Credit Disputes For Boston Homebuyers: Attorney Tips For Mortgage Approval – Think about the idea of risk. Certainly, the pursuit of the American dream requires evaluating all kinds of risks: taking on student loan debt with the promise of a career that provides financial stability, deciding to start a new business, or choosing investment opportunities that will yield the greatest returns.
It also requires being on the other side of that risk assessment. Will lenders be willing to provide financing for your home or business? For African Americans, the likelihood is much higher that the answer is “No.”
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The inequality is clear: While only 1 in 19 white Americans has a credit score of 620 or less (a level considered high risk for most lenders), 1 in 5 black Americans do.
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The reasons for these disparities are complex, but they stem from discriminatory policies dating back to before the founding of the nation that denied black Americans access to wealth-generating assets.
“Credit scores are the perfect example of how structural racism works,” says Chi Chi Wu, an attorney at the National Consumer Law Center and author of “Reparations, Race, and Reputation in Credit: Rethinking the Relationship Between Credit Scores and Reports with Black Communities.”
“It starts with Black consumers who have been denied their human and economic rights during enslavement and exclusion and Jim Crow with legalized discrimination,” Wu says. “Then their communities are deprived of assets. That affects the economic position of those communities and that is reflected in the credit scores.”
With credit scoring, a system developed in the 1970s and implemented in the 1980s ostensibly as a neutral way to weigh creditworthiness, its impact on the racial wealth gap is very clear. Black Americans are more likely to have negative payment histories in their credit scores and much less likely to have positive benefits from the types of payments they are most likely to make, such as rent and utilities. And the credit reporting agencies don’t have to give a reason.
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Those factors push some Black Americans out of traditional credit markets, steering them toward less stable forms of credit, such as check cashing, payday loans, rent-to-own plans and secured credit cards. These often come accompanied by usurious interest rates and exorbitant fees that make borrowers more likely to default, further damaging their credit.
The system discourages some black Americans from trying to access credit markets, fearing they will be rejected or subject to predatory conditions. Black Americans are much more likely to be credit invisible, with little or no credit history. While only 9% of white Americans fall into that category, 15% of black Americans do.
Credit-invisible Americans primarily use cash, considering it safer than banking, and even promote the idea among black consumers that paying with cash is a virtue.
In addition to the 15% of black Americans who are invisible to credit, an additional 13% have credit histories that don’t show up in credit scores, compared to 7% of white Americans, according to data from the U.S. Financial Protection Bureau. Consumer.
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Rep. Ayanna Pressley’s (D-MA) recent push to reform credit reporting practices doesn’t just come from policy documents and data that show the stranglehold these practices have on Americans, particularly people of color. In this topic, she contributes her lived experiences.
“To be honest, I’m a black woman who grew up in America and grew up in an underserved neighborhood,” Pressley said during a congressional hearing last July. “While working as a full-time, unpaid congressional intern, working three part-time jobs, and collecting several money orders to pay rent and utilities, I cashed my check at a check cashing facility. And I did it because I grew up around it.”
She says her family “took a lot of pride” in buying things with cash because they considered it honorable.
She notes that her majority-minority Congressional district in Greater Boston “has 57% of the city’s check cashing locations, but only 12% of the city’s commercial bank branches.” ”.
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“So, for my constituents and for the 1 in 5 people across America who are unbanked or underbanked, the lack of access and fractured trust in financial institutions is incredibly costly,” he says Pressley. “The cost of cashing checks alone can reach $2,400 per household with an annual income of $32,000. Payment. Checks.”
Pressley has outlined the same factors driving the dual credit market to send more black and brown Americans to high-risk, high-cost financial institutions instead of traditional banks: fear of debt, distrust of financial institutions and even idea that cash is king.
“The experience you hear Rep. Pressley talk about is the experience of so many Black Americans,” says Lisa Rice, president and CEO of the National Fair Housing Alliance. “They live in a credit desert.”
The American dream will never be accessible to everyone as long as inequalities are built into the credit market. It’s time to renew it. That is how.
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Renew credit rating to better assess risk. The current problem with credit scoring is largely two-fold: First, credit scores are often inaccurate or affected by inherent racial bias. And in most circumstances, they are also a terrible predictor of consumers’ ability to pay.
President Joe Biden has proposed creating a public credit reporting agency to compete with private entities Equifax, TransUnion and Experian, which together have faced a torrent of criticism for everything from data breaches to inaccuracies and racial bias.
Biden’s plan is admirable, but the problem is not just who qualifies, but how they do it. A public credit scoring system can only provide benefit if it fairly and transparently weighs the factors that actually predict a consumer’s ability to pay, gives consumers greater ability to dispute and correct inaccurate information, and refrains from weighing unequally negative and positive payment activities.
One of the main factors that affect credit score is payment history. That in itself creates racially disparate outcomes. For example, on-time mortgage payments improve consumers’ credit scores, but rent payments generally do not. But while the homeownership rate for white Americans is 72%, for black Americans it is only 43%.
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“We need to make sure the infrastructure is in place for people to be able to report their rental housing payments to credit registries so the data can be used,” Rice says.
Weighing rent payments equally with mortgage payments will also help eliminate the low-income credit gap, created when low-income Americans are forced to make difficult decisions about which bills to pay to try to make ends meet. .
“People pay rent first,” Wu says. “It doesn’t make sense that the payment that’s most likely to be made won’t boost credit, while a late credit card payment can hurt credit.”
Other alternative payment data that may serve as more predictive factors of ability to pay, according to the researchers, are utility payments, telecommunications bill payments such as cell phone plans, and bank account payment histories. .
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Let’s stop using credit scores for non-credit decision making and stop weighing non-voluntary debt. There is no data (none) to show that a person’s credit score predicts how valuable that individual will be as an employee. However, credit scores are often used for job applications, making it difficult for people with unclear or negative histories to advance in their careers. This inability to earn better wages and be able to pay bills better creates a cycle that leads people to failure.
In addition to prohibiting the use of credit scores in employment decisions (with limited exceptions for things like federal security clearances), the use of credit scores should also be prohibited to access insurance coverage or to open heating, electric, and other accounts. necessary public services. to keep homes safe and habitable.
Additionally, credit reporting agencies should be prohibited from considering non-voluntary debts, such as debts incurred for medical bills, divorces, or judgments issued in legal disputes over issues that do not involve the type of payments that would have been reportable to the credit bureaus in the first place. credit agencies. . Records of collections, late payments and personal bankruptcy filings remain in the credit system for seven to ten years, a period that should be reduced. The system cannot work if people are not given the opportunity to get up if they have fallen.
The announcement by the three largest credit reporting agencies, Experian, Equifax and TransUnion, to voluntarily remove 70% of consumers’ medical debt from credit reports is laudable. However, black Americans are more likely to have medical debt; According to the Consumer Financial Protection Bureau, credit bureaus have a poor track record of self-monitoring and no one should be less able to buy a home, start a business, or get a job because of a past illness or injury. The only fair solution is a federal mandate prohibiting the consideration of medical debt in any credit score.
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Other steps included in Pressley’s proposed Comprehensive Credit Rating, Disclosure, Innovation and Transparency (CREDIT) legislation, which passed the House but has not yet been adopted in the Senate, include prohibiting lenders from charging credit fees. higher interest rates or make loans less affordable and riskier for borrowers based
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