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Barriers to Minority

Homeownership

The Department of Housing and Urban Development (HUD) has reviewed updated

statistics issued by the U.S. Census Bureau on the homeownership rates of

minority households. Despite increases in the number of minority families that

became homeowners, the census figures show that large differences in rates of

homeownership between minority and white households remain and have

narrowed only slightly.

According to an analysis of these numbers by HUD, the minority homeownership

rate was 26.8 percentage points below the rate for white households in 1994. The

black homeownership rate was 27.5 percentage points below the white rate, and

the Hispanic rate was 28.8 percentage points below the rate of whites in 1994. By

2001, the gap had been reduced by only 1.5 percentage points for all minorities,

1.6 percentage points for African-Americans, and 1.8 percentage points for

Hispanic households.1

Barriers to Homeownership

Increases in minority homeownership have

occurred recently in an extremely positive

low-interest-rate, low-unemployment

economic environment. Moreover, during the

1990s the conventional mortgage industry

began offering a wider range of affordable

lending programs. This is good, but not

enough to close the homeownership gap.

This initial increase of innovation in the

conventional market has already

reached many of those that were poised

to become homeowners. And because

future economic conditions are unpredictable,

a reduction of the gap in homeownership

levels of non-Hispanic whites and minority

families is not a foregone conclusion and

cannot be assumed. If the persistent gaps in

minority homeownership are to be

substantially narrowed, the structural barriers

faced by minority families, or those that have

a pronounced effect on minority communities, must be eliminated.

There are multiple barriers that prevent minority families from becoming

homeowners. Those barriers include:

 lack of capital for the down payment and closing costs;

 lack of access to credit and poor credit history;

 lack of understanding and information about the homebuying process,

especially for families for whom English is a second language;

 regulatory burdens imposed on the production of housing;

 continued housing discrimination.

1. Lack of Capital for Down Payment and Closing Costs:

 Down payment and closing costs are often the single greatest barrier to

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homeownership.

 Minority families lack the accumulated wealth for down payment and closing

costs. Homeownership is a vehicle to building wealth and assets, which in

turn become instruments for homeownership opportunities for the next

generation of family members.

2. Lack of Access to Credit and Poor Credit History

 Access to lenders becomes difficult when mainstream financial institutions

are not located near potential low-income homebuyers.

 Many potential low-income homebuyers have not established credit or

maintained a good credit history.

 Families with poor credit histories are either rejected for mortgage credit or

given loans with high interest rates.

3. Lack of Understanding and Information about the Homebuying Process

 Homebuyers who do not understand the homebuying process, or for whom

English is a second language, are less likely to be successful in their search

for a home of their own.

 These families are particularly subject to predatory lending practices by

those who charge exorbitant fees and make loans with a high likelihood of

foreclosure.

 Predatory lending can include loan flipping, home improvement scams,

asset-based and unaffordable mortgage loans, repeated refinancing with no

borrower benefit, and packing single premium credit life insurance and other

products into the loan amount.

 Lack of clarity at closing time is a significant barrier to homeownership. At

closing, many families discover unexpected fees that can add hundreds or

even thousands of dollars to the cost of their loans. The purchaser is forced

to make a difficult choice: either hand over the extra cash, or lose the

house.

 The law mandating the information to be provided to consumers in

connection with their home purchase, the Real Estate Settlement Procedures

Act, dates back to 1974. Even after years of revision, the paperwork when

purchasing a home can challenge legal professionals, and creates headaches

for homebuyers.

4. Regulatory Burdens

 The high cost of housing often results from a web of government

regulations. Federal, state, and local codes, processes and controls delay

and drive up the cost of new construction and rehabilitation.

 Unnecessary and cumbersome development regulations contribute to high

housing costs. Barriers involve zoning, land development and site planning,

building codes and standards, infrastructure, administration and processing,

and impact fees.

 In some states, developers report that excessive regulation adds 25 to 35

percent to the cost of a new house. Substantial delays to meet burdensome

regulations are not uncommon.

 When barriers are intentional - through the "Not In My Back Yard" syndrome

of exclusionary zoning, expensive building fees, and burdensome

regulations - the situation is particularly harmful; communities with the most

restrictive land use and zoning regulations often have affordable housing

shortages.

 Affordability often hits minority home-seekers hardest, particularly in urban

centers where the housing stock has deteriorated. The overall

homeownership rate for these central cities is only 51.5 percent.

5. Continued Housing Discrimination

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 Americans are too often denied access to a suitable living environment

based on race, color, national origin, religion, gender, familial status, or

disability.

 A variant on discrimination can be exclusionary zoning spawned by the "Not

In My Back Yard" syndrome; this can lead communities to fear that

affordable housing may result in lower land values; suburban areas

sometimes erect impediments, such as requiring large lots, to discourage all

but a few households who can afford them; if development controls and

regulations fail to address equitably the needs of citizens, they result in an

especially pernicious form of discrimination.

 Barriers to homeownership faced by African-Americans, Hispanics, AsianAmericans, and other minorities will differ depending on where they may

live.

Overcoming Barriers to Homeownership: Administration Actions

Down payment costs - including closing costs - remain the most significant single

barrier to homeownership, especially for low- to moderate-income households. The

American Dream Downpayment Fund proposed in the FY2003 budget at $200

million will set 130,000 first-time homebuyers on the path to owning their own

home.

The Administration has also proposed to provide thousands of low-income

Americans the opportunity to move into their own homes with the help of HUD's

Section 8 Housing Choice Voucher Program. The new plan, part of the

Administration's FY2003 budget, allows local housing officials to provide families

with up to one-year's worth of housing voucher payments to be used toward the

down payment on a home. Prospective homebuyers would have the choice of

using their vouchers for down payment assistance or mortgage expenses.

The Administration has two major initiatives designed to address the lack of

understanding about the homebuying process that presents a significant barrier to

many minority families. Housing counseling is an invaluable tool for prospective

homebuyers. Research has demonstrated that counseling can be effective in

reducing mortgage delinquency. The Administration has proposed for FY2003 the

establishment of a separate housing counseling program with a 75 percent

increase in funding to $35 million to complement the Department's array of new

homeownership initiatives. In particular, the additional funding will enable

counseling agencies across the country to hire and train bilingual counselors and

also produce written materials in multiple languages to reach out to minority

households. Housing counseling can also be a financial literacy and credit

rehabilitation tool for families with poor credit histories.

The Administration has proposed a number of other initiatives to encourage

homeownership, including a proposed tripling of the funds for the Self-Help

Homeownership Opportunity Program (SHOP) to $65 million. SHOP benefits faithbased and other community organizations, like Habitat for Humanity, dedicated to

turning low-income Americans into homeowners. This program expansion will help

support the construction of 3,800 homes, fueled in part by the "sweat equity" of

participating families.

In addition, the Administration has proposed a $2.4 billion Single-Family

Affordable Tax Credit that will help develop and rehabilitate single-family homes.

This investor-based tax credit will encourage developers and non-profit

organizations to build new single-family affordable houses or rehabilitate existing

ones, and will result in an additional 200,000 homes becoming available for

purchase in low-income neighborhoods.

Private Sector Involvement and Commitment

Despite the Administration's actions, it is clear that continuation of the increases in

minority homeownership that occurred during the economic environment of the

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1990s is not assured for the future. Private sector actors involved in the real

estate and mortgage lending industries will need to increase their levels of product

innovation and marketing to minority families in order to sustain these growth

rates.

1Homeownership rates used for white and African-American households exclude Hispanic households.

Content updated June 17, 2002

U.S. Department of Housing and Urban Development

451 7th Street, S.W., Washington, DC 20410

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