How digital mortgage processes can ensure fairer, more equitable home buying

Amit Haller is the co-founder and CEO of reality, a high-tech, high-touch real estate company founded in 2016.

One of the noblest goals in the technology industry is to democratize information and access to goods and services. In the real estate sector in particular, fair and equal access is one of the highest values ‚Äč‚Äčthat we must constantly strive for, especially in home loans. Digital mortgage options can play a role in creating a more equitable lending and home buying process for marginalized communities.

After all, owning a home has long been touted as the pinnacle of the American Dream. However, decades of harmful housing policies, redlining and discrimination have made home ownership an unjust process for some families. Numerous studies have shown that homebuyers can get higher interest rates, stricter terms, and hidden costs based on race, ethnicity, gender identity, sexual orientation and ability.

For example, in 2019, African Americans were denied mortgages at a 16% rate, and Hispanics were denied mortgages at a 12% rate, compared to 7% of white borrowers, according to a report from the Consumer Finance Protection Bureau. In addition, LGBTQ couples were 73% more likely to refuse a mortgage compared to heterosexual couples with similar financial details, according to a 2019 study from Iowa State University.

The differences stem in part from credit risk factors, which have long led to discriminatory mortgages in the US, the agency reported, as well as other factors. This is where automated online processes can potentially help. While digital processes don’t solve every system problem, they may just make owning a home a fairer process. Here’s how:

1. Online and digital options can provide more access and choice.

Home buyers in many underserved communities usually have few, if any, options when looking for a home loan. They often have to choose the most suitable or closest lender, which can lead to predatory lending practices and high loan rates. If that’s the only option available, community members can “deal with it” or view it as the status quo rather than a bad actor who doesn’t want his best.

However, digital tools allow users to track the entire homeownership journey online, be it buying, selling or refinancing their home. This can open up plenty of options, including customizable and customized services offered by lenders across the country. With a broader view and more equitable practices, users can choose the option that suits them best, rather than the only option down the street.

2. The digital process enables comparison and competition.

Online tools allow homebuyers to quickly compare interest rates, mortgage terms and various customizable solutions to suit their specific preferences. With the ability to shop around, home buyers can also save more. In fact, a study by Freddie Mac found that borrowers who looked up five rate quotes saved nearly $3,000 on average. Lenders vie for customers in the online mortgage process, so getting quotes from more than one lender means buyers are more likely to get better interest rates, more favorable loan terms and better long-term savings, the study found.

Additionally, instead of feeling overwhelmed in a high-pressure, high-stakes conversation, users can take the time to review information, look up additional resources, and make an informed decision based on their own comfort level. Without showing their face or meeting anyone, borrowers can upload financial information and the software processes the data.

Reducing the face-to-face process has helped applications, according to The New York Times, which reported that online lenders have seen a significant increase in traditionally underrepresented homebuyers in recent years, including people of color, single women, LGBTQ couples, and student loan debtors.

3. Algorithmic lending can lead to less discrimination.

Mortgage discrimination declined between 2009 and 2015, according to a 2019 study by the National Bureau of Economic Research, which the researchers say could be associated with automated and algorithmic loan offers during the digital mortgage process. The agency found that personal lenders are charging African American and Latinx borrowers 7.9 basis points more to buy mortgages and 3.6 basis points more to refinance mortgages, equating to $765 million a year in additional interest. Personal lenders also rejected minority applicants about 6% more often than comparable non-minority applicants. This means that in 2009-2015, between 740,000 and 1.3 million loan applications were rejected that would otherwise have been accepted.

The researchers found that algorithmic lenders showed no discrimination in loan rejection. That is good news. However, they also found that online lenders charged minority borrowers about 5.3 basis points more to buy mortgages, especially in markets with less competition or in cases where borrowers were less likely to look for different rates. However, based on increasing competition from digital options, the researchers concluded that the increased convenience of shopping online for mortgages could further reduce bias and discrimination in the credit market. It is imperative that we continue to pursue this goal and adapt the algorithms to enable equitable lending.

With additional capabilities, time and more transparent information, digital mortgage options can reduce discrimination in home financing. Online options can also eliminate the hidden costs, which studies have shown can be associated with discriminatory lending practices. This can save customers tens of thousands of dollars on average over the life of a loan.

While digital mortgage tools cannot completely resolve historical discriminatory practices, they can create a safe, welcoming environment for homebuyers to begin their home ownership journey.


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