With all the different types of home loans available, you might think finding one for less than $50,000 would be easy. Think again: A surprising number of people face the challenge of getting a small home loan under $50,000.
Despite the need for small home loans, people are hard-pressed to find small mortgage lenders. Find out why it’s difficult to get small mortgage loans and learn about alternatives to traditional loans for homes that you might want to consider.
The Small Home-Loans Market: Buyers Looking for a Mortgage Under $50K
If you live in a highly populated area with an inflated housing market, you might wonder why a homebuyer would need such a small home loan. The median sales price for a single-family home in Los Angeles today is $702,500, according to Trulia.com. But a few hours outside of Los Angeles in Barstow, for example, you can find a home for a more affordable price — around $117,250, according to Trulia.com.
Homeowners who live in small towns with depressed economies and low property values don’t need to borrow hundreds of thousands of dollars to buy property — they need only as much as someone who wants to buy a high-end, new car. Also among those seeking small home loans are homeowners secured their loans 15 or 25 years ago and have paid down the principal balance on their mortgages, but want to take advantage of today’s low rates by refinancing. Whether you want to refinance a mortgage or get a home loan for $50,000 or less, few mortgage lenders are willing to approve your loan request, regardless of how good your credit is.
Why Lenders Don’t Like Providing Small Mortgage Loans
A home loan lender doesn’t typically offer mortgages for less than $50,000 because the standard, minimum mortgage amount is $50,000. It’s not worth it for banks or financing companies — or to the borrowers, in most cases — to make these loans.
Whether you apply for a $50,000 or $500,000 mortgage, loan origination and servicing costs are approximately the same. 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. It’s not cost-effective for a bank to go through the home loan process for such a small home loan, which is why it’s almost impossible to find 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 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.
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, 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 by issuing small home loans, they won’t advertise their availability, much less the higher rates associated with these loans. This can make finding a small home loan extremely difficult.
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. Discover how to find a home loan for less than $50,000 or how to find an alternative if you can’t.
Reach Out to Local Banks and Credit Unions for a Mortgage Under $50K
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.
Financial institutions are typically willing to work with loyal customers who have proven they’re responsible with money. Navy Federal Credit Union, for example, offers different types of financial products from home equity loans to mortgages with no down payment. And if you’re a member, it will likely improve your chances of getting a Navy Federal 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, because when you apply for multiple new credit lines in a short period of time your FICO score might go down.
What to Do When No One Will Give Home Loans Under $50K
If you’ve had no luck with local lenders, consider alternative ways of funding your home purchase. Decide if one of these nontraditional home loan options might work for your situation.
Instead of trying to find a mortgage loan, try to get a personal loan to finance your home purchase. Many types of personal loans are available, from secured loans from major banks to high-interest payday loans. If you decide on a personal loan, make sure you can manage the terms and payments.
Another option is peer-to-peer lending, an online platform that matches borrowers and lenders using complex algorithms. Prosper and LendingClub are two P2P lending sites that typically get good user reviews and handle smaller loans.
Like anything, P2P loans have pros and cons. Two big pros: P2P lending sites prescreen borrowers and investors and tend to offer more competitive rates than traditional financial institutions. The rate you pay for a P2P loan will depend on your credit score, the amount you’re borrowing and the loan term. The maximum loan amount Prosper and LendingClub will issue is $35,000.
Why You Should Think Twice About Small Home Loans
If you can finance a home with a loan 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 of $5,000 would be considered reasonable on a standard mortgage, but that amount represents 10 percent of a $50,000 loan, which makes it much less reasonable.
Whether a small home loan is advisable for you depends on your situation and your credit profile, said Goodman. “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,” said Goodman. “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 situation, you might find that 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 — or maybe even borrowing from a family member or friend, or waiting to make 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.