You would think smaller loans would be easier to get considering there is less money you would owe the bank, right? It would make sense to believe with less possible loss lenders would be more willing to help. If you believe this sentiment, however, you would be wrong.
Smaller Purchases with Less Mortgages
A recent analysis done by the Urban Institute has found that lending institutions are denying mortgages with smaller dollar amounts at a much higher rate than those with larger amounts. This is specifically for single-family purchases, and apparently it has nothing to do with the credit history of the applicants.
This has resulted in strict limitations on affordable opportunities for families hoping to purchase homes in markets where housing costs are already low. During its analysis, the Urban Institute found that just a mere quarter of homes purchased for under $70K were financed by traditional mortgages. Those homes which sold above $70K but below $150K were mortgaged closed to 80% of the time.
Credit Scores Have No Effect
The data shows the credit scores and reports of denied applicants appeared to have no effect on their inability to become approved. An incredibly 18% of all loans beneath $70K were denied, with applicants ranging in their credit scores. What is even more peculiar is that 36% of loans for homes above $70K were denied, despite there being an incredible 80% mortgage rate on the homes which did sell.
Developing the RDR
This data did not thoroughly explain why there was such a difference in the denial rates of lesser loans versus larger loans. Due to this, the Urban Institute decided to develop what they call the RDR – or Real Denial Rate. This new rate allows for differences in the credit scores and other pertinent information in applicants who were both approved and denied for these loans.
It is interesting to note that upon developing and implementing the RDR, the belief creditworthiness was of no consequence in smaller dollar loan denials was proven.
Findings
The analysis found little to no variations in the credit profiles of applicants when comparing them based on loan sizes. What it did find was that 34% of small-dollar mortgage applicants had a low credit profile. In the group of applicants requesting larger dollar mortgages, 35% had low credit profiles. Only 30% for those loans which went over $100K did also.
Conclusion
The research analysis done by the Urban Institute undeniably calls for more research on creative solutions for the sector of mortgages with smaller dollar amounts. It should be noted when searching for these solutions the high fixed costs associated with originating and serving a loan. These costs, which are the same across loan amounts, make small dollar loans much less attractive to lenders.
By providing creative solutions for this currently dropping sector a very big difference could be made in the affordable housing market. With the economy only just now on the rise after years of crisis, better serving this sector could drastically increase local economies in low-income areas.
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