What you need to know about applying for a mortgage
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For most people, owning a home is a dream. It can provide a sense of stability and control over your living space. It’s also a great investment for the future. But with living costs and interest rates climbing, this dream has become more elusive for many. And despite progress in recent decades, the gap in homeownership rates between Latino and white Americans remains wide.
If you’re considering buying a home, you’ll need to apply for a mortgage first. This home loan, often given by a bank, will help you pay off your home over a set number of years. For Latinos, however, obtaining a mortgage can be a difficult proposition. An analysis by Futuro Investigates found that between 2018 and 2022, financial institutions in New Jersey rejected Latino mortgage applicants at higher rates than white residents.
We spoke to housing expert Marisa Calderon about steps Latinos can take to boost their chances of mortgage approval. She’s the executive director at the Washington, D.C.-based National Community Reinvestment Coalition’s Community Development Fund, which works to increase access to affordable homeownership. She was previously an executive director at the National Association of Hispanic Real Estate Professionals (NAHREP), the largest trade group in the real estate industry for underrepresented communities.
Here are some tips Calderon shared for Latino home seekers on navigating the mortgage process, supported by Futuro Investigates’ analysis:
Build Your Financial Profile
The first step for anyone applying for a mortgage is to build a strong financial profile. Mortgage lenders will look at your credit score to determine if you’re qualified for a loan. According to the Federal Home Loan Mortgage Corporation, known as Freddie Mac, an insufficient credit history is one of the barriers keeping Latinos from buying a home. Most lenders find a score above 670 as an indicator of creditworthiness. But a higher credit score —something between 740 and 799— can improve your chances of getting a mortgage loan and a lower interest rate.
It’s important to understand what behaviors will help build up your credit and what to avoid. For instance, some forms of credit, like payday loans, can actually worsen your score. Payday loans are short-term, high-cost loans that are typically due by your next paycheck and are available online or at a storefront location. Because of easier access to payday lending in many predominantly Latino neighborhoods, many Latino resort to it, says Calderon.
“If you use something that is considered subprime credit, like a payday loan, not only does that cost you more, but it adversely impacts your credit even if you pay it back properly because you used it, which seems like a double ding.”
Building up your credit takes time, but it can help you get a better loan offer in the long run. Banking with a reputable institution, consistently making payments on time, making sure not to spend over your credit limit, and paying off any high-interest debt, like credit card debt, are ways to increase your credit score over time.
Additionally, it’s important to determine how much money you need to save to cover the upfront costs of buying a home, like the down payment and closing costs.
Calderon recommends looking into municipal programs tailored for first-time homebuyers, like the New Jersey Housing and Mortgage Finance Agency, which offers assistance with down payment costs.
Get educated about the Homebuying Process
The lending system has many components, and applying for a mortgage can be confusing.
This is especially true if you’re a first-time homebuyer, as many Latinos are. Research by the Urban Institute projects Latinos will account for 70% of new U.S. homeowners by 2040.
Calderon encourages prospective Latino borrowers to take a homebuying class before applying to better understand the mortgage process.
“It’s a really great way of … setting expectations for what they should encounter and for giving them a little bit of fluency in the process,” she says.
A homebuying course can help you understand the factors lenders will consider when evaluating your mortgage application, including your employment and credit history and the funds you have available for a down payment, Calderon explains.
It’ll explain highly technical lending terms and correct common myths and misconceptions about the mortgage process. For instance, have you ever heard that your initial down payment must cover 20% of your home’s total value? Not true! In many cases, first-time homebuyers can get a mortgage with a down payment as low as 3%.
Most importantly, a homebuying class can empower you to navigate the mortgage process with confidence and select the loan type that best fits your situation.
Common loan types include:
- Conventional mortgage—the most common home loan type and a good option for borrowers who want to capitalize on low-interest rates for a higher down payment.
- Fixed-rate mortgage—A mortgage with the same interest rate and principal payment for the length of the loan.
- Adjustable rate mortgage—A 30-year loan with interest rates that change in tandem with market rates.
- Federal Housing Administration (FHA) mortgage—a common government-backed mortgage that offers low down payment loans to eligible homebuyers. These loans are insured by the federal government.
“Just understanding some of the … truths about the homebuying process, I think, would put [you] in a position of having information as opposed to needing to rely on other people,” Calderon says.
The Federal National Mortgage Association, commonly known as Fannie Mae, offers a free online course that’s designed for first-time homebuyers. You can look for alternative courses online or by contacting your local HUD-certified housing counseling agency. You can find your local office and other housing resources on the HUD website by navigating to your state.
Be Informed About the Terms of Your Offer
Now, let’s say you’ve successfully applied for a mortgage and gotten a loan offer. You may be tempted to try another bank and see if you get a better offer, maybe with a lower interest rate. Or you may just accept the first offer out of fear that you won’t get a better deal. Either way, it’s best to be prepared before shopping around for a loan, Calderon says.
Freddie Mac conducts a weekly survey that provides data on mortgage interest rates and other market trends. Here, you’ll get a sense of the average rates that mortgage lenders are offering to borrowers and what loan terms will work for you before you move forward with a credit inquiry.
It’s also important to note that the interest rate is different from the Annual Percentage Rate, or APR, which includes other costs associated with obtaining the loan, like mortgage insurance or closing fees. When a lender reviews your credit report as part of your mortgage application, this will result in a hard inquiry, which can impact your score. Calderon advises prospective borrowers to ask for the total cost of credit before making a hard inquiry.
Multiple hard inquiries into your credit are generally fine and are counted as one inquiry, as long as it’s within a narrow window of time, says Calderon. But if you’re shopping around with different mortgage lenders, keep in mind that this window can vary depending on the credit scoring model used, anywhere from 14 to 45 days.
An even safer option that Calderon recommends is to do a soft credit pull. Most lenders can do a soft inquiry to provide you with a loan estimate.
“That doesn’t actually harm your credit and it lets the lender know, given whatever is your credit scenario, whether you would be best positioned to get a loan or not, and if so what the rate might be,” Calderon says.
If Barriers Crop Up, Don’t Despair
If you’re a first-time homebuyer or have limited English proficiency, a lack of Latino representation in the lending industry can make it harder to navigate the mortgage process, Calderon adds.
“There are an insufficient number of realtors who are Latinos or who have cultural competencies in working with Latino borrowers … and it’s certainly worse in the mortgage space,” she says.
Barriers to homeownership can also take the form of discrimination. Redlining—the practice of denying loans to certain areas based on their racial or ethnic makeup—has been illegal for over 50 years, but some lenders continue to be accused of withholding services from communities of color. These systemic practices—coupled with unconscious biases baked into the lending process—contribute to racial disparities in homeownership and mortgage outcomes, as shown by our analysis.
The Fair Housing Act prohibits discrimination in housing based on race, religion, disability and other identity categories. If you believe you’ve been racially profiled or experienced discrimination during the mortgage application process, you should file a Fair Housing complaint with local government agencies, Calderon says. She notes organizations like the National Fair Housing Alliance and NCRC can provide you with free legal assistance and help you file a complaint with the right agency.
You can report housing discrimination directly with the NFHA here or with the NCRC, here. If you believe you have a strong case and would like to share it with us for a potential future story, please fill out our contact form online.
*Banner photo by Associated Press.
The work of Futuro Investigates is made possible by The W.K. Kellogg Foundation, the Chan Zuckerberg Initiative, the Tow Foundation, the Geraldine R. Dodge Foundation, Michelle Mercer and Bruce Golden, and Hispanics in Philanthropy.
Senior Supervising Editor
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