Only about a quarter of homes that sold for less than $70,000 were financed with a mortgage, while almost 80% of sales between $70,000 and $150,000 had one, according to an Urban Institute analysis last year. Low-end borrowers had their applications denied at a higher rate than those taking out bigger mortgages even when comparing borrowers with similar credit quality, according to the think tank.
Housing experts say small mortgages have become rarer because lenders have trouble making profits on smaller loans. Lenders typically have a fixed cost to extend a mortgage, and the smaller the loan, the smaller the profits.
“The whole system incentivizes high[-balance] loans,” said Michael Bright, the president of the Structured Finance Industry Group.
Instead, many lenders are catering to more high-end borrowers. Jumbo loans—those too large to sell to government-sponsored guarantors Fannie Mae and Freddie Mac —have been a bright spot for banks. Financial institutions have grown increasingly competitive when trying to attract these customers, in part because they are seen as prime targets for selling additional services.
The dearth of smaller mortgages is becoming an impediment to home buying in regions where prices are otherwise affordable, especially in Midwestern and Southern cities like Chicago, St. Louis, Youngstown, Ohio, and El Paso, Texas, according to local housing advocates and attorneys.
For many home buyers, the difficulty of obtaining small mortgages represents another rung sawed off the ladder to upward mobility.
“Like everything else in our economy, the housing market has become less equitable,” said Julia Gordon, president of the National Community Stabilization Trust, a nonprofit whose work focuses on neighborhoods with low-price homes.