Why It’s So Hard to Get Small Mortgage Loans of Less Than $50k

small mortgage loans

Finding a lender to provide a mortgage loan for less than $50,000: It’s a challenge faced by a surprising number of people, and one that’s often tough to solve.

Sandy Smith of Yes, I Am Cheap brought this issue to our attention when she presented us with a challenge via Twitter:

@gobankingrates @mybanktracker I challenge you both to show banks & rates offering mortgage loans of $50K and less! Under served market!

Under served, indeed. After some research on a few lenders and a call to a Coldwell Banker’s mortgage representative (who promised an agent would follow up with me within 24 hours, but never did), I was left without any clear answers, but more determined than ever to find them.

Who Needs Such Small Home Loans Anyway?

This was my first thought. Spending most of my life within the expansive, densely populated and inflated housing market that is Los Angeles County — namely, the South Bay’s “Beach Cities” — I often forget that half-million dollar homes are not the norm throughout most of the country. According to Trulia.com, the median sales price for a single-family home in Los Angeles today is $551,000.

A few hours away in the more isolated community of Barstow, however, the median sales price is just $77,500.

Homeowners living in small towns or depressed local economies, where property values are quite low, don’t need to borrow hundreds of thousands of dollars to buy property — they only need as much as someone looking to buy a higher-end new car.

Then there are those homeowners who might have secured their loans 15 or 25 years ago, have paid down most of the principal balance on their mortgages, yet want to take advantage of today’s amazing mortgage rates by refinancing.

Unfortunately, whether you want to borrow or refinance a mortgage of just $50,000 or less, few lenders are willing to approve it.

Why Lenders Don’t Like Providing Small Mortgage Loans

So why is it so difficult to find a lender offering small mortgage loans under $50,000 in the first place? Generally, it’s just not worth it to the bank (or the borrower, in most cases).

That’s because whether your mortgage is for $50k or $500k, loan origination and servicing costs are about the same. A loan of several hundred thousand dollars over a couple of decades provides the lender a nice profit from interest, while a much smaller loan requiring the same amount of money and effort to fund it yields significantly less. Often, it’s not cost-effective for a bank to provide such a small home loan.

If lenders lose money providing extremely small home loans, they are certainly not going to go out of their way to advertise their availability, much less the higher rates associated with these loans. That does not mean, however, that there are no lenders out there who will provide one.

How to Get a Small Home Loan and Alternatives for When You Can’t

Just because these small home loans are uncommon doesn’t necessarily mean they don’t exist. If you need financing for a home that doesn’t cost very much, you might be able to get it if you’re willing to put in the work.

Reach Out to Local Banks and Credit Unions

Don’t expect to walk into a Bank of America or Chase mortgage office and be approved for a $50k mortgage. To find small home loans, you have to go to small institutions.

Your first stop should be your local bank; an existing relationship with a community bank or membership with a credit union is a great in to negotiating a small home loan. Financial institutions are much more willing to work with customers who have proven their loyalty and responsibility with money.

If you don’t bank with a community institution, however, or you do, but are rejected for a loan, you should continue to meet with representatives from local banks and credit unions near you and have them review your financial situation (just don’t let them all run your credit!) to find out if a small mortgage loan is a possibility. Keep in mind, it could take some time before finding a lender who is willing to work with you.

What to Do When No One Will Give You a Small Mortgage Loan

If you’ve tried contacting local lenders without any luck, it’s time to find alternative ways of funding your home purchase.

Personal Loans

Rather than obtaining a mortgage loan, you can instead finance your home purchase using a personal loan. There are many types of personal loans, ranging from secured loans from major banks, to dangerous, extremely high interest payday loans. Obviously, if you decide on a personal loan, it’s important that the terms are manageable and the interest rate is affordable.

Peer-to-Peer Lending

Another option is to borrow the money from an individual willing to lend it out of pocket in return for interest from you. There are a couple of peer-to-peer lending sites that facilitate these transactions and tend to have positive user reviews: Prosper.com and LendingClub.com are two to look into.

P2P lending sites like these are helpful because users (both investors and borrowers) are prescreened, while the interest rates charged tend to be more competitive than personal loan rates at traditional financial institutions. Both of these sites serve as the middlemen, matching investors with borrowers who meet qualifications, including a credit check. Like any other loan, the rate charged for a personal loan will depend on things like your credit score, amount borrowed and loan term. It’s important to note that the maximum loan amount allowed by Prosper.com is $25,000, while LendingClub.com funds loans up to $35,000.

Why You Should Think Twice About Small Home Loans

Note that if you do manage to finance a home with a mortgage loan of less than $50k, the interest rate will most likely be higher to compensate for the money the lender is losing on the deal. Additionally, while closing costs of, say, $5,000 would be considered perfectly reasonable on a standard mortgage, that represents 10 percent of a $50,000 loan — not so reasonable anymore.

So in answer to Sandy’s challenge, the banks and rates available for mortgages under $50k vary by applicant, and you won’t find them advertised. Some lenders outright do not provide these small mortgage loans, while those who will do so on a case-by-case basis.

I would advise anyone seeking a mortgage this small to stop for a moment and really think about whether it’s worth it — it might turn out that securing a mortgage loan for that little doesn’t make sense financially. If you need a loan for less than $50k, consider finding an alternate source of funding, maybe even borrowing from a family member or friend, or simply waiting on your purchase so you can save up the money you’d be spending on mortgage payments and pay cash instead.

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  • http://www.nationalfamilymortgage.com Tim Burke

    Thanks you for bringing some attention to this important topic! In fact, home loans under $100K are hard to find these days.

    While Prosper.com and LendingClub.com are both terrific companies and offer potential home financing solutions in undeserved markets, I’d like to offer yet another alternative.

    National Family Mortgage has helped many families in this situation properly structure over $37 million in tax-deductible home loans between relatives. Our “win-win” mortgage helps Borrowers obtain lower rates than from a bank, while earning Lenders a solid return. Our average terms: 3.45%, 22 Years, Zero Points.

    Your money stays in the family, while we ensure that your relationship and tax liabilities are protected.

    Of course, an intrafamily mortgage is not a realistic solution for everyone, for some folks this is an option woth exploring.

    Many thanks,

    Tim Burke, CEO

    • abel gomez

      Hi I read what you replied and Im very interested Im actually looking for a loan of 35000 to buy a duplex with tenats that is producing 1,100 in rent right now please email with more information on how your program works thanks.

  • Yes, I Am Cheap

    This is one of the best, most underrated articles on this site. Having now purchased two homes under that $50K mark, I have found that your best bet is a local or community bank within the area where you would like to purchase. These banks have a better knowledge of the home values within the neighborhood which can work in the borrower’s favor. Thanks for taking the challenge!

    • Casey

      Thanks so much Sandy. I’m glad you presented the challenge as this was a really interesting and enjoyable article to write!

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  • http://www.facebook.com/profile.php?id=680550126 Jennifer Boland

    While it might be expensive, it’s even more expensive to pay rent for 10 years to save up that amount when you could be living in and paying off your 50K mortgage.

  • carlos

    Thank you for the feed back but still a little puzzled. I have found a property that is listed for 69k but i offered 47k now should i offer 62k just to get approved for 50k

  • altabea

    This was VERY good and useful information.

  • Nando

    Our 40.5k home loan’s closing costs were under $1500. But there was no Escrow involved; I pay our own taxes and insurance.

  • Sokenfused

    The problem with LendingClub or Prosper is the time frame is limited to 5 years.

    In my case I am trying to buy a condo for $40,000, with a $10,000 down payment.

    That takes the payment on a $30,000 loan at 6% and triples the monthly payment

    At 30 years the payment would be under $200
    At 15 years the payment would be about $250
    However, at 5 years the payment would be nearly $600

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  • Lc_102

    Yeah, you really do need to step out into the Real world a bit. I’m looking at a house right now that is 16,500. I could put over 5000 down and have the house paid off in five years. Yet I can not get financed. And yes, owning your own home before you are thirty is a very wise financial decision. With the wage that I earn I don’t have the luxury of waiting around another three years to have that money saved up, the market will have slipped through my fingers by that point. The rent from my room mates living there would have the place paid off in a very short period of time.

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      IDK, getting a loan to get get out of debt, still puts you into debt.

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  • hud

    It is not right that banks and the government deny people who do not WANT to be house poor mortgage loans!

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  • Tiffany

    While this article was very helpful, I am somewhat dismayed about suggesting we should consider looking at bigger mortgages. There’s a reason why we’re looking for a mortgage under $50000. I currently have my eye on a $65000 property that is in immaculate condition that I could purchase for $35000. I found another one that had everything we wanted for only $44000. Not all of us are investors. Some of us, like myself, want to get completely cleared from debt so that we can 1) survive in todays economy, 2) have some kind of hope for retirement and 3) we don’t make enough money nor have a down payment for a bigger mortgage. I tried your suggestion of Lending Club. I was offered an $8000 loan for 20% interest! I have good credit so I found this insulting. It also wasn’t anywhere close to the $35000 I requested. My local credit union first played dumb as to whether we could get a mortgage for the amount I requested and then didn’t bother to make good on their promise to call us. In the end, I found a woman who buys and flips and she was kind enough to give us the number to a lady at a local bank that could help us.

    Folks, scroll down through the messages and see if you can’t pick out the scammers. It’s kind of amusing :)