Small Mortgages Offer Opportunity to Invest in Rural Communities

Many Americans in rural areas struggle to purchase low-cost homes, in part because small mortgages—those for under $150,000—are in short supply. With housing costs at all-time highs, surveys show that many renters have become pessimistic about their chances of ever owning a home. Research indicates that plenty of low-cost properties remain available, especially in rural areas where land values are low, but a lack of small mortgages makes it difficult for homebuyers to take advantage of these opportunities. As a result, many would-be homebuyers are stuck competing for a limited supply of affordable rental housing or are forced to buy using risky, costly alternative financing arrangements.

Throughout much of the 2000s, rural areas experienced population declines and employment losses as the nation continued to urbanize. But telecommuting opportunities that opened during the COVID-19 pandemic allowed Americans to be more flexible about where they live and work, and some chose to move from cities and suburbs to rural communities. From 2021 to 2023, the nation’s rural population increased by almost 600,000 (about 1.2%), driving additional housing demand and contributing to fast-rising home prices. Nevertheless, low-cost homes continue to be bought and sold throughout rural America and median home values remain below those of cities.

Despite the affordability of this market, many prospective homebuyers struggle to get mortgages: Rural buyers are less likely than urban ones to use a mortgage, more likely to have their mortgage applications denied, and more likely to use risky alternative financing arrangements. These outcomes underscore the need for policymakers to expand access to credit in these areas, especially the supply of small mortgages. Doing so would improve the financial security of rural Americans and ensure that they have safe and affordable housing options.

Rural homebuyers often struggle to get mortgages for low-cost homes

Millions of Americans have purchased homes in rural communities over the last two decades. The Pew Charitable Trusts analyzed more than 104 million site-built home sales from 2004 to 2022 and found that 12.1 million were located in rural areas, with the remainder located in urban areas. Pew defines rural areas as those outside of metropolitan statistical areas, which typically include a city and its immediate suburbs, but researchers use a variety of methods to delineate urban and rural communities. According to Pew’s definition, there are 1,965 rural counties, and these counties contain about 15% of the nation’s population.

Low-cost homes—those sold for under $150,000—are especially common in rural communities. According to the Pew analysis, the median purchase price of homes sold in rural areas was $213,000 from 2004 to 2022, and 37% of transactions involved low-cost homes. In contrast, the median purchase price of homes in urban areas was $374,000, and just 15% involved homes under $150,000. In particular, low-cost home sales were common in the Great Plains, the Midwest, and parts of the Southeast United States. (See Figure 1.)

Even in communities where low-cost homes are available, many prospective homebuyers struggle to purchase them because of a lack of small mortgages. Nationwide, just 26% of low-cost homes were bought using a mortgage from 2004 to 2022, compared with 71% of higher-cost homes. In part, this is because issuing small mortgages is unprofitable for many lenders. Research shows that small mortgages often have high fixed origination costs but yield less revenue than larger loans, which discourages many lenders from offering these products.

Mortgages for homes under $150,000 were similarly hard to get in urban and rural areas. However, the effects of the small mortgage shortage were felt most acutely in rural communities where low-cost homes are more prevalent. Specifically, just 43% of homes sold in rural areas were purchased using a mortgage compared with 62% of homes in urban areas from 2004 to 2022. (See Figure 2.)

Urban-rural differences in mortgage usage partly reflect differences in loan denial rates. From 2004 to 2023, lenders denied 20% of completed mortgage applications submitted by rural buyers, compared with just 12% submitted by urban buyers. These denial rate gaps persisted even after accounting for loan size and borrower debt-to-income ratio. Further, research suggests that after adjusting for applicant credit profiles, the real denial rate may be higher than what is reported using publicly available data.

In addition, rural Americans are less likely to complete their mortgage applications. Some researchers have suggested that higher incomplete rates are evidence of soft denials, which occur when a lender determines that borrowers are unlikely to qualify for a mortgage even before they complete a full credit evaluation.

When mortgages are scarce, homebuyers rely on inferior alternatives

Rural homebuyers who are unable to get a mortgage face one of three undesirable outcomes. Well-resourced households can purchase their homes using cash, even though data shows that rural households typically have fewer liquid savings than urban ones. For example, just 57% of rural adults report being able to cover a surprise expense totaling $400, and just 45% say they have three months of emergency savings in their bank accounts. For adults living in urban areas, those figures are 64% and 55%, respectively.

Other homebuyers turn to alternative financing, such as land contracts, lease-purchase agreements, and seller-financed mortgages, even though these arrangements are riskier and more costly than mortgages. In 2021, Pew conducted a nationally representative survey that found that 12% of rural adults had used one or more of these alternatives compared with 8% of urban adults. Further, property records data shows that 25% of residential land contracts recorded from 2005 to 2022 were used to finance homes in rural areas even though these communities contained just 12% of the nation’s total home sales.

Finally, some residents of rural areas forgo homeownership entirely even if they are financially ready to buy. These would-be homebuyers must instead compete for the limited stock of rental housing, driving up prices and increasing residents’ housing cost burden. Research shows that rural counties make up 101 of the 152 counties nationwide with the most-severe shortages of affordable rental units. This lack of rental housing in rural communities makes residents economically vulnerable and contributes to rising levels of rural homelessness.

Rural homebuyers would benefit from more small mortgages

Policymakers seeking to make low-cost homeownership opportunities more available for rural Americans should focus on expanding the supply of small mortgages and evaluating other ways to connect rural residents to safe, affordable credit products. Pew research has described several obstacles that limit small mortgage lending nationwide. For example, lenders report that small mortgages are costlier to originate and generate less revenue than larger loans. Further, loan officers are typically paid a percentage of the total loan amount, which means it is in their financial interest to originate larger-balance loans instead of small mortgages.

But given the prevalence of low-cost homes in rural areas, federal and state policymakers should also consider how rural financing challenges limit the availability of small mortgages. Future Pew research will identify and describe the main financing barriers facing rural homebuyers. Addressing these barriers will be critical to expanding the small mortgage supply and ensuring that rural Americans can build wealth, remain safely and stably housed, and achieve their homeownership goals.

Adam Staveski works on The Pew Charitable Trusts’ housing policy initiative.