Smallest Mortgage You Can Get: Minimum Home Loan Amount
You’d think it would be easier to get a small home loan versus a big mortgage. After all, it’s less of a financial risk for the lender. But, surprisingly, smaller loans are actually more difficult to find and even harder to qualify for.
Although it seems like this system is trying to put you into debt, mortgage lenders have good reasons to refuse small loans. In this guide, we’ll cover the answers to the following questions and more:
What loan amount qualifies as a small loan?
Why don’t many lenders offer smaller loans?
Is a small mortgage right for me?
What are the alternatives if no one will give me a small home loan?
What Is Considered A “Small” Home Loan?
It’s difficult to pinpoint an exact number. What qualifies as a low mortgage loan depends on the location and the market – in areas with more expensive property, the figure could be significantly higher. Lenders will also have varying thresholds, so you should check with your potential mortgage provider to see what their minimum loan amount is.
Generally speaking, however, a small mortgage could be anywhere from $70,000 to $100,000. According to My Mortgage Insider, loans under fifty grand accounted for just 3-4% of all mortgage loans.
Most major mortgage lenders won’t offer loans under the $50,000 mark. Lenders are used to people asking for the maximum amount they can borrow, so some might not even have an official minimum threshold. But just because a lender doesn’t advertise a floor on loan amounts, it doesn’t mean that they will engage with you and lend you the money.
Benefits Of Small Loans
It’s no surprise that small home loans come with a whole host of benefits for homeowners. Here are just a few:
You will have a lower down payment: You usually only need smaller loans if you’re buying a cheaper home. A $100,000 property at a 3% down payment is just $3,000. The down payment for a $250,000 home with the same rate will set you back $7,500.
You pay less every month: Since you’re borrowing less than a conventional loan, your monthly mortgage payments should be lower as well.
You will own your home faster: You can opt for a shorter loan term, which means that you’ll have full equity in your property much quicker than if you’d taken out a bigger or longer mortgage.
You avoid huge debt: Mortgages are one of the biggest sources of household debt. Minimizing your home loan allows you to avoid taking on more debt than you might be able to handle.
You protect your credit score: Too-high mortgage payments puts you at a higher risk of defaulting. With a small loan, you’re more likely to pay on time – protecting your credit score from the damage of a missed payment.
You can save money for other things: Less money spent on your monthly mortgage directly translates to more money for literally anything else. You’ll have more cash on hand for emergencies, home upgrades, and even little luxuries.
Disadvantages Of Small Loans
Although small home loans may seem like a big win, there are some downsides too:
You should expect higher closing costs: Closing costs tend to increase with the loan amount. Some closing costs, like origination charges, are calculated as a percentage of your total loan amount. However, because the loan is so small, the lender may need to raise other charges to turn a profit.
You’ll have a higher interest rate: At normal rates, lenders would not make a lot of money off small mortgages. They usually make up the difference by charging you a higher interest rate on your mortgage loan.
You have fewer property options to choose from: There aren’t a lot of options in the sub-$100,000 housing market unless you’re looking for property in a particularly cheap area. If you’re dead set on borrowing a small amount of money, you’ll have a much harder time finding a home for sale that fits your budget.
You will have a harder time finding a mortgage lender: The less you want to borrow, the more difficult it will be to find a mortgage lender that will accommodate you. Most won’t lend you less than $50,000, and some won’t even engage for twice that. We’ll get into the reasons that lenders don’t like small home loans in the next section.
Why Is It Harder To Get Small Mortgage Loans?
Most homeowners, if given the choice, would rather loan a small amount or buy a cheaper home. Unfortunately, many lenders won’t even give you the time of day if you’re looking to borrow less than $70,000.
Why? Because the work that goes into originating a loan is the same regardless of the amount. If you borrow a huge sum, the closing costs and interest rate often make the loan worth it. But with a smaller mortgage, your lender will be putting in a lot of time and money for very little returns.
Closing costs average out to around 2-5% of the loan amount, including around $6,000 worth of expenses that don’t change depending on the loan amount. At that rate, a small loan of $50,000 would net the lender just $1,000-2,500, putting them at a loss. Compare this to the average mortgage of $250,000, where a lender could potentially get $5,000-$12,500.
With that profit margin, it’s no surprise that many lenders are hesitant to approve a small mortgage loan.
Where To Find Small Mortgage Lenders
If you’ve decided that a small mortgage is right for you, the next challenge is to find lenders that are willing to loan you the amount you need. This is quite difficult since many lenders won’t finance a small home loan or, if they do, advertise it. Below are some tips that will hopefully make it easier for you:
Do your due diligence: Get as many leads as possible. Ask your friends and family for recommendations. Read reviews online. Talk to local banks, credit unions, and small-time lenders. The research required for small home loans requires significantly more effort than a conventional loan, so you have to be willing to put in the work.
Ask for quotes: Collect estimates from different lenders – try to get at least three to five quotes before making a final decision. Don’t be shy to ask questions, either! Lastly, make sure that your inquiries don’t result in too many credit checks. That’s a sure way to bring down your credit score, hurting your chances of qualifying for the loan.
Check with your local bank or credit union: If you’ve been banking with a local financial institution, you may be able to leverage your loyalty for a small mortgage loan.
Try a hard money lender: Hard money lenders often charge higher rates and shorter loan terms, but they’re also a lot laxer when it comes to loan floors and credit scores.
Work with a real estate agent: Real estate agents who specialize in cheaper homes may have connections with small mortgage lenders. As with your mortgage, you should shop around before signing up with an agent.
How To Qualify For Small Mortgages
Whether you’re borrowing $25,000 or $250,000, the process of evaluating a potential buyer is the same. That means that the requirements for small home loans aren’t very different from the qualifications for a conventional one.
Let’s take a look at what you’ll need:
A credit score of 620 or higher
A minimum down payment of 3% (although most conventional loans require 20% down)
A debt-to-income ratio of 45%
Steady employment and proof of income for the past 2 years
Mortgage insurance, if you have less than the 20% down payment requirement
Alternatives To Small Mortgage Loans
If you still can’t find anyone who will give you small loans, all hope is not lost. There are other ways to come up with the cash needed to purchase property, including:
Borrowing from friends and family
Taking out a home equity loan (HEL) or a home equity line of credit (HELOC)
Getting a personal loan from a bank
Funding your purchase through peer-to-peer lending platforms
Checking out neighborhood organizations that offer homeowner assistance
Although it may seem counter-intuitive, small loans are actually just as hard (if not harder) to get as conventional mortgages. Most lenders won’t approve low amounts because they don’t make as much money off it, despite putting in the same amount of time and energy into originating the loan.
If you need help loaning a small amount, Wesley Mortgage, LLC is here for you. We assist you in finding small mortgage lenders and other financing options. Contact us today to learn more!