimination in contrast to in-person meetings with loan underwriters. 

The reason can be found in the algorithm utilized by online lenders. The algorithm is more likely to accept or decline potential borrowers on traditional reasons such as their credit score, income, debt ratios, so forth. Nevertheless, latino and black borrowers are more likely to attract higher interest rates when accepted for loans. 

One study showed that lenders, whether on or offline, charged an average of 7.9 more basis points to purchase a property and 3.6 more basis points to refinance, compared to that of a white applicant. The result of these higher charges amounted annually to $765 million in interest charges.

Online fintech lenders do discriminate less, but the algorithms can still unfairly evaluate applications from latino and black people. It can judge the shopping behaviors and neighborhood of those seeking to borrow. The online system is thus not perfect, but applies much lower levels of discrimination than those experienced during face-to-face applications. 

Tips When Evaluating

When searching for a lender, there are certain relevant criteria to establish. Use a company that’s satisfied with your credit score, your debt-to-income (DTI) ratio, and your down payment capability. You’ll need a lender that’ll offer you your preferred type of loan, with a reasonable interest rate. By identifying one that ticks these boxes, you stand a much better chance at getting a mortgage approved.

A pre-approval process involves the lender examining your income, credit score, recent bank statements, and assets to determine whether you are a creditworthy borrower worth approving for a loan. If they approve, their assessment will also determine how much they’ll lend. 

Should you find the perfect home, the final procedure rests on signing the closing documents. This usually requires a face-to-face meeting, however, during the recent pandemic this has been accomplished remotely. To lower chances of discrimination make sure to source a lender, such as Vylla that use algorithms to make lending decisionss.

What Are The Best Online Mortgage Lenders?

 Let’s take a look at three of the best online lenders on the market right now:

• Borrow a wide range of amounts, with funds often deposited the next day. Avant offers a simple, quick application process that’s clear and transparent, with customer service support available around the clock. Applications can be made on its site or app, and it also provides resources on a variety of financial topics
• Best Egg. This lender is confident in taking the hassle out of personal loans. It offers fixed rates so that you know exactly is required to be paid back each month. Potential borrowers can be quoted a rate in minutes, and it won’t affect their credit score. By consolidating debts, customers can simplify their bills and lower monthly costs. Like Avant, Best Egg also offers a grace period
• Offers large amounts but at low rates. At Upgrade there are no prepayment fees, and monthly payments are tailored to fit the borrower’s budget. This lender’s loans allow borrowers to add co-signers, include hardship plans, delivers a credit health tool, and can offer options to borrowers with weaker credit scores. It’s quick quote and soft inquiry will not affect borrower credit scores either

Bottom Line

Many studies show that black and hispanic borrowers have suffered clear discrimination when applying for mortgages. Fortunately, this disappointing reality can be avoided by applying online rather than in-person for higher approval likelihoods.