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Updated on Wednesday, February 6, 2019
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.
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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).
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:
- 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.
- 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.
- 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.
- 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.
- 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.
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 your best lending deal can go a long way toward securing a small mortgage loan. Do your research and make the process work for you.