How Mortgage Discrimination Denies First-Time Homebuyers Their American Dream

Housing affordability has emerged as a key issue this election cycle, but even the financial relief of lower interest rates or expanded downpayment assistance may not be enough to help first-time homebuyers. A new CFA research report has found that many buyers lose out not only because of escalated home prices, but also for a less-known, more troubling reason: they face discrimination during bidding wars based on the type of mortgage they plan to use. Nationwide around 16 percent of homebuyers use the Federal Housing Administration's (FHA) mortgage program to buy a home, and many of them are first-time, as well as Black and Hispanic homebuyers.

While the FHA program was designed to level the playing field, we found that many FHA buyers unfairly lose out when competing to buy a home. This problem not only hurts individual consumers: it is tilting opportunity towards wealthier buyers and investors with cash.

Over a dozen states have passed "source of income" antidiscrimination laws in recent years that make it illegal for landlords to discriminate against tenants who use federal housing subsidy vouchers ("Section 8"). But we know little about a similar process happening when buying a home. Also called "source of financing" discrimination, sellers and their agents often view FHA buyers as less desirable, thinking that these loans are harder to close or come with strings attached. But data by ICE Mortgage Technology found that average time to close is actually shorter for FHA loans than for conventional loans - partly because the online mortgage companies that often originate FHA loans have technological advantages.

The consequences are devasting for first-time buyers, as thousands of sellers, advised by their agents, make the same decision to pick cash or conventional offers over the perceived hassle of working with an FHA buyer - a decision too often based on misperceptions rather than underlying truths. To fix this, home sellers and their real estate agents need to step up, and we need stronger legal protections to hold them accountable.

Home sellers and their agents should not buy into myths about FHA. FHA buyers can waive the inspection just like any other buyer, and the inspection parts of the mandatory FHA appraisal are focused on ensuring the basic safety and functionality of the home: it does not need to be a scary hurdle. FHA buyers have passed all of today's stringent mortgage credit tests and represent a wide range of incomes: people often opt to use FHA because its low downpayment works best for them - they are not "risky" buyers. With that knowledge, home sellers may welcome the opportunity to pass on their house to a first-time homebuyer. They would walk away not only with the same cash in hand - or more cash, as sometimes FHA buyers lose out even when they offer the highest bid - but also with the great feeling that they contributed to wealth-building and opportunity in their community.

Barring that greater awareness, States and local municipalities should be more aggressive in enforcing their "source of income" antidiscrimination laws. These laws, while originally passed to protect tenants, can be a powerful tool in leveling the playing field for FHA buyers too. State Attorney General's offices should monitor the ways that real estate agents mention FHA in how they advertise listings and whether they systematically exclude FHA buyers in their repeat transactions. By prosecuting the worst offenders, it would send a strong message that excluding buyers based on financing is discriminatory, and that discrimination has no place in our housing market.

It is already hard enough to buy a home today: we need to remove hidden barriers that stop so many from achieving their American Dream.

Share This Page: