let’s talk : SMALL DOLLAR financing pt.1
Do you all mind if I use this week’s touch point as a self-help meeting? I want to chat with you about something we are currently struggling with; SMALL dollar financing. As many of you are well aware of by now, because I have annoyingly mentioned it 100 times, we have been working to invest in Binghamton, NY. With low housing prices and relatively high rental rates it has been GREAT, but we have run into our first roadblock… small dollar financing – an issue I never knew existed. We had previously applied for “average” home priced loans and received pre-approval no problem; so, we had NO CLUE that when it came time to finance the less expensive homes, we would run into such an issue. Let me walk you through what we are learning and see what your thoughts are on the matter…
So, as we do, let’s talk Real Estate, let’s talk SMALL DOLLAR FINANCING…
WHAT IS CONSIDERED A “SMALL DOLLAR” MORTGAGE?
Typically, anything less than $50,0000, however, this number can TOTALLY depend on the city, state, and frankly, your relationship with the bank.
WHY ARE SMALL DOLLAR MORTGAGES HARD TO FINANCE?
- “RISKY” CREDIT : Lenders may assume that people who are looking to purchase an “inexpensive” house may be more likely to have flawed credit (not COOL). I am not saying this is ALL banks, and for the record I am NOT anti-bank, just repeating what I have come to find from my research.
- LESS PROFITABLE : Lenders find small mortgages unattractive because they’re not as profitable as larger mortgages. Whether you apply for a $50,000 or $500,000 mortgage, the bank is required to put in roughly the same amount of effort to underwrite the loan. A small loan paired with high origination fees offers little profit for the same amount of work. On average, a bank earns 50 bps per home loan; so, if a bank originates a $50,000 loan it will earn $250, whereas if it originates a $500,000 loan it will earn $2,500. It makes sense that they would prefer to spend their time and resources on larger loans.
- PREDATORY LENDING : Predatory lending is when a lender underwrites a loan that unfairly benefits the lender themselves i.e. high fees or interest rates. With a small dollar mortgage, it is easy for such fees to takeover a high percentage of the monthly mortgage payment. In such cases, this could appear to look like predatory lending, regardless of whether or not the lender is ill-natured. This kind of works hand in hand with my next point…
- HIGH LOAN COSTS : Some states (NY) do not allow a loan to be given, if the costs associated with the loan are disproportionately high. These restrictive provisions are based on [% of : Origination + Closing Costs / Total Mortgage]. For smaller mortgages, these fees could take over a considerable percentage of the total loan amount, and therefore you may see that small dollar loans are often automatically rejected from the banks. A large portion of the closing costs for a loan are fixed, so the percentage of costs to total mortgage is easily affected.
For the above reasons, and many more I am sure, conventional mortgages for tiny priced homes are not as prevalent as we had once assumed!
OKAY WE GET IT, SMALL DOLLAR MORTGAGES ARE HARD TO FIND, BUT THEY DO EXIST, SO WHERE CAN I FIND THEM?
You may want to check out the following…
- Local Community Bank
- Local Credit Union
- Some National Chains : If you are unable to receive funding from a local bank you could try one of the below national chains…
- Bank of America : loan minimum (from what I have found) of $60,000
- Chase : loan minimum (from what I have found) of $50,000
- Are there any banks that may be willing to go lower than $50,000?? Yeah! Just to name a few…
- LightStream, an arm of SunTrust Bank, focuses on small loans for “tiny homes” ranging $5k-$100k over 24-84 month terms
- Affinity Plus Federal Credit Union
- Unconventional funding paths also work!
- Personal loan (unsecured) : here the loan is given based on the borrower and their ability to repay, rather than what the money is being used for; in this case, a house!
- Peer to peer lending can be found on sites such as Prosper or Lendingclub.
- Private Money: perhaps you have a super generous family member or friend with some extra cash they are willing to lend?!
WHAT ROUTE DID WE TAKE?
Luckily, after a few rounds of rejection on our small dollar inquiries, we were able to get pre-approval from a small regional bank BUT, that does not mean we are out of the water just yet! Fingers crossed we can continue to build a working relationship with this bank, so come mortgage closing time we are good to go – will keep you posted once the deal closes!
If YOU have ANY other suggestions/ ideas/ ways we should consider financing these “less expensive” homes – PLEASE DO TELL. ANY suggestion is helpful!
Feel free to comment on the blog post HERE and let us know what YOU think!
DON’T FORGET, I added a few new features to the blog recently…
Quick Metrics : This allows you to go in and quickly grab some of the calculations we use to analyze deals.
Tell us about YOUR business: Essentially, SHOW US WHAT YOU GOT. Here you can share with the greater let’s talk Real Estate community what you are doing, what you need, questions you may have, etc. Seriously though, I do hope you all use this as free marketing and work with each other, because I truly do believe in the power of a good network.