3 Major Obstacles Limit Rural Homeownership

Americans living in rural areas often struggle to get a mortgage, which limits their ability to attain homeownership. One key reason is the limited availability of small mortgages, those under $150,000, which hits particularly hard in rural communities. But potential buyers in these areas also face several distinct barriers to financing that prevent them from using mortgages at the same rates as their urban counterparts.

After an analysis of research and data from multiple sources, The Pew Charitable Trusts identified three major factors impeding credit access in rural areas. First, rural Americans often have low or even no credit scores, which makes lenders hesitant or unwilling to extend them credit. Second, a large share of homes in rural communities cannot get mortgage financing because of issues with their physical condition or ownership status. Third, rural homebuyers have typically gotten their mortgages from brick-and-mortar bank branches, which have become less common over time.

To expand mortgage access for rural Americans, state and federal policymakers should consider actions that address the common financing challenges facing these communities. Those strategies could include adopting new underwriting models that more accurately reflect consumers’ ability to repay their loan, making it easier for homebuyers to obtain home repair or rehabilitation loans, and boosting support for lenders operating primarily in rural areas. These steps would help more rural homebuyers get mortgages, enabling them to remain stably housed in their communities.

Rural Americans often have low or even no credit scores

Americans living in rural areas are more likely to have low or even no credit scores than those living in urban areas, which makes lenders hesitant or unwilling to issue them mortgages. For example, data from the Consumer Financial Protection Bureau shows that 37% of consumers in rural parts of the South have credit scores below 600, a level at which borrowers are typically ineligible for standard mortgage products. That’s compared with 26% of consumers nationwide. Further, between 10% and 15% of rural Americans are credit invisible, meaning they do not have enough credit information available to generate a score, compared with between 5% and 9% of Americans living in urban areas.

Research has linked low credit scores to higher levels of medical debt, especially for those living in the rural South. Americans had at least $88 billion of cumulative medical debt in 2021, and more rural Southerners (28%) had medical bills in collections than consumers elsewhere (17%). The presence of this type of debt can adversely affect consumers’ credit scores, even though medical debt is a poor predictor of a borrower’s ability to successfully repay a mortgage. Although a series of policy changes in recent years has reduced the number of Americans whose credit reports contain medical debt, 15 million people are still adversely affected.

Low and missing credit scores are a leading reason for mortgage denials nationwide, but especially in rural areas. Pew’s analysis of Home Mortgage Disclosure Act data from 2018 to 2023 finds that 30% of would-be rural homebuyers had their mortgage applications denied because of their credit history, compared with just 19% of would-be urban homebuyers. Among small mortgage applicants, credit scores played an even larger role and were the leading cause of denial during this period.

Rural communities have a large number of non-mortgageable homes

Some homes in rural areas have physical deficiencies or titling issues that make it difficult or impossible for homebuyers to get a mortgage, according to Pew’s analysis.

For example, data shows that owner-occupied homes in rural areas are about twice as likely as those in urban areas to fall short of the Department of Housing and Urban Development’s definition of housing adequacy. Inadequate homes—which include those without hot and cold running water, regular electricity, and plumbing hookups, or those with numerous structural problems such as leaks, holes, or exposed wiring—make up 6% of buyable properties in rural areas compared with 3% in urban areas. Although lenders are not prohibited from originating mortgages on substandard homes, these properties are generally ineligible for common government insurance programs and cannot be purchased by Fannie Mae or Freddie Mac, the two government-sponsored enterprises responsible for increasing liquidity for lenders.

Other homes have complicated legal statuses that make mortgage lending difficult or impossible. For example, about 13% of the housing stock in rural areas consists of manufactured homes, which are often not titled as real estate and therefore ineligible for mortgage financing. Further, about two-thirds of the approximately half a million heirs’ property cases—situations where a homeowner passes away without a will and property ownership is split among multiple descendants—occur in rural areas. Many lenders steer clear of these arrangements because of the time, expense, and risk associated with issuing loans for them.

Rural homebuyers rely on a declining number of physical bank branches

Many rural homebuyers also face challenges connecting with mortgage lenders, lengthening the process or dissuading them from purchasing a home at all. Research shows that rural households disproportionately rely on physical bank branches to access financial services, yet more than 13,000 banks nationwide closed or consolidated nationwide from 1986 to 2020. These closures have had an unequal geographic impact, as rural Americans were 10 times more likely than urban ones to live in a banking desert in 2017.

With banks originating fewer mortgages than they did in 2004, independent mortgage companies have partially filled the gap. These lenders leverage government insurance programs and operate using online-only business models to reduce costs and maximize the number of loans they can issue. However, independent mortgage companies often struggle to originate small mortgages, which are less profitable than larger loans. They are also frequently unable to reach homebuyers in the rural South, many of whom may lack broadband internet access and may be unable to connect with lenders who primarily operate online.

Policymakers should remove financing barriers facing rural homebuyers

Policymakers at the federal and state levels seeking to improve credit access in rural areas should focus on addressing the financing barriers that commonly affect these communities.

To help these Americans with low or missing credit scores, federal agencies should follow the example of the Federal Housing Finance Agency and allow the use of modern credit scoring models, such as FICO 10T and VantageScore 4.0, that are more accurate than the traditional FICO score model and have been shown to reduce rates of credit invisibility. Policymakers should also consider pivoting away from traditional underwriting models that rely on consumer credit scores and toward models that incorporate cashflow data, which may better predict consumers’ likelihood of repaying their loans.

Lawmakers should also create pathways for homebuyers to purchase properties in need of repairs. For example, the Federal Housing Administration recently updated its 203(k) Rehabilitation Mortgage Program, which helps Americans rehabilitate or repair dilapidated homes. Officials at the federal and state levels should also consider investing in or improving other home repair programs, which have historically been successful but under-resourced.

Finally, policymakers should expand efforts to connect rural homebuyers with mortgage lenders. That includes better supporting banks operating in rural communities, expanding access to broadband internet nationwide, and lowering mortgage origination costs to encourage new lenders to offer mortgages to currently underserved borrowers.

These policy actions would benefit all who seek to be homebuyers, ensuring that low-cost homeownership opportunities remain accessible for all and that financing for those homes is safe, affordable, and widely available.

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