How (and Where) to Find Small Mortgage Loans
Small mortgage loans, which are for any dollar amount less than $100,000, can be hard to come by. Still, it’s possible to qualify for one.
We’ll walk you through what defines a small mortgage loan, how to find one and why it can be difficult to secure one. We’ve also compiled a list of alternatives so that you can decide what loan type is right for you and your finances.
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What is a small mortgage loan?
Small mortgage loans, sometimes called small-dollar mortgages, are exactly what they sound like: mortgages with small loan amounts. What, precisely, qualifies as “small” can vary but the Urban Institute, a social and economic policy research nonprofit, defines any mortgage under $100,000 as a “small” mortgage. For comparison, the average mortgage loan amount in the U.S. is currently $406,200.
Small mortgage loans are harder to find than loans for higher amounts, but with persistence and a little strategy you can find a lender willing to help you buy an affordable, small-dollar home.
Why are small mortgage loans harder to find?
The short answer is because lenders don’t stand to make much money by offering them. There are many reasons for this, including:
- Low volume. Only about a quarter of homes sold in a given year will go for less than $100,000. Of those homes, only a quarter will be purchased with a mortgage rather than cash.
- High costs. It costs a lender over $10,000 to originate a loan, no matter the size of that loan. But, because the lending business is based on charging interest, a lender stands to make far less of that money back with a small loan.
- Capped fees. The Consumer Financial Protection Bureau protects borrowers by limiting how many points and fees a lender is allowed to charge. If lenders exceed these limits, the loan becomes a non-qualified loan and can’t be backed by government agencies, which in turn makes it riskier to issue.
- Rising fixed per-loan costs. After the 2007-08 financial crisis, Congress passed the Dodd-Frank Act in order to prevent some of the predatory mortgage lending practices that had generated the housing bubble that fueled the crisis. The act increased some of the fixed costs that lenders must pay in order to originate loans.
What’s the minimum mortgage amount you can borrow?
Every lender is free to set its own minimum mortgage amount, so expect variability as you research your loan options. Most lenders don’t list this information on their websites, so you’ll likely have to call or email. Below, we’ve compiled a list of some lenders and the smallest loan amount each of them offers.
|Lender||Minimum mortgage amount|
|Truist (formerly SunTrust)||No set minimum|
|MiMutual||No set minimum|
|Better Mortgage||$50,000 ($10,000 in Michigan only)|
|PenFed Credit Union||$50,000|
|Navy Federal Credit Union||$50,000|
Small mortgage loan requirements
Small home loan lenders typically require borrowers to meet the same minimum mortgage requirements as they would for larger loan amounts.
If you’re getting a conventional loan, for example, some of the main requirements include:
- A 620 credit score or higher.
- A 3% down payment or higher.
- A 45% debt-to-income ratio or lower.
- Proof of steady employment and income for the last two years.
- Private mortgage insurance for a down payment less than 20%.
Another factor to consider is that the closing costs on a small mortgage may amount to a higher percentage of the loan amount than is typical for mortgages in general. A common rule of thumb given to homebuyers is to expect to pay 2%-6% of the loan amount in closing costs. But, because many of the fees you pay are fixed, someone with a small loan amount will pay proportionally more during the closing process.
Small-dollar loans also have higher application rejection rates across all of the major conventional and government-backed loan types, including FHA loans and VA loans.
Where and how to get a small mortgage loan
It can be frustrating to find and qualify for small mortgage loans, especially if you don’t know how to shop for them. Here are some tips for finding the loan you need.
Where to find a small mortgage loan
- Local banks and credit unions. Start your search with local banks and credit unions. These sorts of financial institutions may be more willing to make small mortgages in an effort to make homeownership more accessible.
- Nonprofits that partner with lenders. As the connection between a lack of small-dollar loans and socio-economic inequality has gained recognition, nonprofits have begun to create programs that offer these loans in their local communities.
- Portfolio lenders. Loans held by the lender, known as “portfolio loans,” don’t have to abide by the rules set by Fannie Mae and Freddie Mac because they won’t be sold on the secondary mortgage market. This gives them more flexibility to set their own terms and loan limits.
Steps to get a small mortgage loan
- Research local mortgage lenders. If you find a lender that offers small-dollar loans, don’t forget to do your due diligence. Check lender reviews to ensure they are in good standing and don’t have a history of complaints.
- Compare multiple quotes. Compare the mortgage offers of at least three to five lenders, including the loan terms, interest rates and estimated fees. Ask questions to get a feel for each lender.
- Find a real estate agent. Talk to a few real estate agents before committing to working with anyone, but focus on finding an agent experienced with lower-priced homes who can help you narrow down your search to the right areas.
Pros and cons of small mortgage loans
Keep the following benefits and drawbacks in mind if you’re considering a small mortgage loan to buy a less-expensive home.
Your down payment is lower. Getting a small mortgage loan means you’ll pay a lower minimum down payment. For example, if you buy a $90,000 home and qualify for a conventional mortgage, 3% down would be $2,700. By contrast, 3% down on a $200,000 home is $6,000.
Your monthly payments are lower. You’ll borrow less with a small mortgage loan. That means your monthly mortgage payments will also be lower.
You can pay off your mortgage faster. If you have some extra disposable income to dedicate to your payments each month, you can pay off your mortgage faster than your repayment term calls for.
You’ll pay less in interest. Since you’re borrowing less money, you’ll pay far less in interest than you would on a more expensive home.
You’ll have fewer for-sale homes to choose from. As previously mentioned, lower-priced homes are harder to find, especially when you’re competing with real estate investors who can afford to offer cash up front.
You may have a higher mortgage rate. Because lenders won’t make as much money on a small mortgage loan, they typically charge a higher mortgage rate to compensate for the limited profit.
Your probability of competing with cash buyers is higher. The lower price makes it easier for real estate investors or house flippers to swoop in with cash. In fact, the vast majority of small-dollar homes aren’t purchased with a mortgage at all, and only 57% of people buying this type of home will use it as a primary residence.
Your closing costs may be higher than expected. Your closing costs may be higher, as a percentage of your loan amount, because lenders have a minimum fee they charge no matter the size of the loan.
Alternatives to a small mortgage loan
It’s possible to find small mortgage loans, but it also pays to consider other options. Here are some alternatives to consider when looking to finance a home under $100,000.
→ Hard money loans. These loans typically have higher interest rates and shorter terms than mortgages, but you can get them fast and without a credit check.
→ Personal loans. An unsecured personal loan won’t leave you vulnerable to foreclosure because it doesn’t require that you use your home as collateral. You will likely have to pay a higher interest rate, but on a small-dollar loan, this might not add to the total cost of the loan nearly as substantially as it would with a traditional mortgage.
→ Rent-to-own. They may be a little harder to find in today’s hot housing market, but rent-to-own deals can allow renters to work towards homeownership, even if they don’t have the cash to buy right now.