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Notes from the Field

Small-Dollar Mortgages Offer Much-Needed Entry into Homeownership

For lower-income households, the barriers to homeownership can seem insurmountable. Lending programs can help address the lack of traditional financing available to buyers who are often left out of homeownership—those who need a small-dollar mortgage.

The views expressed in this report are those of the author(s) and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.

In recent years, the inventory of homes to purchase has been down, a situation which, in many markets, has caused home prices to soar. In 2021, the national average for a mortgage loan was $353,462.1 That number puts homeownership out of reach for a lot of potential homebuyers, especially those who earn lower incomes.

However, there are still areas of the country where homes are much more affordable. In fact, according to Home Mortgage Disclosure Act (HMDA) data (which tracks mortgages originated by deposit-taking institutions), 16 percent of mortgages in metropolitan counties, 30 percent of mortgages in micropolitan counties, and 40 percent of mortgages in rural counties were for less than $100,000.2 Unfortunately, securing a mortgage for these more affordable homes can be tricky; small-dollar mortgages are even more scarce than the affordable homes they are used to purchase.

What—or how much—is considered a small-dollar mortgage? While there is no universal definition for a small-dollar mortgage, the Urban Institute has most recently used mortgages of $100,000 or less to define the term. Why are these mortgages so hard to come by? There are a few reasons, but one is most prevalent: lender reluctance. Traditional lenders are reluctant to provide loans for small-dollar mortgages simply because they are not as profitable as a higher-dollar mortgage.

For potential homebuyers in need of a small-dollar mortgage, the search for a lender can be discouraging. Add unwilling lenders to challenges such as saving up for a down payment and negotiating a less-than-perfect credit score, and the barriers to homeownership can seem insurmountable. This is an especially unfortunate situation for lower-income households for whom it is not unusual to pay more to rent than they would to own a home if they were able to secure a small-dollar mortgage.

Northeast Ohio’s CHN Housing Partners, an affordable housing nonprofit, is working to help potential homebuyers—especially low-income people and underserved communities—overcome those barriers. With their affiliate CHN Housing Capital, they developed the Believe Mortgage program to address the need for smaller-dollar mortgages.

Homes in Cuyahoga and Lorain Counties are eligible for a Believe Mortgage. The program offers homebuyers mortgages that do not require private mortgage assistance or first-time homebuyer status. Down payments for those in the program may be as little as 3 percent, and CHN Housing Capital offers down-payment assistance programs, too. Credit scores aren’t necessarily a barrier with the program; homebuyers with lower credit scores are considered. In addition, the program offers a second mortgage home repair loan for properties that require repairs. This can be a huge help for securing older homes that otherwise do not qualify for a mortgage because they need repairs.

Of the program, Greg Perelka, executive vice president of lending with CHN Housing Capital says, "We created the Believe Mortgage to provide opportunities and to fill the small-dollar gap within communities of color and to low- to moderate-income homebuyers. We believe there is power in a permanent address, so we strive to fill the homeownership gap for individuals who are being left out of the housing market and believe they are unable to reach for the American dream of homeownership."  The program’s loan amounts range between $20,000 to 350,000, with an average of $89,000. Ninety-six percent of the program’s applicants are African American; of those, 49 percent are Black female heads of households.

Lending programs designed to assist with homebuying are created to address the lack of traditional financing available to buyers who are most often left out of homeownership—those who need a small-dollar mortgage, those with imperfect credit, LMI people, and people of color. For some buyers, small-dollar mortgages make homeownership possible. Programs such as CHN Housing Capital's Believe Mortgage offer a much-needed entry into homeownership and future wealth creation.

  1. Mean loan amount from 2021 according to HMDA data. Home purchase originations (single-family, 1–4 units) covering the United States. Return to 1
  2. Data for owner-occupied loans from all reporters (HMDA, 2015–2019). Return to 2