How to Get a Small Mortgage Loan

How to Get a Small Mortgage Loan
Written by Publishing Team

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You may want to take out a small mortgage if you are looking for a country house or condominium in an affordable area. Or maybe you want to buy a single family home in a low cost area.

Since small mortgages are not as widely available as large mortgages, you may have trouble finding lenders that offer them. We’ll explain why, where to look, and how to qualify.

Here’s what you need to know about small mortgage loans:

What is a small mortgage loan?

A micro-mortgage loan is a home loan of less than $150,000, according to the Pew Trusts. These loans may also be referred to as mini dollar mortgages, mini mortgages, or mini mortgages.

advice: Some lenders use the term “mini-mortgage” to refer to a home equity loan, but this article is about first mortgages, also called purchase mortgages.

It’s not hard to imagine a scenario where you might want to borrow less than $150,000 to buy a home. Here are some examples:

home type Location Purchasing price push down Amount of mortgage required
one family Houston $250,000 150 thousand dollars $100,000
condominium Bismarck, North Dakota $100,000 $10,000 90 thousand dollars
Town Home Philadelphia $75,000 3000 Dollars $72,000

Why is it so hard to get small mortgages

There are several reasons why small mortgage loans are not as widely available as large home loans, but one of the biggest reasons is cost.

Less profit for lenders

Small mortgages are difficult to obtain because they are not profitable for lenders – not necessarily because they are riskier.

The reason it’s not profitable is that lenders have to follow the same basic procedures – such as carefully underwriting each loan – and meet the same regulatory requirements to process most mortgages, regardless of the loan amount.

Example: One of the main regulatory requirements is the ability to repay rule. It limits how much lenders can charge borrowers in points and fees for a qualifying mortgage, such as a conventional or government-guaranteed loan. The maximum is either 3%, 5%, or 8% of the loan amount, depending on the size of the loan.

For example, if a lender can’t earn more than $3,000 on a $100,000 mortgage, but costs the lender more than $9,000 to issue the loan, issuing similar small mortgages will be unprofitable.

To make small mortgages profitable, lenders may charge higher interest rates—but they are still limited to how much they can collect under the ability to repay rule.

do not miss: FHA Loans: A Complete Guide for First Time Homebuyers

Popular subprime mortgage

Lenders who do not want to follow these rules have an alternative. They can offer homebuyers non-qualified (non-QM) mortgages. Non-qualified mortgages do not adhere to the strict lending rules of conventional and government loans.

This gives lenders more flexibility regarding loan terms and allows them to decide what the borrower can afford. Therefore, if you have non-traditional income (for example, you were a freelancer) or have poor credit, you may have an easier time qualifying for a non-qualified mortgage than a qualified mortgage.

However, this accessibility makes nonqualified mortgages more risky for lenders, and as a result, non-QM loans are only a small part of the mortgage market. Some lenders do not offer non-QM loans, and those who do may charge higher fees or interest rates to compensate for the additional risk.

Comparing: USDA vs FHA: Which Loan Is Better?

implicit value

Another problem is that less expensive homes are less valuable collateral.

The homes that people want to buy with small mortgages may be located in low-income areas with weak housing markets. These homes are likely to lose value and not be of sufficient value to cover the lender’s losses after foreclosure.

Minimum Mortgage Amount You Can Borrow

Mortgage lenders have different amounts of the mortgage. It will probably be easier to find a small mortgage if you want to borrow at least $50,000.

Here is a sample of different lenders and their minimum mortgage amounts:

the lender Minimum Mortgage Amount
missile mortgage There is no minimum
Naval Federal Credit Union $50,000
Vermont Federal Credit Union $10,000
Carrington Mortgage Services There is no minimum
KeyBank There is no minimum
Federal Credit Union Pentagon $50,000

How to get a small mortgage

Lenders often list the maximum amount you can borrow to buy a home on their website, but finding a lender’s minimum mortgage amount isn’t easy.

You may have a better chance of finding a small mortgage at these types of institutions:

  • credit unions
  • small community banks
  • Financial institutions for community development

Credit unions can be a good place to start when shopping for small mortgages. Because they are not-for-profit organizations, credit unions can be more flexible with who they lend to and offer more consistent options for low- and middle-income homebuyers.

Small community banks have an incentive to offer small, traditional mortgages because the Community Reinvestment Act requires them to meet the needs of the areas they serve. Meanwhile, community development financial institutions are exempted from the repayment capacity base.

Credibility can help you find a great mortgage rate on a conventional loan. In a few minutes, you can see pre-qualified rates from all partner lenders. Checking rates with us is free and secure – and it won’t affect your balance.

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Small Mortgage Requirements

Qualifying for a small mortgage is not the same as qualifying for a standard mortgage. As always, the requirements will depend on the type of loan you are applying for as well as the specific guidelines of the lender.

The main difference is that if you are applying for a small mortgage, there is a higher chance of applying for a non-qualified mortgage. And when it comes to non-qualified mortgages, not all of the usual borrower requirements apply, so lender guidelines become even more important.

Requirements vary for different lenders, but here are some guidelines you may need to meet:

  • Balance level: at least 500
  • Enter: Expected to be stable and reliable for at least three years after closing
  • Debt to Income Ratio (DTI): no more than 50%
  • down payment: at least 3.5%
Good to know: You are not likely to qualify if you meet only the minimum requirements for each category. Lenders typically require you to compensate for a lower credit score with a higher down payment and a lower DTI, for example. Having enough cash reserves to cover at least three months of mortgage payments after closing can also help you qualify.

paying off: Mortgage closing costs: what they are and how to reduce them

Small Mortgage Alternatives

If you can’t find a small mortgage, you can consider one of these options. However, they all have major drawbacks to buying a home.

personal loan

Personal loans are available in almost any amount, depending on the lender and what you can afford based on your income, current debt, and credit history.

While personal loans are not the way most people buy single-family homes, cottages, or apartments, they are a common form of financing for mobile homes and tiny homes.

Personal loans usually have higher interest rates and a shorter term than mortgages, so you may be looking for a relatively high monthly payment.

owner financing

With landlord financing, you make payments directly to the home seller. You might be interested in this option if you don’t have good credit or enough money for a down payment – or if you can’t get a small enough mortgage even if you qualify well.

If you don’t know much about the legalities and risks involved in buying a home this way, you can easily take advantage of it. Make sure to hire an experienced real estate attorney if you decide to go this route.

See also: What is a supplier mortgage and how does it work?

rent to own

Lease-to-own arrangements allow you to rent a home with the option or requirement to buy it after a few years. They share the same appeal as owner financing, along with similar drawbacks.

One of the main risks of rent-to-own arrangements is that if your landlord is unscrupulous or irresponsible, you can overpay for housing during the rental phase and you will never end up owning the home. Again, proceed with caution and speak to a real estate attorney if this option seems tempting to you.

home equity loan

If you already own a home and have a lot of equity, you may be able to use a equity loan to buy an inexpensive second home that you can’t get a small enough mortgage. Your lender may waive closing costs.

Learn more: Private Mortgage Insurance (PMI): What it is and how it works

About the author

Amy Vinyl

Amy Vinyl

Amy Fontinelle is a mortgage and credit card authority and contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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