On October 4, 2022, the US Department of Housing and Urban Development released a request for information seeking information on barriers to small mortgage loans in the Federal Housing Administration (FHA) program to consider opportunities to better support and expand affordable homeownership in underserved markets with low housing prices.

To inform the issue, we updated our analysis of the characteristics of small mortgage loans using new property records data. We also revisited the MicroMortgage Marketplace demonstration program. Using property records, we find that in 2020, 13.1 percent of all homes sales in the US sold for less than $100,000, and half of these were flagged as being purchased by owner-occupants. This compares with nearly 78.7 percent of homes selling for at least $100,000 that owner-occupants purchased. Only about a third of all the low-cost homes were purchased using a mortgage, compared with more than 80 percent of homes that sold for at least $100,000. The challenges of obtaining financing for small mortgages were apparent in the much higher likelihood of denial for loan applications under $100,000. Property condition played a larger role in denials than for loans over that amount.

Observers continue to point to the prevailing compensation models for real estate and mortgage actors—whose costs are fixed (or sometimes even higher for low-cost property sales to first-time homebuyers) while their income increases with transaction size—as a major factor limiting first-time homebuyer access to affordable homes. The FHA can facilitate marginally more access to these properties for owner occupancy, especially with respect to purchase-construction lending and property condition requirements. But effectively serving this market segment will require cross-agency and cross-industry cooperation and the will to design a path for small-dollar, entry-level mortgages.