Communities previously underserved by financial institutions or unbanked due to past redlining or other discriminatory policies represent a potentially lucrative pipeline of clients for the mortgage industry. The path toward reaching these consumers and helping them attain sustainable homeownership, though, will require efforts that combine old methods with new technology. 

Apart from the importance of addressing historical racial disparities, prioritizing affordable homeownership opportunities while reaching out to the underserved makes sound business sense. Recent higher interest rates have altered the housing market with the lock-in effect eliminating many who otherwise would be open to relocation.

"You need a new sector to look into," said Tai Christensen, president of Arrive Home, an affordable housing program solutions provider.

"Now all of a sudden, bringing those people that are in marginalized low-income communities into homeownership has now become your priority because those are the new borrowers you need to pull from. Your trusted group that you've gone to over the years and decades, really has no interest in talking to you."

According to a 2021 Urban Institute study, homeownership growth between 2020 and 2040 will be concentrated within minority communities. Among the almost 7 million net new homeowners expected, 6 million will emerge from Hispanic and Black communities. Meanwhile, white homeownership is estimated to fall by 1.8 million. 

Technology initiatives, including artificial intelligence, launched by government-sponsored enterprises and federal agencies, are proving fruitful at opening homeownership opportunities to minorities, with the introduction of programs able to capture consumers with thin credit files who might have previously been overlooked.  

Fannie Mae's decision in 2022 to expand underwriting models and factor in bank account balances was a step in the right direction because it opened the door to nontraditional borrowers, who might not have high — or any — credit score available. 

"I think that was a great start right there to introducing yourself to these communities," Christensen said.

GSEs and credit reporting agencies have since opened up consideration to other alternative credit history as well, including rent and utility payments. 

Unlike in other industries where private businesses might lead the way in technology development, within home finance, government entities have been at the fore, according to Michael Neal, senior fellow at Urban Institute's Housing Finance Policy Center. Neal and his colleagues produced research in late 2023 looking at how artificial intelligence could be harnessed to produce equitable solutions in housing. 

"That is where we saw AI really being used," Neal said, referring to efforts undertaken by Fannie Mae, Freddie Mac and the Department of Housing and Urban Development. 

"Alternative credit I think, is an important piece, because combined with AI, it can potentially bring the positives from rent and other reporting," he said. 

With greater understanding now of the potential held by borrowers outside the traditional mold, a growing number of technology companies are bringing to market with AI-backed platforms aimed at educating or matching the consumer to the lenders and businesses that can help them work within their means. 

Among fintechs trying to use AI in determining creditworthiness is Formfree, an Athens, Georgia-based software firm. 

Through an application a consumer links directly to bank account data, Formfree assists with determining loan eligibility and borrowing power based on cash flow history, before presenting potential lending options. By linking directly to individual bank data, Formfree also avoids introducing any details that could result in potential bias, it says.

"We work a lot with some of the groups that specialize in CRA, or the Community Reinvestment Act, and low to moderate incomes. So that way, they can go through this process and then see what the borrowing power is," said Eric Lapin, the company's president.

Formfree's measure of borrowing potential differs from a traditional credit score, which typically relies on prior lending data, according to Lapin. Instead, the data produced by Formfree serves as "a correspondence of predictability of default" based on cash flow, rather than a direct correlation to past credit performance. 

While the technology can help determine mortgage readiness of consumers, those tools alone will not necessarily bring the marginalized groups they are trying to serve to the closing table. With technology often relying on access to banking information, narrowing the racial homeownership gap between minority and white households will also require old-school boots-on-the-ground outreach to overcome historical mistrust of financial institutions among many Black and Hispanic consumers.

Although many might be successful at saving money and may have the financial means for initial down payments and housing costs, 11.3% and 9.3% of Black and Hispanic U.S. households were still unbanked, meaning that no family member had a checking or savings account, according to a 2021 survey by the Federal Deposit Insurance Corp. 

"Meaningful outreach is done one on one and in small groups," Christensen said. "You need to speak with these people where they live, meet them where they are and let them know about these resources that are there to assist them on their journey into homeownership. But it's got to be done one on one in a trusted capacity with familiar faces that look like you look in order for the message to be well received."

But building the trust to advance financial inclusion can also turn into a win-win situation for all parties. Even when underserved consumers have a proven ability to save even without bank accounts, they can benefit from learning how to best make their money grow as well as the benefit of owning a home.    

"As a group of community members, we are trying to get minority community members to be a little bit more intentional about putting their resources more in banking and not relying so much on cash," Christensen said. "Specifically, as we're moving into the digital age where soon everything that we need to buy, purchase, etc, it's going to be on our phone."