Innovative Solutions to Financing Dilemmas

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According to Pew Research Data between 2000 and 2015, the denial rates among different demographics have decreased, but the groups with the highest denial rates in 2015 have not changed since 2000. Back then, 44.6% of African-Americans were denied home mortgages, 31.4% of Hispanics were denied, and 22.3% of Caucasians were denied. Fast-forward 15 years, and the numbers are more encouraging, but equally disturbing. By 2015, 27.4% of African-American mortgage applications were denied, 19.2% of Hispanic mortgage applications were denied, and 10.9% of Caucasian applications were denied. The metric used to evaluate the change in Asian denials was only activated by 2004, and by 2015, Asians were the most approved demographic of all with a denial rate of just 10.8%.

The Pew Data is disconcerting for African-American homeownership which currently stands around 41.3% and Hispanic homeownership at around 47%. Since 2004, there has been an increasing wedge between homeownership among African-Americans and Caucasians in the United States. For one thing, qualifying for a standard mortgage is extremely difficult for Hispanics and African-Americans. To make matters worse, if they are approved they typically pay more in interest-related charges than their Asian and Caucasian counterparts. This data was provided courtesy of the Home Mortgage Disclosures Act (1975). Since it takes a considerable amount of time and effort to compile annual reports, the latest data is only available for 2015.

African Americans Pay Lowest Down Payments and Highest Mortgage Rates

There are many reasons why banks and traditional lenders may reject a home mortgage application or a business loan from each of the demographics. Among Caucasians, Asians and Hispanics, the most common reason for being denied was debt/income ratios. For African-Americans, the most commonly-cited reason was their poor credit history. Since the year 2000, mortgage applications among African Americans have dropped off significantly, with just 132,000 African-Americans applying for standard loans in 2015. 10 years before that, in 2005, that figure was 1.1 million applications.

The overall number of loan applications among African-Americans is extremely low, at just 4% (2015 figures) compared to 7% for Hispanics (2015 figures). In terms of down payments, 50% of African-Americans and Hispanics tend to place a deposit of 10% or less on a new property. Just 30% of Caucasians and 31% of Asians place down payments of 10% or less on properties. When it comes to mortgage rates, 23% of African-Americans pay between 6% and 8% +, compared to 18% of Hispanics, 14% of whites and 6% of Asians.

Solutions to Declining Loan Approval Rates for Minority Groups in the US

What happens at a macroeconomic level does not always filter down to a microeconomic level, especially with personal loans, business loans and mortgages. That the US economy is considered structurally sound by the Federal Reserve Bank is one thing, but it doesn’t always reflect at grassroots level. The unemployment rate is currently hovering around 4.3%, and the US economy is operating at what the Fed considers to be ‘full employment level’. This means that there is very little slack in the economy and growth prospects are tight. For those who have dropped out of the workforce, it is an uphill battle to qualify for financing for business loans, personal loans or mortgages.

Fortunately, there are several ironclad solutions available to people to wanting to qualify for loans, including those with average credit. Various options are available in the form of SBA loans (government-backed small business loans at low rates of interest). For a small business to qualify for this type of loan, it needs to be in operation for at least 2 years, and a credit score of 640 minimum is required. Annual revenues in the region of $100,000 + are preferred. With these types of loans, it is possible to borrow money for any business-related expense. The loan amount can range from $5000-$5 million, with a repayment term between 5 years and 25 years. It’s important to check the prevailing interest rate, since the Fed FOMC is currently hiking interest rates to tighten monetary policy. With SBA loans, you can expect interest rates to start at around 6.5%. These loans can be approved in under a month, typically within a 3-week period.

There are many other types of loans available including term loans (interest rates between 7% and 30%), equipment financing (interest rates between 8% and 30%), business lines of credit (interest rates between 7% and 25%) and short-term loans with interest rates starting at 10%. Borrowers may even be interested in micro-loan programs which have zero fees associated with them, but higher interest rates in the region of 8% – 13%. Typically, clients will have up to 6 years to repay these loans.