The challenge of getting a small mortgage loan
You might think it’d be more challenging to qualify for a jumbo mortgage of say, $800,000 or more than it would be to gain approval for a smaller home loan of $100,000 or less.
But you’d be mistaken.
It can actually be more difficult to land a smaller loan for one simple reason: Many mortgage lenders don’t consider these loans to be worth their time.
The profit problem
“From a lender’s standpoint, it’s just harder to make a solid profit on a smaller loan,” said Kyle Kamrooz, co-founder of Irvine, California-based mortgage-technology company cloudvirga. “You can almost compare it to a real estate agent. You know when a realtor finds a house for you, the more expensive that house is the more commission the realtor gets. It’s kind of the same thing on the lender side.”
What does this mean for buyers trying to finance a home that costs $100,000, $90,000 or $80,000? They’ll have to do plenty of shopping with mortgage lenders if they want to find one who will originate such a small loan.
Those buyers who can’t find a mortgage lender? They can always turn to a personal loan for, say, the $60,000 they need to finance a home. The problem is that personal loans usually come with higher interest rates and less advantageous terms, Kamrooz said.
Kamrooz instead says that buyers should keep hunting for mortgage lenders that are willing to loan them a smaller dollar amount.
Finding the right home
Tom Rhodes, chief executive officer of Austin, Texas-based Sente Mortgage, said that it's not only finding a lender that's more challenging for consumers hunting for smaller mortgages.
These buyers typically face three challenges that are even more difficult to overcome, he said: First, it's not easy to find homes in many parts of the country priced under $100,000. Such homes tend to be of lower quality, Rhodes said. Real estate appraisers might decide if they are in particularly rough shape that they are worth even less than their low price tags.
Say a home is on the market for $80,000, but an appraiser determines that the home is actually worth just $60,000. Lenders won't loan buyers $80,000 for that home. And if buyers are purchasing a home that is that inexpensive, the odds are high that they won't be able to make up the $20,000 shortfall with their own financial resources.
Are there any comparables?
Finally, there is the challenge of comparables, Rhodes said. Appraisers need to see what similar homes sold for in an area when they are determining what a residence is worth. Homes priced at $100,000 or lower might not have any comparables in some markets. This makes it especially difficult for appraisers to determine an accurate value for these lower-price homes.
These three additional challenges can often prove difficult to overcome, Rhodes said.
"Yes, some lenders won't loan small amounts. But you can usually do your research and spend maybe the better part of a day to find one that will," Rhodes said. "But it can take buyers the better part of nine months or more to find a suitable house that only costs $70,000, is in good enough shape and has a comparable sale for appraisers to look at."
Working locally matters
Rhodes said that the best move that consumers can take to overcome these hurdles is to work with both mortgage loan officers and real estate agents who are local.
A local agent can help consumers with the supply challenge, directing buyers toward the parts of a community in which they are more likely to find lower-priced homes that are also in good-enough shape to ease the concerns of appraisers and lenders, Rhodes said.
"You need someone with local knowledge," Rhodes said. "They will know the areas in which there is quality inventory at lower prices. Using local agents matters more than if you are looking at homes priced at $200,000 or $300,000. There are a lot more of these homes out there."
A local loan officer can help, too, Rhodes said. Buyers looking for lower-priced homes often don't have money to spare. It can then be challenging to come up with a down payment, even on a home priced at $90,000 or $80,000. A local loan officer can help these financially-strapped consumers find local down payment assistance programs. With the help of these programs, buyers can often get into a home while having to come up with far smaller down payments.
"These programs are not universal around the country," Rhodes said. "They are very local. If you are working with a lender who lives and breathes in that market, one who understands the local possibilities, you might have a better chance of getting into a home without needing as large of a down payment."
Finding a lender who cares
Kamrooz says that it's important, too, to make sure that your lender wants to take on a smaller loan. Even if a loan officer is willing to provide you financing for a $85,000 home, doesn't mean that this lender is all that excited about the job.
That might not seem to matter. But Kamrooz said that it can. If your loan is a small one, your loan officer might be tempted to provide you with less attention. Your lender might not respond to your questions as quickly as it would if you were taking out a mortgage of $300,000.
"The last thing you want is to work with a lender and then realize that the lender doesn't care too much about you," Kamrooz said. "Your lender might put your loan on the bottom of the pile. You become a lower priority than the loan of $300,000. I'd be sure to ask your lender if it really wants to take your loan. Only work with a lender who appears to really want your business."