Finding a lender to provide a mortgage loan for less than $50,000 is 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 challenged GoBankingRates via Twitter to show options for the underserved market of consumers seeking mortgage loans of $50,000 or less.
Despite the definite need for small home loans, you will be hard-pressed to find small-mortgage lenders. Read on to find out why it’s so hard to get small mortgage loans, what traditional options are for getting one, and feasible alternatives to consider.
The Small Home-Loans Market: Buyers Looking for a Mortgage Under $50K
For people living in highly populated areas with inflated housing markets like Los Angeles, it might be hard to fathom why a homebuyer would need such a small home loan. According to Trulia.com, the median sales price for a single-family home in Los Angeles today is $640,000.
A few hours away in the more isolated community of Barstow, the median sales price for a single-family home is just $105,000. 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 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, regardless of your good credit.
Why Lenders Don’t Like Providing Small Mortgage Loans
The reason it’s so difficult to find a lender offering a mortgage under $50,000 is that generally, loans that don’t meet the minimum mortgage amount of $50,000 are just not worth it to the bank — or to the borrower, in most cases.
That’s because whether your mortgage is for $50,000 or $500,000, 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 the minimum mortgage 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, thus the near impossibility of finding any small-mortgage lenders.
“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 and “Master Your Debt” author Jordan Goodman of MoneyAnswers. “If the bank does a $200,000 loan it’s going to earn $1,000 — for the same amount of work they did for the small mortgage.”
In a lot of places where homes cost relatively little, those areas are economically depressed — places where chances of loan default are higher. “Most lenders are adverse to small loans [in situations] like that because of the decreased profit possibility as well as the increased risk,” Goodman said. “So 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.”
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 small mortgage loans. That does not mean, however, that there are no lenders out there who will provide home loans under $50,000.
How to Get a Small Home Loan and Alternatives If You Can’t
Just because these small home loans are uncommon doesn’t 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 — and pay the higher rates associated with small mortgages.
Reach Out to Local Banks and Credit Unions for a Mortgage Under $50K
Don’t expect to walk into a Bank of America or Chase mortgage office and be approved for a $50,000 mortgage — the smallest mortgage amount these large institutions would usually consider. 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 when 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, or if you do but are rejected for a loan, you should continue to meet with small-mortgage lenders and representatives from local banks and credit unions near you and have them review your financial situation to find out if a small mortgage loan is a possibility — just don’t let them all run your credit. Keep in mind that it could take some time before finding a lender who is willing to work with you.
What to Do When No One Will Give Home Loans Under $50K
If you’ve tried contacting local lenders without any luck, consider alternative ways of funding your home purchase. In order to know if these non-traditional home-loan options might work for your situation, you need to understand their terms and limits.
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. 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 (P2P) 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. Plus, 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 P2P loan will depend on factors like your credit score, the amount borrowed and the loan term. It’s important to note that the maximum loan amount allowed by Prosper.com and LendingClub.com is $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 $50,000, 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 $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 $50,000 vary by applicant, and you won’t find them advertised. Some lenders simply do not provide these small mortgage loans; those who will do so on a case-by-case basis.
As for whether small home loans are advisable at all, Goodman said it depends on factors including your specific situation and what your credit is like. “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. 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?”
After considering your unique situation, it might be the case that securing a small mortgage loan doesn’t make financial sense for you. If you need a loan for less than $50,000, 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.
“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.”
Keep Reading: Is Buying a House Cheaper Than Building a House?
Ruth Sarreal contributed to the reporting for this article.