When buyers don’t feel their home is being fairly valued it can lead to a feeling of being taken advantage of. During these situations, lenders often require the buyer to cover any difference between what the appraisal amount and the agreed-upon mortgage amount. While some lenders don’t take race into consideration when deciding the loan amount, Freddie Mac found that this practice disproportionately affects minority neighborhoods.
Appraisal gaps are caused by several factors, including differences in local markets and housing trends. To develop an accurate home value it is important to account for recent sale prices, physical condition of a property, and local economic conditions. In minority locations, these factors may not always be accurately reflected in an appraisal. This can cause the discrepancy between the appraisal value and the agreed loan amount resulting in a gap. Freddie Mac’s report noted that appraisal gaps tend to be larger in African American and Hispanic neighborhoods than they are in other areas.
Freddie Mac suggests that lenders should use technology and data to help close the divide between homebuyers and lenders on these issues. By doing so, lenders will reduce the discrepancy between an appraisal and a loan amount. Additionally, lenders may be able to provide better education to homebuyers about how appraisals are determined and the potential discrepancies associated with them.
In order to address appraisal gaps, Freddie Mac also recommends lenders use an automated validation process to check the accuracy of appraisals. Automated systems can help detect potential inaccuracies and errors, ensuring that homes are more accurately valued.
The findings from Freddie Mac’s study demonstrate that appraisal gaps are more prevalent in African American and Latino communities. With the use of automated validation systems, lenders can reduce the discrepancy between a home’s actual value and the lender’s assessment. This could help create more equal opportunities for homebuyers regardless of race or ethnicity. Additionally, lenders should provide better education to homebuyers on appraisal processes to help ensure that buyers are aware of potential discrepancies. Ultimately, this could help create a fairer playing field for minorities when buying a house.
This article was contributed on Sep 27, 2023
