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Is It More Difficult to Get a Small Mortgage Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Homeownership has long been a pillar of the proverbial American dream, but that goal can be more difficult for lower- and middle-income Americans to reach if they lack the savings or credit score necessary to secure a mortgage loan.There’s another obstacle that’s mentioned less often — to finance a lower-cost home, potential buyers have to find lenders inclined to offer a smaller mortgage loan. And fewer lenders are willing to do that because there’s less profit to be made.

In 2017, the U.S. average for new mortgage balances was $260,386, but in many rural, mid-sized and inner-city urban communities, homes under $100,000 make up a large share of the area’s housing stock. Mobile and manufactured home prices also fall within this range.

That means many Americans are in the market for less-expensive homes while lacking the funding to buy them. But there are still options available for potential buyers looking to secure a smaller mortgage loan.

The basics of getting a small mortgage loan

The Urban Institute, a nonpartisan, nonprofit research firm, defines a small mortgage loan as anything lower than $70,000 in its April 2018 report on small mortgages for single-family residential properties. It noted that of the single-family homes sold in the U.S. in 2015, just 643,000, or 14%, were $70,000 or less. A little over one quarter of those sales were financed with a traditional mortgage loan.

“Many first-time homebuyers and low- and middle-income (LMI) families rely on low-cost properties to move from renting to owning a home,” the study authors wrote. “Low-cost properties remain largely inaccessible to LMI households because traditional mortgage financing is too difficult to obtain on these properties.”

A list of major lenders who offered small mortgage loans as of May 30, 2018 can be found here. Chase offered a minimum mortgage of $10,000, while Bank of America and KeyBank offered a $25,000 minimum loan.

Potential buyers interested in mobile or manufactured loans also have difficulty finding traditional financing, and the Urban Institute report noted that many turn to costlier options, such as a personal loan, to finance the purchase. The 2017 average sales price of a new manufactured home was $70,600, according to the Manufactured Housing Institute. Government-run programs specifically for manufactured homes do exist, including those offered by Fannie Mae and Freddie Mac, the U.S. Department of Agriculture (USDA), the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA).

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Benefits of having a small mortgage

The most noticeable benefits of a small mortgage are lower monthly payments and modest down payments. To buy a $60,000 home, for example, a potential buyer could secure a loan requiring a 3% down payment, or $1,800. Lower out-of-pocket costs at closing can make the difference for those considering owning versus renting.

Low monthly payments can also make it easier for homeowners to pay an additional amount each month to pay down principal more quickly. In regions with a lower overall cost of living, securing a smaller mortgage for a low-cost home could be a great long-term investment.

Drawbacks of having a small mortgage

It can be difficult to find a mortgage lender open to funding smaller loan amounts because servicing costs are the same across the board and a smaller loan offers less opportunity for profit. A lender will often charge a higher interest rate for a smaller mortgage loan, which increases monthly payment costs for homeowners.

The Urban Institute report noted that after the Great Recession of 2007-2009, federal regulators placed greater scrutiny on lenders in an effort to protect lower-income buyers from predatory lending practices such as issuing high closing costs and rolling them into smaller mortgage loans to make the transaction more profitable. While that might protect homeowners from nonpayment and eventual foreclosure, it also makes it less likely for lenders to be interested in issuing small mortgage loans at all.

The Urban Institute report said that lenders might also be wary of offering small mortgage loans because of local market conditions, as many low-cost homes are in economically distressed rural and urban areas. In turn, borrowers seeking them might be more subject to income fluctuations, leading to difficulty in making their monthly payments.

The condition of an area’s residential housing stock, the gap between a property’s appraisal and the value required for loan underwriting, along with competition from investors who can pay for a low-cost home in cash can contribute to a dearth of small-dollar mortgage opportunities for properties that a purchaser wants to buy as his or her primary residence.

Why is it so hard to get a small mortgage?

“Lenders have to incur all of the operational costs of generating a mortgage regardless of its size,” said LendingTree chief economist Tendayi Kapfidze. LendingTree is the parent company of MagnifyMoney.

In addition to facing lower profits for smaller mortgages, lenders also tend to be wary of issuing loans that have an increased risk of default, considering many low-cost homes are located in areas where buyer incomes are more likely to be hurt by market and employment downturns.

Kapfidze advises potential homeowners to consider multiple options, as institutions have varying lending practices regarding smaller loans. Private lenders, from national institutions to local community banks, are introducing more small-mortgage options, and credit unions are often likely to offer them as well because they’re more likely to know their members and their unique financial situations.

“Shop around and find a lender who’s willing to work with your and your specific case,” he said.

What are the borrower qualifications?

Most of the qualifications necessary for a small mortgage loan are similar to those for larger loans over $100,000.

Here are some points to consider:

  1. Credit score: The higher your score, the better your chance of landing a smaller loan at a competitive interest rate. Higher scores signal less risk to lenders.
  2. Loan type: Do you qualify for a conventional loan? Or is an FHA loan a better choice? Some state programs for first-time or lower-income homeowners could also provide affordable options. Talk to a lender to learn more about your options and how you can qualify.
  3. Down payments: Can you secure the upfront funds needed for the loan? That might be easier with a small mortgage loan, as the minimum down payment for an FHA loan is 3.5% and other federal and state-based lending products exist that offer low down payments for potential homeowners. Even private lenders are rolling out low down payment loans with a minimum of 3% down.
  4. Homebuying programs: You might not have to worry about gathering funds for a down payment at all if you qualify for one of a growing number of homebuying programs available on a local, state or national level. These programs can help you secure the funds needed for a down payment and closing costs. Also, consider a USDA loan if you are looking for a mortgage in an area defined as rural by the agency.
  5. Get an agent: A good real estate agent can help you navigate the process. Find an agent who is experienced with low-priced homes in your community and can connect you with lenders who can help you secure the loan you need for purchase.

Conclusion

Yes, you can still get a small mortgage, and lenders both large and small do offer loans under $70,000 for potential buyers. Some go as low as $10,000.

The process of securing a smaller loan might be more challenging, however, as lenders are less likely to issue them because the costs involved are the same as with larger loans — meaning less profit for the lender. Smaller mortgage loans also are seen as being at greater risk for nonpayment.

A good credit rating, a helpful real estate agent and a willingness to shop around for the best lending deal can go a long way toward securing a small mortgage loan. Do your research and make the process work for you.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Shannon Shelton Miller
Shannon Shelton Miller |

Shannon Shelton Miller is a writer at MagnifyMoney. You can email Shannon here

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Top Tax Benefits for Home Buyers

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The Tax Cuts and Jobs Act of 2017 launched the most significant overhaul of the U.S. tax code in three decades. With the new law placing caps on home-related and other itemized deductions, while increasing the standard deduction across filing statuses, many homeowners could see a major shift in the way they prepare their tax returns this year.

It’s a good time for a refresher course on what to expect under the new regulations, which took effect for the 2018 tax year and will remain in place through the 2025 tax year.

Among the biggest changes for homeowners include the $10,000 cap on property-tax deductions and the elimination of many second-mortgage/home equity loan interest deductions. In turn, the standard deduction amount has increased, moving to $24,000 for joint filers (up from $12,700), $18,000 for head-of-household filers (up from $9,350) and $12,000 for single filers (up from $6,350). An additional standard deduction of $1,300 is available for elderly and blind taxpayers, a deduction that increases to $1,600 if the taxpayer’s filing status is single.

“Your overall itemizations have to be greater than the standard deduction to make it worthwhile,” said Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney. “A lot of people will likely switch from itemization to just taking the standard deduction under the new tax regulations.”

And for those looking to buy in the next few years, the new tax code could make owning a home less appealing for some middle-income buyers who don’t qualify for assistance programs geared toward the lowest-income buyers. Without the ability to deduct all mortgage interest and property taxes on one’s tax return, renting might become the more affordable option.

“I think for buyers right on the margin, if you compare the cost of renting to owning, this could push them more in favor of renting for the time being,” Kapfidze said. “Without the itemized deductions, you’ll incur the full cost of the mortgage.”

Read below for a guide to the new tax law and how it can affect current homeowners and those considering buying a home in the next few years.

Mortgage interest deduction

Long touted as a benefit of homeownership, mortgage interest deductions give homeowners the opportunity to lower their taxable income by writing off the amount of interest paid on the mortgage for their primary residence and in certain cases, a second home. The ability to deduct mortgage interest is often mentioned to renters as an incentive for buying because rental payments cannot be written off and do not decrease taxable income.

Effective in tax year 2018, taxpayers can deduct interest on no more than $750,000 in qualified residence loans used to buy, construct or complete major improvements to a primary residence and a second home, if applicable. This is a decrease from the previous limit of $1 million. For married taxpayers filing separately, the new limit is $375,000, compared with the previous limit of $500,000. This regulation applies to loans taken out after Dec. 16, 2017, through the 2025 tax year; older loans are grandfathered in under the past rules.

While most homeowners won’t be affected by this shift, as the average monthly mortgage payment nationally is about $1,029, the rule change for second-mortgage loan deductions might have more impact.

Whether you can still deduct interest from home equity loans or second mortgages depends. Confusion reigned — and might still — when the new regulations were passed, as they appeared to wipe out the possibility of deducting any interest. An IRS memo in February 2018 clarified that taxpayers can deduct interest on a home equity loan, home equity line of credit, or HELOC, or second mortgage of up to $100,000 if that loan is used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”

Using the IRS examples, if you take out a second mortgage to build a new deck on your home, your interest would be deductible. But, if you obtained a second mortgage to pay down personal debt or gain money for another purchase, the interest would not qualify. The grandfathering rule would apply to older home equity loans/second mortgages only if the funds were used for substantial home-related improvements.

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Property-tax deduction

State and local taxes, which include property taxes, can still be deducted under the new tax code. But there are changes to the state and local taxes (SALT) deduction — under the new regulations, taxpayers are limited to $10,000 in SALT write-offs, which include the sum of real property taxes, personal property taxes and either state or local income taxes or state and local sales tax.

Homeowners in higher-tax states, which often have higher home values as well, could feel the pain on this one, as the full amount they deducted in the past could be significantly reduced. Like mortgage interest, the property-tax deduction was an itemized deduction, and more taxpayers might find that $10,000 in SALT deductions, mortgage interest and other write-offs might still be less than the new standard deduction amount — but still lower overall than the previous full total of SALT deductions, mortgage interest and other eligible write-offs.

Tax-free profits

If you make a profit from selling your home, you could exclude up to $250,000 of your capital gain from your income, or up to $500,000 if you file jointly with your spouse. Homeowners should own and have lived in the home for at least two years out of the last five prior to the sale date. You also can’t have exempted capital gains on a different home sale in the past two years.

For the joint deduction, the co-owner has to have lived in the home for at least a two-year period as well. Any sale that takes place under a year would be considered a short-term capital gain, and subject to being taxed.

In other words, the new tax law shouldn’t have much effect on your home sale. There’s also a new exemption for special circumstances — such as the death of a spouse — that gives you two years instead of one after a spouse’s death to sell a home and qualify for the full $500,000 in exemptions.

Moving expenses

Say goodbye to this deduction altogether, unless you are an active-duty member of the Armed Forces moving pursuant to a military order. Taxpayers can no longer deduct moving expenses to start a new job, while in the past, they could deduct expenses that weren’t reimbursed or prepaid by an employer.

Consider the potential change in tax-bracket status if you do accept a new job and have an employer paying for your move. Qualified moving expense reimbursements are no longer excluded from gross income and wages, and employers who pay for an employee’s move must now include those costs as part of employee income.

Other benefits

Homeowners can still take advantage of other benefits that remain unchanged by the new tax law. Those in lower income brackets could receive a state-issued Mortgage Tax Credit Certificate as part of their mortgage loan to earn up to $2,000 in tax credits per year. Unlike the mortgage interest deduction, this credit can be claimed even if you take the standardized deduction.

Mortgage insurance deductions typically have required a year-to-year renewal by Congress. The Bipartisan Budget Act of 2018, passed on Feb. 9, 2018, extended the write-off for the 2017 tax year, but no extension action has been taken at time of publication (mid-January 2019) for the 2018 tax year.

Conclusion

Most homeowners will experience changes in the way they prepare their taxes for 2018 due to the new tax-code regulations. While new mortgage-interest deduction limits shouldn’t have a significant effect on the majority of homeowners, the $10,000 cap on property-tax deductions could have a major impact.

And, with the increase in the standard deduction, it might not be worth it for many homeowners to itemize deductions at all.

As for potential homebuyers, LendingTree’s Kapfidze said that owning a home is still worth the effort in the long term, despite the lack of immediate tax benefits that made ownership more appealing than renting for many. Ironically, the loss of longstanding tax breaks across the board could indirectly encourage more Americans to buy a home for a different reason.

“It could be very beneficial if homes appreciate at a slower rate due to decreased demand and homes then become more affordable,” he said.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Shannon Shelton Miller
Shannon Shelton Miller |

Shannon Shelton Miller is a writer at MagnifyMoney. You can email Shannon here

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