Home prices have grown in most parts of the country in 2020, but there are still many pockets of affordability with homes available for less than $100,000. All in all, there were around 50,100 single-family listings across the U.S. in November, usually located in small or medium-sized cities or rural areas.
But buyers are struggling to snag one of these affordable homes as lenders pivot toward more financially rewarding transactions.
An article in realtor.com points out that it’s typically not profitable for lenders to execute small-dollar mortgages or loans, defined as those that are $100,000 or less. Buying trends during the pandemic have made it even more difficult to receive a small-dollar mortgage. Lenders are focused on larger, more lucrative loans, which are surging due to low mortgage rates.
“It may be more difficult than ever for borrowers to get a [more modest] loan,” Nadia Evangelou, a senior economist and director of forecasting at the National Association of Realtors, told realtor.com. “There’s such a high demand for high-dollar loans.”
Purchase loans are up 26.3% annually. The average purchase loan was $376,800 during the week ending Dec. 18. That is nearly four times more than a small-dollar loan. In 2019, only about 8.9% of all mortgages made for owner-occupied homes were less than $100,000.
Small-dollar loans can be more expensive for lenders to make. “The cost to originate [loans] keeps going up,” Steve O’Connor, senior vice president for affordable housing initiatives at the Mortgage Bankers Association, told realtor.com®. Lenders may even lose money on making smaller loans, particularly those below $50,000, because of the added fixed costs, including appraisals and processing and underwriting fees.
Some programs are being created to help make small-amount loans. For example, the MicroMortgage Marketplace—created by the Urban Institute and the Homeownership Council of America and lender Fahe—offers small-dollar loans through a pilot program that they hope to roll out nationally.
“There is a lot of affordable housing out there, but if you don’t have the financing and you can’t get the mortgage and you don’t have the cash on hand, [you can’t] get on the road to homeownership,” Sheryl Pardo, a spokesperson for the Urban Institute, told realtor.com.
Meanwhile, investors are swooping in to purchase these low-cost properties in all-cash deals since they’re able to bypass financing. The homes then often become rental properties.