Why THIS POPULAR INVESTMENT MORTGAGE is harder to get than high-dollar loans

Real estate investors often use traditional mortgage financing to acquire their first few rental properties, but the types of mortgages that investors most often seek for these investments are becoming harder to get. According to the Urban Institute, relatively modest, affordably priced homes for $70,000 or less are becoming extremely difficult to finance. In fact, only about 25 percent of U.S. properties worth less than $70,000 have any financing. By comparison, nearly 80 percent of properties worth between $70,000 and $150,000 are mortgaged[1].

It has long been true that homes valued lower than $70,000 have been harder to finance than those in the “sweet spot” around $150,000, but it is demonstrably harder today to get relatively low-dollar mortgage than it was just 10 years ago. In fact, mortgages for between $10,000 and $70,000 have fallen by nearly 40 percent in the last decade, and mortgage originations for homes worth between $70,000 and $150,000 have declined 26 percent. If you’re buying for more than that, though, you have much better odds. Mortgage originations on homes worth more than $150,000 have risen 65 percent in the past 10 years[2].

Why Lenders Can’t or Won’t Help Lower-Priced Buyers

While it might be tempting to just blame the bankers for being mean people who won’t lend to home-buyers who aren’t rich already, the truth is that it has always been more difficult for lenders to profit on low-balance loans because the costs of extending the loan are fixed so the profit margin is simply smaller. Factor in that smaller mortgages may be more likely to get paid off early, reducing interest earned, and that it can be difficult to find a buyer for these notes once the loan is made, and you have a system that “incentivizes high-balance loans,” as president of the Structured Finance Industry Group, Michael Bright, put it.

Bright noted many lenders deal with the fixed costs of lending by catering to high-end borrowers who need jumbo loans. Although these loans cannot be sold to Fannie Mae or Freddie Mac, they not only offer a much broader profit margin but also bring in customers likely to purchase additional services. The combination is simply too attractive for most lenders to pass up. Furthermore, while a big spender might obtain flexibility on credit score or past late payments that would stall a lower-dollar loan, the smaller-volume borrower with even a moderately good credit score may well find themselves out of luck when it comes to getting the loans they need.

Creative Financing Can Get Tricky

This small-loan issues tends to affect real estate investors on all fronts. Buyers who pay religiously on their creatively financed properties and then wish to purchase the home at the end of a lease-option or contract-for-deed transaction sometimes find it difficult to get the financing they need to get their own mortgage at the end of the creative-financing term.

For example, if a buyer pays a large down payment and then pays regularly for the next five years in a relatively affordable market, there is a good likelihood that while they are a very good risk when it comes to their credit score, the bank may not want to make a sub-$70,000 loan anyway. Since these homeowners may have paid over appraised value to begin with in order to compensate the note-holder for the risk associated with the financing in the first place, they may also find their homes appraise too low to hit that benchmark of $70,000. Fortunately for investors, creative financing can be extended, usually to everyone’s benefit!

Tell us what you think:

  • Should it be easier to get a sub-$70,000 loan?
  • Is it realistic to use cash or hard money for long-term, relatively small mortgage loans?
  • Is this situation fair to homeowners? Investors? Lenders?

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[1] https://www.wsj.com/articles/small-mortgages-are-getting-harder-to-come-by-11557394201

[2] https://magazine.realtor/daily-news/2019/05/13/are-smaller-mortgages-tougher-to-get-than-high-dollar-ones

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