The Challenge of Getting a Small Mortgage
Any way you look at it, $100,000 is a lot of money. But in the world of mortgage loans, it's not much money and the low amount can make getting a loan more difficult instead of easier.
For homebuyers in rural or other low-cost areas, or people buying small vacation properties or refinancing low loan amounts, loans for less than $100,000 can be difficult to get and sometimes impossible from major lenders. There are other options, such as small lenders and credit unions, but borrowers will likely pay higher interest rates.
"Mortgages under $100,000 are difficult to get," says Adam Funk, a certified financial planner in Troy, MI. "That is about the break even point where revenues and expenses to process a loan meet. If a broker can't earn enough revenue to cover the expenses then she wouldn't do the deal."
A rookie mortgage broker might work on the deal for the experience, Funk says, or a local bank or credit union may do it with the hope of the customer using its other services. Or the banker may work on salary instead of commission, keeping expenses down.
Small loan may not cover bank's costs
"If you're looking for only a $50,000 mortgage, expect to pay a higher interest rate than published rates and plan to cover the closing costs yourself out of pocket," he says. "Figuratively speaking, there is a lot of paper to be pushed to transact a mortgage, it doesn't matter how large or small the loan amount.
Just the office and wage expenses to originate the loan might be at least $3,000, says Funk, who gives the example of a $50,000 loan at 4 percent interest earning only $2,000 per interest per year. That might not be enough to cover a bank's origination and annual administrative and compliance expenses for a loan, he says.
Government regulations limit how high of an interest rate a bank can charge, so small-loan borrowers may have to pay more closing costs out of their own pocket, Funk says. That could make consumers balk at such a large expense on an inexpensive house.
There's also the factor that people buying $50,000 homes often have relatively high risk factors, he says. These include lower credit scores, less income, less emergency savings and less collateral value on the house.
Another difficulty: High loan costs
Some states have high cost loan provisions that don't allow a loan if the costs of the loan are high. The loan provisions are based on percentages, not the dollar amount, so a loan for $50,000 or less would likely hit the allowable percentage provisions, says Josh Moffitt, president of Silverton Mortgage Specialists in Atlanta.
For example, a $400 appraisal for a $40,000 loan equates to 1 percent of the loan amount as a cost. If a state has a 3 percent "high cost" provision, a lender wouldn't be able to offer the loan because the costs would go over the allowable 3 percent.
"A number of the costs associated with getting a loan are fixed and don't vary with size, so as a percentage, they can add up quickly," Moffitt says.
Those loan provisions can be tougher than the Qualified Mortgage rules that the federal government put into place in 2014. Among other things, the QM rules require lenders to make sure borrowers have the financial ability to pay back their mortgage loans on time.
The QM rules actually make small loans of $60,000 to $100,000 easier to get now through Fannie Mae than they were before the rules took effect, says Brian Seligmiller, vice president of retail development at MiMutual Mortgage in Phoenix, Ariz. Fannie Mae used to have a 5 percent cap on mortgage fees for that loan range, but they're now capped at the dollar amount of $3,000 instead of a percentage, Seligmiller says.
The rules are meant to make it a little easier for lenders to remain competitive, especially in underserved areas, he says.
Options for borrowers
Other than going to a small bank or credit union and likely paying a higher interest rate on a small loan, borrowers could get an unsecured personal loan that doesn't require collateral. This is done with loans for tiny houses, for example. The loans are based on a customer's credit history and ability to repay, and the lender doesn't care how the money is used.
Lighstream, the online consumer lending division of SunTrust Bank, provides unsecured, fixed rate loans for people with good credit for loans of $5,000 to $100,000 for tiny houses. Terms are for 24 to 84 months and there are no fees.
MiMutual Mortgage in Phoenix, offers home loans for as low as $40,000, says Seligmiller, who adds that the interest rate for small loans isn't as big as people may think it is. A $75,000 loan can have an interest rate that's 0.25 percent higher than a higher loan amount, he says.
Loans below $60,000, he says, are more difficult to get approved for.
Another option for borrowers who want a small loan is to buy a condominium, mainly for the simple reason that they may be cheaper than homes. "Condos are not any easier," Seligmiller says.
Richard Kelleher , a marketing sociologist in Phoenix, bought a townhome in 1994 for $28,000 after putting down 20 percent and paying four points on the small loan - double what he says he would have paid on a larger loan. It wasn't an FHA loan but a traditional loan through Wells Fargo. He got the loan with some help from his real estate agent, and Kelleher's impeccable credit, he says.
After refinancing his 8 percent mortgage years ago, Kelleher has a $22,000 mortgage with monthly payments lower than his homeowner association fees. The refis were done after he was contacted by Wells Fargo. He's looking to sell it, giving another borrower the chance to search for a mortgage loan that will likely have low monthly payments but may still be hard to find.