Mortgage loans can be used to purchase a home, refinance an existing home loan, or for home equity lines of credit. You’d think getting a small home loan would be easier than a large mortgage. After all, it’s less of a financial risk for the lender. But, surprisingly, smaller loans are more challenging 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 not to consider 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 gives 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-balance 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 their minimum loan amount.
Generally, the average minimum mortgage loan amount is $30,000. However, a small balance mortgage could range from $25,000 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 (the average maximum mortgage loan amount is $ 300,000), so some might not even have an official minimum threshold. But just because a lender doesn’t advertise a floor on loan amounts doesn’t mean they will engage with you and lend you the money.
Benefits Of Small Loans
Unsurprisingly, small home loans come with many benefits for homeowners. Here are just a few:
- You will have a lower down payment: You usually only need smaller balance loans if you buy a cheaper home. A $100,000 property with a 3% down payment is just $3,000. The down payment for a $250,000 home with a 3% downpayment will set you back $7,500.
- You pay less every month: Since you’re borrowing less for a small home loan, your monthly mortgage payments should also be lower.
- You will own your home faster: You can opt for a shorter loan term, which means that you’ll have total equity in your property much quicker than if you’d taken out a more significant or longer-term mortgage.
- You avoid huge debt: Mortgages are one of the most significant sources of household debt. Minimizing your home loan allows you to avoid taking on more debt than you might be able to manage.
- You protect your credit score: Too-high mortgage payments put you at a higher risk of default. With a small home 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 anything else. You’ll have more cash 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 costs to turn a profit.
- You’ll have a higher interest rate: The interest rate on a mortgage loan is determined by a number of factors, including the type of loan, the borrower's credit score, and the size of the down payment. At average interest rates, lenders would not make much 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 many 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 more challenging 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. In the next section, we’ll examine why lenders don’t like small home loans.
Why Is It Harder To Get Small Mortgage Loans?
Most homeowners would borrow a small amount or buy a cheaper home if given a choice. Unfortunately, many lenders won’t even give you the time of day if you’re looking to borrow less than $50,000.
Why? Because the work that goes into originating a loan is the same regardless of the mortgage loan amount. If you borrow a considerable sum, the closing costs and interest rate often make the loan worth it for the lender. But with a smaller mortgage, your lender will put in a lot of time and money for minimal returns.
Closing costs average 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 earn $5,000-$12,500.
With that profit margin, it’s no surprise that many lenders hesitate 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 finding lenders 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 for small home loans requires significantly more effort than a larger mortgage loan, so you have to be willing to do 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, ensure that your inquiries don’t result in too many credit checks. That’s a sure way to reduce 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 laxer regarding loan floors and credit scores.
- Work with a real estate agent: Real estate agents specializing 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 the requirements for small home loans aren’t very different from the qualifications for a larger mortgage loan.
Let’s take a look at what you’ll need:
- The minimum credit score for a conventional mortgage is 620, but borrowers with lower scores may still qualify for loans with higher interest rates
- The minimum down payment for a conventional mortgage is 3%, but borrowers with lower credit scores may need to make a higher down payment.
- A debt-to-income ratio of 45% or less
- Steady employment and proof of income for the past two years
- Mortgage insurance is required for all loans with less than a 20% down payment.
- FHA, VA, or USDA mortgage loans are also great options.
Alternatives To Small Mortgage Loans
If you still can’t find anyone who will give you a small home loan, not all hope is lost. There are other ways to come up with the cash needed to purchase property, including:
- Borrowing from friends and family for your house
- 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
Conclusion
Although it may seem counter-intuitive, small loans are just as hard (if not harder) to get as larger mortgage loans. Most lenders won’t approve low loan amounts because they don’t make as much money off it, despite putting the same amount of time and energy into the loan.
Wesley Mortgage, the official mortgage provider of the Tennessee Titans, is here for you if you need help borrowing a small loan amount or need more information about mortgage rates or the borrowing process. We will assist you in exploring your mortgage loan options. Contact us today to learn more!
