Home Appraisal Bias Could Soon Be a Thing of the Past. Here's Why

That's a really positive thing.

Anyone who's ever signed a mortgage, or refinanced one, is likely familiar with the concept of the home appraisal. The purpose of a home appraisal is to determine how much a given property is worth.

When mortgage lenders give out loans, they run the risk of not being repaid. And this risk tends to be amplified when lenders write loans to borrowers whose credit isn't in the best of shape.

As part of the process of mitigating that risk, lenders commonly insist on a home appraisal, whether in the course of getting a mortgage or refinancing one. If a given property appraises at a high-enough value, the lender gets some protection in that it could potentially force the sale of that home via the foreclosure process and get repaid what it's owed without facing a financial shortfall.

The problem with home appraisals, though, is that in some cases, they can be somewhat subjective. And that opens the door to racial bias.

A report from the Department of Housing and Urban Development (HUD) found that there's been a huge gap between home appraisal values for properties in white neighborhoods versus those in Black neighborhoods. And now, steps are being taken to address the problem at hand.

A skewed system that can't continue as-is

On average, homes in majority-Black neighborhoods are valued at less than half of those in neighborhoods with few or no Black residents. That's clearly problematic.

Thankfully, steps are being taken to address the issue of racial bias in the context of home appraisals. It was recently announced that HUD, through the Federal Housing Administration, is creating a process designed to give some recourse to those seeking FHA loans who feel their homes appraisals aren't accurate and have been skewed by racial bias.

As an example, those seeking to refinance an FHA loan, or any mortgage for that matter, generally need to go through a home appraisal. Once this new process is implemented, a homeowner trying to refinance their mortgage can take clearer steps to ensure that the appraisal they receive is fair.

This change is actually one of many being implemented to clean up the processes that lenders must follow when a borrower requests a Reconsideration of Value review if concerns arise in the context of appraisal bias. Under this new set of processes, lenders will have clear guidance on how to address buyer or homeowner concerns.

An important step in the right direction

White homeownership rates across the U.S. are substantially higher than those of Black people or minorities. That's been the case for a long time, and it's a system that needs to change.

Tackling home appraisal bias is certainly a step in the right direction. But more work needs to be done to address the issue of housing inequality, including addressing bias at the mortgage application level and eliminating the clearly terrible practice of redlining.

It's long been said that owning a home can lend to financial stability. And everyone deserves a fair shot at that.