The Importance of Inclusive Lending in Today’s Real Estate Market

In the modern real estate industry, inclusive lending is becoming increasingly important. Understanding the role that inclusive lending plays in today’s market can better prepare you for the home-buying process. While private lenders in Indiana often provide borrowers with better terms and faster financing, the underwriting process can be just as structured and inflexible as it is with banks and credit unions. Because of the challenges that exist in the current real estate market, lenders can benefit from adopting inclusive lending practices.

Drawbacks to Traditional Lending Practices

While an increasing percentage of lenders are taking steps towards more inclusive lending, the truth is that the real estate market has been lacking in this regard for decades. Even as recently as 2019, black borrowers with incomes that ranged between $75,000-$100,000 received higher interest rates than white borrowers who made just $30,000 or less. It’s also common for qualified borrowers to have issues when applying for mortgage loans because of language barriers. 

Borrowers with a disability have been at a disadvantage in the past as well. For example, some lenders don’t count Supplemental Security Income (SSI), Social Security Disability Income (SSDI) or disability income when reviewing loan applications. If a borrower has hearing or sight impairments, they may be unable to use traditional application forms.

Along with biases, many of these issues occur because lenders often have mechanical underwriting processes that are highly automated. Automation has been implemented to make the lending process more efficient when dealing with thousands of applications. Borrowers often benefit from this technology. 

The issue occurs when deciding if a borrower should be approved for loans. By automating this process, it’s possible for borrowers to be evaluated based on strict criteria. Even when a borrower meets specific criteria, lenders could find factors that they believe add risk to the borrower. When this happens, lenders may assign higher interest rates, even when there’s no real reason to.

Instead of mechanically voting “Yes” or “No”, lenders would benefit from looking at all facets of a borrower to make a less biased decision. The mortgage industry has been biased and exclusionary for a long time. While borrowers cannot be denied loans based on color, race, religion, or disability, there are less visible types of bias that can affect a lender’s decision. 

For example, lenders can look at zip codes before assigning interest rates. While banks and other lenders are currently prohibited from eliminating loan eligibility based on zip code, there’s nothing that stops them from creating pricing trends for different locations. When this occurs, the lender is no longer making a decision based on whether the borrower meets the standard lending qualifications. 

If a lender informs a borrower that they need to have a specific debt-to-income ratio, credit score, and income to be approved for a loan, these are the main factors that the borrower believes will be considered. If an unspoken element is introduced to the equation to add negative bias, it’s unfair to the borrower.

While it might seem normal for lenders to consider zip codes and other economic factors when measuring a borrower’s qualifications, it often leads to lending decisions that aren’t based on verifiable data. In this scenario, the lending industry can overlook specific zip codes when approving loan applications. The borrower can’t do anything to improve their prospects. These problems can be solved with inclusive lending.

What Is Inclusive Lending?

There are many ways that borrowers are excluded from obtaining mortgage loans. For example, a borrower with a low credit score can automatically be rejected. Even if the borrower has a high income and a lot of savings, their application could be discarded immediately. Developing inclusive financial practices involves making sure that everyone has the opportunity to become a homeowner. 

Inclusive lenders strive to make fully informed decisions that take everything about the borrower into account. By allowing more people to participate in the home-buying process, the economy could be strengthened by more consumer spending. There are several strategies lenders use to become more inclusive, which include everything from making broad changes to how they assess borrower risk to allowing members of marginalized communities to be reviewed under the same parameters as every other borrower.

How Lenders Can Benefit from Being More Inclusive

Inclusive lending is only possible once lenders make the underwriting process less mechanical and more personalized. Restricting applications based on zip code only serves to ensure that certain communities are always underserved. 

Instead of just looking at factors like credit and collateral, lenders should evaluate if the borrower has the resources and financial ability to qualify for a loan by looking at their character. If a borrower wants to invest in a piece of real estate, inclusive lending works by looking at factors like:

  • Does the borrower have a solid plan for their investment? 

  • Are there other investors involved? 

  • Does the investor intend to fix and flip or rent the property?

Answering these questions offers much more important information about the veracity of a borrower. By learning more about each potential borrower, a lender can make better and more inclusive decisions. While loan applications will always be denied, lenders need to focus on obtaining more business and closing more loans.

Why You Should Apply with an Inclusive Lender

If you want to buy a new home or invest in real estate, you have a better chance of being approved for financing if you apply with an inclusive lender. While homeownership might have appeared challenging for you in the past, inclusive lending means that you won’t automatically be denied because of a middling credit score or a slightly high DTI ratio. 

You can avoid rigid lending terms by applying with a private lender. At BUYHOUSEEZ, we provide Indiana buyers with alternative financing solutions that are fair, inclusive, and flexible. Call us today if you’d like to apply for a loan or learn more about how our financing works. 

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