Monday, July 30, 2007

Using Prosper for a small mortgage

Today there is all sorts of interesting news about unusual uses of peer to peer lending. The Wall Street Journal published an article about using P2P lending to fund a startup. I just came across an article on Mortgage 101 about using Prosper to fund small mortgages - Why mortgages under $50,000 are hard to find. The author, a professor of finance emeritus at the Wharton School of the University of Pennsylvania, explains that the minimum amount for mortgages is usually $50,000 to $75,000, but there are some communities where smaller loans are necessary.

"The town is Winters, Texas, population about 3,000, most of whom are retirees. There are no jobs there or anywhere very close. Houses in Winters sell for less than $60,000.

Mortgage loans are not available in Winters. In part, this is because the town is so isolated and the demand so small that it can't support a lending facility. There are no appraisers, for example; if one is needed the cost will be double the cost in a larger center because of the time it takes for the appraiser to get to Winters and back.

But the major problem is that the loans are too small to justify the cost of originating them. A mortgage origination cost of $5,000, which is a very modest number, is 10 percent of a $50,000 loan, though only 1.7 percent of a $300,000 loan."

In addition, some people have paid off most of their loan and would like to refinance a small amount (less than $50,000) to take advantage of lower interest rates. That is hard to do unless your new loan includes a cash-out. Due to the high fees refinancing a small loan is often not worth the cost even if it can be done.

"The great majority of loans for amounts of less than $50,000 are second mortgages or unsecured. The development of the Internet has widened borrower choice in the unsecured market enormously -- at least among those who use computers. (For the others, small-loan offices are still found in many shopping centers.) Residents of Winters, Texas, should forget about getting mortgages and shop for unsecured loans on the Internet."

Unfortunately the outlook for those living in Winters, TX may not be as promising as it first appears. Interest rates vary by state and Texas caps the maximum interest rate at 10% APR (business loans can be up to 18%). Lenders are unlikely to fund such a large loan at an interest rate that low. The average rate offered to $25,000 loans is 12.76% for lenders with the best credit.

From what I see on Prosper, loan listings for real estate are usually for investment purposes instead of personal mortgages. Here are two open listings where someone is trying to use Prosper to assist with a real estate deal:

Real estate bargain - currently 100% funded with 4 days left at 9.79%. The borrower is requesting $10,000 and says, "I've got a great chance to snap up a 3/2 condo with a 6% fixed rate assumable mortgage. The seller is willing to carry a 2nd on the property for a portion of the difference (I'll still be putting money down), but the rate he wants on the 2nd is a little high and I feel I can get a better rate here on Prosper."

Buying a rental house - currently 100% funded with 2 days left at 14.80%. The borrower is requesting $5,000 and says, "I need your help to put some of 20% of down payment on a mortgage loan for a rental property."

For more information, or to start borrowing on Prosper go here.


Anonymous said...

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Matt said...

That is really interesting about the small mortgages. I didn't know
it was so hard to get a small mortgage, but it does make sense.