Small Loan Scenario
Have you wondered why it’s so hard to get a small loan for real estate?
Honestly, a small loan for real estate just isn’t very profitable. Just as you are borrowing money to make a profit, the lender wants to make a profit too. The interest received on a small loan isn’t very profitable. The risk of losing money is much greater with a small loan than large one. I know, it doesn’t seem to make sense at first, but read on.
First, the lender has to cover the overhead of setting up and approving the loan. Some lenders will charge points and fees to cover some or all of this cost. They still have to pay the overhead for every loan that gets rejected too. Compare this: A lender charges $2,500 up front for a $25,000 small loan. Does that seem steep? The same lender charges $2,500 for a $150,000 not so small loan. It doesn’t seem as bad now does it? The fee didn’t change, but our perception of it did. It’s the ratio that changes.
Once a lender makes a loan, every month the lender has the expense of servicing the loan. That includes: sending statements, processing payments, tracking balances, end of year reporting, sending a 1098, government compliance, etc all those costs have to be covered, and they cost the same to the lender whether it’s a small loan or a large loan.
If a small loan goes unpaid, just like the expenses of setting up the loan, proportionally there is a large cost with the attempt to collect on the debt. So, even if you find a lender that will do a small loan, they typically want better credit to reduce the chance of the loan going bad.
Cheap houses purchased with a small loan are typically in areas that have more foreclosures, and more damage to the property when it is foreclosed. This increases the chance of loss to the lender even after they foreclose on a property.
Is it any wonder lenders are reluctant to do a small loan? It’s easier to get a loan completed for $100,000 than $25,000. Admittedly, we do get some small ones done, but with the challenges listed above, it’s not nearly as often as we’d like.