How To Find Small Mortgage Loans
Small mortgage loans, which are usually less than $100,000, can be hard to come by. Still, it’s possible to find small mortgage lenders if you know where to look.
We’ll walk you through how to find a small mortgage loan, what you need to qualify and why it can be difficult to get approved. We’ve also compiled a list of alternatives to help you decide which loan type is right for you and your finances.
What are small mortgage loans?
Small mortgage loans, sometimes called small-dollar mortgages, are exactly what they sound like: mortgages with small loan amounts. What qualifies as “small” can vary, but the Urban Institute, a social and economic policy research nonprofit, defines any mortgage under $100,000 as “small” mortgage. For comparison, the average loan amount for a new home in the U.S. is currently $399,879, according to data from the Mortgage Bankers Association (MBA).
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.
Where and how to get a small mortgage loan
All of the most common mortgage loan types can still work with small loan amounts. You can get conventional loans, FHA loans, VA loans and USDA loans for loan amounts less than $100,000.
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 are often more willing to originate small mortgages, especially in rural areas where housing costs are generally lower.
- Nonprofits that partner with lenders. As the connection between a lack of small-dollar loans and socioeconomic inequality has gained recognition, nonprofits have created programs that offer these loans in their local, underserved communities.
- Portfolio lenders. Loans held by the lender, also known as portfolio loans, don’t have to abide by the usual rules that guide conventional and government-backed mortgages. This gives them more flexibility to set their own terms and loan limits.
Tip: Use detailed search terms
If you’re open to living in a tiny house, a manufactured home, an RV or any other nontraditional type of housing, be sure to research loans and programs using the name of the exact sort of housing you’re considering. The Federal Housing Administration (FHA), for example, doesn’t set a minimum loan amount and offers manufactured home loans.
3 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 online to ensure they’re in good standing and don’t have a history of complaints.
- Compare multiple quotes. Compare the loan offers of at least three to five lenders, including the loan terms, interest rates and estimated fees. Don’t be afraid to ask questions — you need to get a feel for each lender.
- Find a real estate agent. Talk to a few real estate agents before committing to one. Focus on finding an agent experienced with lower-priced homes who can help you narrow down your search to the right areas.
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 13% of homes sold in a given year have a purchase price less than $100,000, according to data from the Urban Institute. Of those homes, only a third are financed with a mortgage rather than purchased with cash.
- High costs. It costs a lender more than $12,500 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 (CFPB) 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 mortgage and can’t be backed by government agencies, which in turn makes it riskier to issue.
- Disincentives. Because they’re usually paid in commissions, many key players in the mortgage process — like real estate agents and loan officers — often don’t have much incentive to work with homebuyers shopping for lower-priced homes. The larger the home price, the more these professionals stand to make.
What’s the minimum mortgage amount you can borrow?
Small mortgage lenders are free to set their own minimum mortgage amounts, 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 |
|---|---|
| PenFed Credit Union | $50,000 |
| Navy Federal Credit Union | $50,000 |
| Ally Bank | $75,000 |
| Veterans United | No set minimum |
| Chase | No set minimum |
| Rocket Mortgage | No set minimum |
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 (DTI) ratio or lower
- Proof of steady employment and income for the last two years
- Private mortgage insurance for buyers making a down payment less than 20%
Home condition
The home’s condition is often more important in qualifying for a small mortgage loan than it is for larger loans. The reason is that many homes selling for under $100,000 need significant renovations. If a home inspection uncovers that the home you’ve chosen needs a ton of rehab work to meet basic safety or soundness standards, lenders are often unwilling to approve you for a small-dollar loan.
Home condition is a major reason small-dollar loans have higher loan denial rates when compared to more traditional home loans for more than $100,000. However, that difference is most pronounced with conventional loans, which have higher rejection rates by 26 percentage points for small loans, and least pronounced with USDA loans (7 percentage points higher).
Closing costs for small mortgage loans
The closing costs on a small mortgage may add up to a higher percentage of the loan amount than is typical for mortgages in general. A common rule of thumb is for homebuyers to expect to pay 2% to 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 likely pay proportionally more during the closing process.
Pros and cons of small mortgage loans
Pros
Lower down payment. 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 $300,000 home is $9,000.
Lower monthly payments. You’ll borrow less with a small mortgage loan. That means your monthly mortgage payments will also be lower.
Quicker payoff. 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.
Lower interest costs. Since you’re borrowing less money, you’ll pay far less in interest than you would on a more expensive home.
Cons
You’ll have fewer for-sale homes to choose from. Lower-priced homes are harder to find, especially when you’re competing with real estate investors who can afford to offer cash upfront.
You may have a higher mortgage rate. Because lenders won’t make as much money on a small mortgage loan, they may 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, according to a report from the nonprofit think tank, New America. Additionally, data from the U.S. Department of Housing and Urban Development (HUD) shows that only 57% of people buying this type of home will use it as a primary residence.
Your closing costs may be higher than expected. Because lenders have a minimum fee they charge no matter the loan size, your closing costs may be higher as a percentage of your loan amount.
Alternatives to a small mortgage loan
- Renovation loans: If you’re looking to purchase a fixer-upper, but lenders are balking at financing the property as-is, you may want to consider a renovation loan. These loans allow you to roll the costs of repairs into your purchase loan.
- 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 homes: They may be a little harder to find in today’s hot housing market, but rent-to-own deals can allow renters to work toward homeownership, even if they don’t have the cash to buy right now.