Some areas of the country have homes for sale that don’t cost a fortune. In fact, the median sales price of homes in some areas is quite inexpensive – less than $100,000. But borrowers are having a hard time finding lenders who will finance small mortgages.
“It is a problem that we will need to do some creative thinking on how to fix,” says Ellen Seidman, senior fellow at the Urban Institute, the housing finance policy center, in Washington, D.C.
She and fellow co-worker Bing Bai, research associate, wrote a blog recently from their research titled, Where have all the small loans gone?
“It’s important to know that this trend happened well before 2014 – when all the new rules and regulations were written,” Seidman adds.
Getting a mortgage loan for less than $50,000 has become almost impossible, she explains. From 2004 to 2011, only 3-4 percent of mortgages were for less than $50,000, and the number is even lower for 2014.
But many towns, a substantial amount of homes cost $50,000 or less.
In their research, they uncovered certain towns such as Scranton, Penn., and Kalamazoo, Mich., had a large number of homes for under $50,000.
According to Seidman, lenders don’t find these smaller loans attractive. Loan origination fees are mostly fixed and recovered either through the sale of the loan or over time, or through the financing spread and payment for servicing.
However, there is hope if you want a smaller mortgage loan. Here are a few ways to find one when you need one:
Small Town Banks and Credit Unions
“In some small towns, you can get some lending of that size from the local banks that are doing it,” she says.
Going to your own local bank or credit union lender who knows you might also give you a chance to get a smaller mortgage.
Mission-oriented neighborhood groups in your area might be offering smaller-sized loans.These organizations may also offer homeowner counseling, and sometimes downpayment and closing cost assistance.
Personal loans can come from anywhere, from major banks to high-interest payday loans. Be careful to find a lender who offers manageable terms and an affordable interest rate as picking the wrong mortgage could prove to be costly.
Family and Friends
If you know someone who has money to spare, you could convince them to give you a loan. According to the Federal Reserve Board Survey of Consumer Finances, loans from family and friends amount to $89 billion each year in the United States, and a large amount of that is specifically borrowed to purchase a home.
It is a wise move to draw up and sign a loan contract regardless of your relationship with the lender. This protects both parties in case of a disagreement. A loan agreement between two individuals is more simplistic but very similar to a standard bank promissory note.
Home Equity Loans
It’s worth checking with your local banks and credit unions which do refinancing loans to see if they will give you a home equity loan to buy a home, says Bruce Dorpalen, executive director of National Housing Resource Center in Washington, D.C. The home you are buying becomes the collateral since you don’t already have a house.
“You will have to have 20 percent down, but that’s not so difficult with smaller amount mortgages. Plus, the good thing is the upfront costs with home equity loans are much less than for a regular mortgage,” he says. “Home equity loans to some banks are their thriving part of their business.”
Seidman says that small mortgage loans are important to the vitality of hundreds of urban communities throughout the United States.
“Bringing them back will be hard, and we don’t have any immediate or easy solutions,” she says. “We’re eager to work with policymakers and industry leaders to understand the impact of these loans and develop strategies to encourage their availability.”
Check Your Eligibility With Multiple Lenders
Instead of individually contacting each lender to find out if you are eligible for a specific type of loan, you can get multiple rate quotes from lenders by providing a few pieces of your information.
Doing this can save some time, and you may find out about mortgage opportunities you didn’t know were available to you.