How Small-Dollar Mortgages Can Help Homeownership Equality
Cities, large and small, across the country are working to address the lack of affordable housing as a means to boost homeownership opportunities. While home prices continue to rise in most areas, in November of 2020 there were still more than 50,100 listings nationwide for single-family homes priced at $100,000 or less on realtor.com.
However, low home prices alone aren’t enough to make home ownership a reality. The lack of small-dollar mortgages is also a factor.
The exact definition of a small-dollar mortgage, or micro mortgage, varies. Conservatively, a small-dollar mortgage is a loan issued for less than $70,000, and liberally it’s a loan for less than $100,000.
Regardless of the specific amount, small-dollar loans are harder to secure than their larger counterparts. According to U.S. Census Bureau data, in 2020 only 43 percent of homes sold below $80,000 were financed with a mortgage. In many of these communities, investors, armed with all-cash deals, are buying up these affordable properties and turning them into rental units.
“Black and Hispanic people, in particular, have been left out of this wealth-building opportunity,” Sheryl Pardo, a spokeswoman for the Urban Institute said in the article Lots of Homes Under $100K Are for Sale, but Most Buyers Can’t Get One for This Reason. “It’s important [to offer more small-dollar mortgages] in this era where we’re recognizing the severity of the racial wealth gap and finally trying to do something about it.”
Simply put, small-dollar loans are less profitable for lenders. Typically, a loan officer receives 1 percent of the loan amount in commission. For an $80,000 loan, that’s just an $800 return at most. After fees, lenders may end up losing money.
Naturally, lenders are less inclined to pay attention to small-dollar mortgages than bigger loans with a higher return. And with home inventory dwindling, home prices rising, and mortgage rates at record lows, lenders have the leeway to be even pickier with who they issue mortgages to.
“The lack of lending activity and access to credit for communities of color is a barrier of building wealth and is an example of inequity in the system,” says Gabe del Rio, CEO of the Homeownership Council of America, in the article Lots of Homes Under $100K Are for Sale, but Most Buyers Can’t Get One for This Reason.
Additionally, the pandemic has brought with it high rates of unemployment and economic instability. In response, lenders have tightened their lending requirements and have become more selective with whom they chose to issue mortgages. For Black and Latino Americans, who are “disproportionately more likely to hold a low-wage job or a job that cannot be performed remotely,” the pandemic has further intensified the racial homeownership gap.
Small-dollar mortgages make homeownership attainable for homebuyers at all price points. “There is a lot of affordable housing out there,” said Pardo. “But if you don’t have the financing and you can’t get the mortgage and you don’t have the cash on hand, [you can’t] get on the road to homeownership.”
The pilot program, MicroMortgage Marketplace, is removing some of the traditional barriers homebuyers face when looking to obtain a small-dollar mortgage. The program is being run by the Urban Institute, along with the Homeownership Council of America and Fahe – a Kentucky based lender. MicroMortgage Marketplace offers some distinct advantages over traditional loans:
- Zero down payment for buyers in rural and urban areas.
- No extra fees (mortgage insurance).
- Allows buyers to use automated valuation models (AVMs) that can save the borrower money.
- Allows buyers with low credit scores to use alternative credit like rental history or timely utility payments.
The MicroMortgage Marketplace is a shining example of why small-dollar mortgages are important in the fight to reduce racial inequalities in homeownership.