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Small mortgage, big challenge

By Marilyn Kennedy Melia
CTW Features

Usually, it’s a high price tag that inhibits home buying.

A recent report finds that very low cost homes can be difficult to sell because lenders are reluctant to make mortgages totaling $50,000 or less.

The report, issued by the Urban Institute, Washington, D.C., examined ten metropolitan areas, including Scranton, Pennsylvania; Rochester, New York; Tampa, Florida and Jackson, Michigan, where low-priced homes, both single-family and condominiums, totaled eight percent or more of the housing stock.

In 2014, the study found, less than one percent of the total low-cost home supply had a recently originated mortgage.

“Small loans are less profitable” for lending firms, says Bing Bai, co-author of the report.

Since fixed costs for extending mortgages are the similar for both large and small loan amounts, firms are more reluctant to make little loans, agrees Steve O’Connor, senior vice president of the Mortgage Bankers Association, Washington, D.C.

Moreover, he notes, “The credit profiles of borrowers seeking lower balance loans may sometimes present challenges.”

Ensure credit issues are resolved before applying, O’Connor says.

So, too, is shopping for a willing lender.

“In some cases,” says Keith Gumbinger of mortgage data site hsh.com, “a mortgage broker can help expand your financing sources beyond local offerings.” Brokerage firms extend loans with funds from a variety of firms.

By using the opposite approach — tapping local, independent banks and credit unions — borrowers might find a small loan, Bai says.

Indeed, the median size of mortgages among all lenders is $192,000, but the median for credit unions with a mission to serve low-income members is $148,000, reflecting that they make more small loans, notes Mike Schenk, vice president of the trade group, Credit Union National Association, Madison, Wisconsin.

Borrowers must be members of a credit union to borrow, however, explains Schenk.

The CUNA Website, http://www.asmarterchoice.org/, provides information on how to investigate and join.

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