How do you get a mortgage in Detroit?
Detroit Future City, a nonprofit policy advocacy group, has released two new resource guides to provide some answers. The guides focus on navigating obstacles in the mortgage process and a catalog of available loans and payment programs.
“It’s fair to say we believe homeownership provides power and voice and community change, and also creates stability and opportunity,” said Kimberly Faison, director of community and economic development at DFC. “We want to dig deeper in advancing homeownership.”
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Faison said the resource guides adapted recommendations from the Black Homeownership Collaborative, which focuses on homeownership counseling, down payment assistance, housing production, credit and lending, sustainability, civil rights and sustainability.
Homeownership remains out of reach for many Detroiters, according to DFC research. In 2020, only 55% of home purchase mortgage loan applications in Detroit resulted in mortgages. Black applicants were denied at twice the rate as white applicants that year. DFC sees signs that Detroit’s lending environment is improving, but persistent disparities hold back the potential for residents to build wealth and sustain their neighborhoods.
“If you’re not purchasing a home with a mortgage, there aren’t a lot of other options for the average person,” Faison said. “Mortgages are really the mechanism to get the capital you need to make a purchase.”
The three most common reasons mortgage loan applications are denied, according to DFC, are a borrower’s credit history, their level of debt relative to income and the appraised value of the house.
DFC researchers say uneven mortgage lending in Detroit makes it harder for appraisers to accurately measure a home’s value, causing prospective homebuyers trouble in obtaining a loan for homes where the sale price is more than the assessed value.
“Homeownership is something to be celebrated and it’s a pathway – and through – the middle-class,” Faison said. “For those who believe that is a good fit for them, if it’s even an idea that they want to explore, we continue to work with the entire system as a homebuyer ecosystem to support prospective buyers and help them to see that dream come true.”
Building credit is key
Financial lenders take a hard look at a homebuyer’s credit history when determining whether to approve a mortgage.
Roughly half of Detroiters could be denied a mortgage based on low credit scores. According to the Urban Institute, 52% of the city had a score under 600 last year while most conventional mortgage options require a score of at least 620. Look up your credit score for free.
There are several ways homebuyers can improve their credit scores before buying a home. Lenders want to see applicants with experience making purchases with credit and making payments on time. Opening a bank account and consistently using a credit card can create a good financial history in the months or years before applying for a mortgage loan.
Credit agencies can also consider rent and utility payments if prospective homebuyers sign up for a rent-reporting service. Some of these services cost money or require landlords to confirm the payments. Late or delinquent rental payments will have a negative effect on a prospective homebuyer’s credit, but a history of on-time rental and utility payments will build their credit score.
The DFC guide strongly recommends prospective homebuyers review their credit reports before approaching lenders for a home mortgage, especially to identify errors – like accounts that don’t match the homebuyer’s name and incorrect personal information – that could have a disastrous impact on an application.
Lenders can deny loans or provide less generous terms based on a flawed estimate of an applicant’s debt. Lenders often require applicants to have debts of no more than 43% of their income, and generally offer mortgages with monthly payments of no more than 28% of an applicants’ income.
Credit report information can be disputed by filing a claim with the credit agency and any organizations that provided information to the agency. Complaints can also be filed online with the Bureau of Consumer Financial Protection.
Get schooled at a homebuyer course
There are a variety of services to learn about loans and the purchasing process, taxes, predatory lending and avoiding foreclosure.
DFC recommends that Detroiters take advantage of classes and workshops offered by city organizations. The Detroit Housing Network and its members offer homebuyer classes that combine homeownership education and financial counseling. Programs also provide access to financial assistance like mortgage down-payment help.
Seek a financial expert
Finding the right bank or loan officer to talk with can be a challenge, but tracking them down can lead to more success than sending in a mortgage application without guidance.
DFC recommends homebuyers meet with a loan officer or mortgage broker to get assistance.
Loan officers are employees of a bank, credit union, or other financial institution who assist borrowers in the process of applying for loans. Community Reinvestment Act (CRA) Loan Officers specialize in working with low-income and moderate-income homebuyers.
Mortgage brokers don’t lend money, but they do work with lenders on a homeowner’s behalf to compare mortgage options and find what best fits a homebuyer’s needs.
Shopping for a mortgage
DFC compiled a catalog of mortgage options through interviews with banks, mortgage lenders, housing counselors and Detroit Neighborhood Housing Compact members. The in-depth roundup provides details on lenders and programs, credit requirements, down payments, income restrictions and other features.
Some mortgages are government-sponsored, while others are from banks, credit unions, nonprofit organizations and other groups.
The catalog includes programs to help homebuyers cover down payments and closing costs.
Know your rights
Here are some important laws and regulations that protect homebuyers against unfair and discriminatory housing practices.
- Fair Credit Reporting Act (FCRA): Homebuyers must be told if their credit reports have been used to deny a loan or provide less generous terms. Homebuyers have a right to know their credit score and access annual reports for free. Consumer reporting agencies must remove inaccurate information and can’t report outdated information about bankruptcies and other types of “negative information.”
- Truth In Lending Act (TILA): Lenders must disclose the specific terms and conditions of a loan, including a home purchase mortgage. These include borrowing costs, total charges over the life of the loan, the number of payments and late payment fees.
- Equal Credit Opportunity Act (ECOA): Protects homebuyers against discrimination from lenders on the basis of race, religion, sex, age or other factors. Loan applicants can obtain the specific reason for being rejected.
Wrongly denied? Here’s what to do
Homebuyers have options if they believe their mortgage application has been wrongly denied or that the terms and conditions offered by a lender are less favorable. They can formally request lenders to reconsider, file an administrative complaint or seek a lawsuit.
Requests for reconsideration are handled with the mortgage lender, while administrative complaints involve neutral third-party investigators.
Homebuyers can file credit-rated complaints with the Consumer Financial Protection Bureau or Michigan Department of Insurance and Financial Services.
Complaints regarding home appraisals can be filed with the Michigan Professional Licensing User System.