As housing affordability has emerged as a key issue this election cycle, the $25,000 downpayment support pushed by Kamala Harris may not be enough to help first-time homebuyers. Buyers lose out not only because of escalated home prices, but also for a less-known, more troubling reason: they face discrimination during bidding wars based on the type of mortgage they plan to use.
In Massachusetts, around one in eight homebuyers use the Federal Housing Administration’s (FHA) mortgage program to buy a home. Many of them are first-time Black and Hispanic homebuyers.
While the FHA program was designed to level the playing field, new research indicates many FHA buyers unfairly lose out when competing to buy a home. This problem not only hurts individual families: it is tilting opportunity toward wealthier buyers and investors, and keeps our communities segregated.
Massachusetts and over a dozen other states have passed “source of income” antidiscrimination laws that make it illegal for landlords to discriminate against tenants who use so-called Section 8 federal housing subsidy vouchers. But we know little about a similar process happening when buying a home. Also called “source of financing” discrimination, sellers and their agents often view FHA buyers as less desirable, thinking that these loans are harder to close or come with strings attached. But data by ICE Mortgage Technology found that average time to close is actually shorter for FHA loans than for conventional loans – partly because the online mortgage companies that often originate FHA loans have technological advantages.
The consequences are devasting for first-time buyers, as thousands of sellers, advised by their agents, make the same decision to pick cash or conventional offers over the perceived hassle of working with an FHA buyer – a decision too often based on misperceptions rather than underlying truths.
FHA buyers are blocked from buying in many White, more affluent communities across Massachusetts, In towns such as Brookline, Cambridge, and Newton, less than 1 percent of buyers used an FHA mortgage during the pandemic. Like most of the country, Massachusetts communities have been racially segregated, and as Black and Hispanic buyers are priced out of Boston, new locations of segregation are popping up in cities such as Lawrence and Brockton. During the pandemic, buyers using an FHA mortgage became even more segregated in a small number of communities, a trend that cannot be explained by rising home prices alone.
To fix this, home sellers and their real estate agents need to step up, and we need stronger legal protections to hold them accountable.
Home sellers and their agents should not buy into myths about FHA mortgages. FHA buyers can waive the inspection just like any other buyer, and the inspection parts of the mandatory FHA appraisal are focused on ensuring the basic safety and functionality of the home: it does not need to be a scary hurdle.
FHA buyers have passed all of today’s stringent mortgage credit tests and represent a wide range of incomes: people often opt to use FHA because its low downpayment works best for them – they are not “risky” buyers. With that knowledge, home sellers may welcome the opportunity to pass on their house to a first-time homebuyer. They would walk away not only with the same cash in hand – or more cash, as sometimes FHA buyers lose out even when they offer the highest bid – but also with the great feeling that they contributed to wealth-building and opportunity in their community.
Barring that greater awareness, Massachusetts should be more aggressive in enforcing its “source of income” antidiscrimination law. This law, while originally passed to protect tenants, can be a powerful tool in leveling the playing field for FHA buyers too.
The Massachusetts attorney general’s civil rights division should monitor the ways that real estate agents mention FHA in how they advertise listings and whether they systematically exclude FHA buyers in their repeat transactions. By prosecuting the worst offenders, it would send a strong message that excluding buyers based on financing is discriminatory, and that discrimination has no place in our housing market.
It is already hard enough to buy a home today: we need to remove hidden barriers that stop so many from achieving their American Dream.
Sharon Cornelissen is the director of housing at the Consumer Federation of America.
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