By For renters struggling to keep up with soaring home prices, a $150,000 or less house may seem like the most affordable option. However, securing financing for such a purchase can prove to be a Herculean task.
According to a recent report by The Pew Charitable Trusts, mortgages for homes under $150,000 have become increasingly scarce. Prospective buyers in this price range often resort to riskier alternatives such as personal property loans, paying in cash, or giving up on the idea altogether.
Pew revealed that people of color, particularly Black, Hispanic, Indigenous people, and those in rural areas, have been disproportionately affected by the scarcity of small mortgages. From 2018 to 2021, only 26% of homes sold below $150,000 were typically financed with a mortgage, compared to 71% of higher-cost homes.
The report claims that “outdated policies” have hindered mortgage-ready borrowers looking for low-cost financing. Speaking during a press conference, Alex Horowitz, Director of the Housing Policy Initiative at The Pew Charitable Trusts, said, “Home buyers seeking loans under $150,000 are often unable to find a mortgage.”
It’s worth noting that about 25% of all homes sold during the same period fell below the $150,000 threshold.
Small Mortgage Lending Becoming More Expensive for Lenders
Regulations enacted after the Great Recession have made small mortgage lending more costly for lenders, according to a report by Pew. The report notes that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has increased the cost to lenders for originating mortgages, as they must verify borrowers’ ability to repay and comply with strict requirements. As a result, small mortgage lending has fallen sharply, from 2.7 million mortgages in 2004 to just 830,000 loans a year.
Small Mortgages Unpopular Among Lenders Despite Demand
Small mortgages are not profitable for lenders, despite high demand, because they produce the least revenue. Additionally, their costs are relatively fixed, making them difficult for lenders to originate. Between 2018 and 2021, 38% of mortgage lenders did not issue a single small mortgage. However, buying a cheap home is still possible.
The Challenge of Buying Cheap Homes in Today’s Market
Matthew Bruckner, an associate professor of law at Howard University in Washington, D.C., recently purchased a single-family home in Maryland for approximately $65,000. In today’s market, one-third of all homes purchased in April were paid in cash, according to real estate brokerage Redfin.
However, buying a cheap home can come with its challenges and complications. Many affordable homes tend to be older and may have structural deficiencies, making it difficult for buyers to obtain a mortgage. This caveat has been noted by Pew, which suggests that homes under $150,000 are more likely to have such issues compared to higher-priced homes.
To overcome lending barriers that come with purchasing a sub-$100,000 home, Bruckner opted to use cash from his stock market investments. He also established a limited liability corporation to buy the property instead of buying it in his name, which made it even more challenging to obtain a small dollar loan.
Ethan Finkelstein, who runs Cheap Old Houses alongside his wife on Instagram, is also well-acquainted with the struggles of buying affordable properties. He recognizes the difficulty in getting a mortgage for homes with structural problems. Despite these challenges, he remains committed to promoting cheap homes and showcasing their unique character to potential buyers.
Getting Creative with Financing a Cheap House
Buying a cheap house can be a great investment for those who are willing to roll up their sleeves and do some renovation work. However, financing such a purchase can be challenging. According to Finkelstein, many buyers opt for creative financing solutions.
Finkelstein also shared another success story of his staff member who bought two buildings for $99,000 by obtaining a mortgage from a small, regional bank with in-house underwriting. However, the staff member had to put down 20% toward the homes.
According to Finkelstein, the biggest challenge in getting financing for a cheap house is getting the bank to appraise the property for the value that is equal to the purchase price. He noted that if the home has certain features such as a working kitchen, a bathroom, plumbing, and heating, the buyer has a better shot at using the traditional mortgage financing system to get a low-cost house to renovate over time.
Finkelstein and his wife also own two cheap houses and are renovating them both. They bought their first Federal-style farmhouse on 10 acres of land for $70,000 in cash and they are hoping to have it valued at around $500,000 after restoration. They are also carrying $20,000 in credit-card debt due to the cost of materials involved in these restoration projects.
The Easy Process of Purchasing a Home with Cash
According to Bruckner, a college professor, buying a single-family home in Maryland’s Alleghany County for $65,000 through an LLC was a quick and easy process.
Paying in cash was the key factor in the swift transaction.
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