With all the different types of home loans available, you might think finding small home loans under $50,000 would be easy. But it can actually be quite challenging.
The Small Home-Loan Market: Who Is Looking for a Mortgage Under $50K?
Buyers in towns with low home prices don’t need to borrow hundreds of thousands of dollars to buy a home. In Binghamton, N.Y., for example, the median listing price is about $139,000, according to Realtor.com. And homeowners who secured their loans 15 or 25 years ago and have paid down the principal balance might want to refinance their remaining balance into a lower rate.
Why Lenders Don’t Like Providing Small Mortgage Loans
A large loan gives the lender a tidy profit from interest over a couple of decades, but the minimum mortgage loan, which requires the same amount of effort to fund, yields significantly less.
“For example, the profit margin of a particular mortgage loan is 50 basis points, which is kind of typical. If the bank makes a $50,000 loan it’s going to earn $250,” said finance expert Jordan Goodman of MoneyAnswers.com and author of “Master Your Debt.”
“If a bank processes a $200,000 loan, it’s going to earn $1,000 for the same amount of work it would do for a small mortgage,” said Goodman.
Downturn in Economy
In places where homes cost relatively little, the economy is often depressed, which means borrowers could be more likely to default on loans. Most lenders don’t like to make small loans in this situation because it decreases the possibility of a profit and increases risk “If lenders are earning less and the chances of default are much higher, you can understand why they are reluctant to provide those small mortgages,” Goodman said.
How To Get a Small Home Loan and Alternatives if You Can’t
Just because small home loans are tough to find doesn’t mean they’re nonexistent. 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 — and pay higher rates.
Local Banks and Credit Unions
To find small home loans, you have to go to small institutions, and your first stop should be your local bank. If you have a relationship with a community bank or you’re a credit union member, you might be able to negotiate a small home loan.
If you don’t bank with a community institution — or if you do but were denied a loan — keep meeting with small mortgage lenders and representatives from local banks and credit unions to find what you need. Make sure you don’t let them all run a credit check, though. Excessive inquiries will hurt your credit score.
Personal Loan Providers
Instead of trying to find a mortgage loan, consider a personal loan to finance your home purchase. Wells Fargo, for example, offers personal loans as low as $3,000 to existing customers. The downside is that you’ll pay higher interest and get a much shorter term than with a mortgage — 5.74% to 24.24% interest in this case, and loan terms of 12 to 84 months.
Another personal-loan option is peer-to-peer lending via an online platform.
Prosper and LendingClub are two popular P2P lenders, and they’ll issue personal loan amounts up to $40,000. Prosper’s minimum loan amount is $3,000 and LendingClub’s is $1,000.
Hard Money Lenders
Hard money lenders — also called private money lenders — make high-interest, short-term home loans. They typically work with investors like house flippers and rental property owners exclusively, so you might be in luck if this is the type of home purchase you’re looking to finance.
Why You Should Think Twice About Small Home Loans
In the rare cases where a mortgage lender originates a home for less than $50,000, you’ll typically pay a higher interest rate to compensate for the money the lender is losing on the deal. Additionally, closing costs will be proportionately higher because some fees are fixed amounts rather than a percentage of the amount you borrow.
Whether a small home loan is advisable for you depends on your situation and your credit profile. “You have to look at the terms of the loan and what the closing costs are and compare that to what it costs to rent and use the money,” Goodman said. “If you have $25,000, what kind of return can you earn on that money, versus putting it into a house — where it’s sitting there and not earning anything?”
If it turns out that a small mortgage loan or personal loan doesn’t make financial sense or isn’t available to you, consider borrowing from a family member or friend or simply waiting until you can save enough to make a cash purchase.
“Renting sometimes gets a bad name, but it shouldn’t,” said Goodman. “A lot of people stress themselves too much to buy homes when they probably shouldn’t. This is what got people in trouble in the mid-2000s. It’s nice to build equity and all that, but if it’s too overwhelming to your finances, then it’s not a good thing. In those types of circumstances, the home owns you — you don’t own the home.”
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