BAM Key Details:

  • A new Zillow report shows a lack of access to credit is barring a significant percentage of Black households from buying a home, leaving them with rent payments that are often considerably higher than the median mortgage payment for their area. 
  • Areas with higher levels of credit insecurity tend to have higher populations of Black Americans, mirroring the impact of redlining practices that were outlawed decades ago.

While actual redlining to keep Black Americans out of certain neighborhoods is now prohibited by law, its legacy lives on and impacts millions of Black households across the U.S. 

While the actual practice of redlining may not have an immediate impact on someone’s ability to build credit, vestigial bias or even outright discrimination in financial institutions can certainly limit a minority American’s access to financial assets. 

In other words, racism is not dead. And it can still play a part (directly or indirectly) in a Black household’s ability to qualify for a mortgage. 

Without that option, Black families are stuck paying rents that, in many areas with higher Black populations, are considerably higher than the median mortgage payment. 

Even in metro areas where the median mortgage payment is less than rent, higher mortgage rates have caused financial institutions to tighten their restrictions, further limiting the number of qualifying homebuyers. And one of the basic requirements is a strong credit score. 

Most qualifying borrowers have FICO scores in the high 600s to 700s. And for most types of mortgage loans, the minimum is 620. That said, borrowers with scores under 650 make up a small percentage of total borrowers. And loan applicants with scores of 740 or higher get the lowest mortgage rates. 

Lack of credit essentially rules out a potential borrower, even if they’re currently and consistently making rent payments that are significantly higher than the mortgage payment for the home they want to buy. 

 Fortunately, there are things policymakers can do to improve credit access and close the racial wealth gap. 

Lack of credit access bars homeownership for millions—and particularly Black families

Zillow Research has published new maps showing how a lack of credit access is preventing millions of Americans—particularly Black families—from becoming homeowners. 

Source: Zillow

That includes those whose current rent payments are considerably higher than the median mortgage payment. In many credit insecure areas, the share of household income that goes to rent exceeds 50%. In some, it exceeds 70%. 

Ten credit-insecure census tracts with the highest share of income going to rent:

  1. Los Angeles, CA (88.1% of the median household income is needed to cover the median rent — versus 68.4% to cover the median mortgage payment)
  2. Miami, FL (86.3% vs 55.1%)
  3. San Diego, CA (84.7% vs 72.2%)
  4. Boston, MA (80.7% vs. 46.5%)
  5. San Francisco, CA (78.8% vs 61.2%)
  6. Providence, RI (78.1% vs 42.8%)
  7. New Orleans, LA (77.5% vs 28.6%)
  8. New York, NY (75.9% vs 57.9%)
  9. Hartford, CT (75.8% vs 30.5%)
  10. Tampa, FL (74.8% vs 51.1%)

Zillow also published an interactive table with data for markets with varying levels of credit insecurity. 

Source: Zillow

Lack of credit access keeps people in a cycle of paying more in rent than they would pay each month for a mortgage on that same home. Communities of color, particularly Black families, see this play out, keeping a path to economic stability and wealth generation locked. Policymakers should take action to reasonably improve access to credit for millions of families.

Nicole Bachaud

Senior economist at Zillow

What does it mean to be credit insecure?

Credit insecurity has to do with the obstacles individuals and households have to overcome to qualify for credit. These obstacles are especially prevalent in Black neighborhoods, many of which have limited access to traditional and safe credit building. 

Because of this, many Black households are stuck with renting in their communities, despite being able to prove they can afford a monthly mortgage payment—often because their current rent payment is well above what they would pay for a mortgage, even with rates at a 22-year high. 

Across the U.S., tenants spend $600 billion on rent every year. Yet those payments, even for renters who pay on time every month, often do absolutely nothing to help these renters build credit. It’s almost as if the folks who are behind the mass production of rental properties are trying to make sure renters have a harder time becoming homeowners. 

Typically, in areas with more credit insecurity, homeownership rates are lower than average. Because loan seekers with no credit history and low FICO scores—even those who’ve never missed a rent payment—cannot qualify for a mortgage. 

It’s even more insane when you consider the typical monthly mortgage payment in these areas costs less than the rent they’re already paying, proving beyond a doubt that a lack of credit access is as much a barrier to becoming a homeowner as low affordability. 

In fact, for many of the renters in these credit insecure areas, the lack of credit access is more of a barrier.  

Credit insecurity is linked to a higher Black population and a wider gap between median rents and mortgage payments

Zillow’s analysis included interactive maps that show how credit-insecure census tracts are linked to the share of the population that is Black and areas where rent costs more than mortgage payments. 

New Orleans sits at the top of the list of credit-insecure census tracts with the widest gap between the share of household income required to cover the median rent and the share required to cover the median mortgage payment. 

Over half of the population in New Orleans (56.7%) is Black. And a median renter household in this metro would spend more than three-quarters of their household income—77.5%—on a typical rental. But a homeowner in this metro with a median household income would spend only 28.6% on a mortgage payment for a typical home. 

In other words, renters in these credit-insecure areas who are unable to qualify for the financing they need to buy a home are stuck paying significantly more for rent every month—amounting to thousands more per year—than they would pay for a mortgage. 

Here are the 20 credit insecure census tracts with the widest gaps between median rents and monthly mortgage payments:

  1. New Orleans, LA (28.6% of median income goes to mortgage payment vs 77.5% to rent, for a difference of 48.9%)
  2. Hartford, CT (30.5% vs 75.8% for a difference of 45.3%)
  3. Pittsburgh, PA (19.5% vs 56.6% for a difference of 37.1%)
  4. Cincinnati, OH (26.9% vs 63.6% for a difference of 36.7%)
  5. Cleveland, OH (22.1% vs 58.6% for a difference of 36.5%)
  6. Minneapolis–St. Paul, MN (30.0% vs. 66.3% for a difference of 36.3%)
  7. Baltimore, MD (25.8% vs 61.6% for a difference of 35.8%)
  8. Providence, RI (42.8% vs 78.1% for a difference of 35.3%)
  9. Philadelphia, PA (30.4% vs 64.8% for a difference of 34.4%)
  10. Boston, MA (46.5% vs 80.7% for a difference of 34.2%)
  11. Detroit, MI (21.9% vs 54.8% for a difference of 32.9%)
  12. St. Louis, MO (20.3% vs 53.2% for a difference of 32.9%)
  13. Chicago, IL (29.7% vs 61.8% for a difference of 32.1%)
  14. Miami, FL (55.1% vs 86.3% for a difference of 31.2%)
  15. Virginia Beach, VA (32.9% vs 63.6% for a difference of 30.5%)
  16. Washington, D.C. (36.1% vs 66.4% for a difference of 30.3%)
  17. Portland, OR (42.0% vs 71.5% for a difference of 29.5%)
  18. Atlanta, GA (37.0% vs 65.3% for a difference of 28.3%)
  19. Memphis, TN (22.6% vs 50.5% for a difference of 27.9%)
  20. Charlotte, NC (39.4% vs 56.4% for a difference of 27.0%)

And here are the 20 credit insecure census tracts with the highest shares of the population that is Black:

  1. Memphis, TN (68.2% of the population is Black)
  2. Baltimore, MD (63.8%)
  3. Birmingham, AL (63.6%)
  4. Detroit, MI (60.1%)
  5. Atlanta, GA (57.6%)
  6. New Orleans, LA (56.7%)
  7. Washington, DC (51.1%)
  8. St. Louis, MO (50.5%)
  9. Virginia Beach, VA (49.6%)
  10. Jacksonville, FL (48.8%)
  11. Philadelphia, PA (47.7%)
  12. Richmond, VA (46.7%)
  13. Raleigh, NC (42.9%)
  14. Miami, FL (39.9%)
  15. Milwaukee, WI (39.7%)
  16. Orlando, FL (37.4%)
  17. Indianapolis, IN (36.1%)
  18. Chicago, IL (35.9%)
  19. Charlotte, NC (35.1%)
  20. Columbus, OH (35.0% & ranking at #21 for difference between rent & mortgage costs)

As shown by the metros in bold type, over half of the census tracts in the second list are also among the top 20 tracts with the biggest differences between the median rent payment and the median mortgage payment. 

Now, for the sake of comparison, here are the 20 credit insecure census tracts with the highest homeownership rates: 

  1. Birmingham, AL (54.3% homeownership rate)
  2. Oklahoma City, OK (52.8%)
  3. Richmond, VA (52.3%)
  4. Pittsburgh, PA (50.8%) ***
  5. Detroit, MI (50.3%) ***
  6. Louisville, KY (50.2%)
  7. Houston, TX (50.1%)
  8. San Antonio, TX (49.3%)
  9. Riverside, CA (49.1%)
  10. Portland, OR (48.0%) ***
  11. Tampa, FL (47.7%)
  12. Baltimore, MN (47.4%) ***
  13. Philadelphia, PA (47.4%) ***
  14. Nashville, TN (47.2%)
  15. Phoenix, AZ (47.0%)
  16. Denver, CO (46.9%)
  17. St. Louis, MO (46.8%) ***
  18. Dallas–Fort Worth, TX (46.7%)
  19. Charlotte, NC (46.5%) ***
  20. New Orleans, LA (46.4%)

Eight of the 20 metros listed above (in bold) are also metros with higher Black populations. 

Six of those (with asterisks) are also on the list of metros with the widest gaps between the median rents and mortgage payments, indicating how motivated Black households in these areas are to achieve homeownership. 

So, what can we do to remove the barriers to homeownership for those still stuck in renting purgatory?

Solutions for policymakers

Disparities in credit access disproportionately impact communities with higher rates of credit insecurity—which tend to have higher minority populations and, in particular, Black households. 

There are a few things policymakers can do to help address this problem:

  1. Encourage more landlords and financial institutions to report positive rent payments and to factor in this data when determining an applicant’s creditworthiness. 
  2. To allow a strong record of timely and complete rent payments to factor into a renter’s complete credit history, allowing them to build credit while renting. 

Both of these changes would help renters across the country build a strong credit history, especially in areas where access to other means of building credit is limited. 

It would also help to improve awareness of down payment assistance programs, which can remove another financial barrier to homeownership for many renters. 

Finally, policymakers across the U.S. can support the building of more homes priced below the (local) median to make homeownership more affordable and accessible. 

Read the full report for more details.