How to get a small mortgage

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, which we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to herein as “Credible”.

You may want a small mortgage if you are looking for a townhouse or condominium in an affordable neighborhood. Or maybe you want to buy a single-family home in a low-cost area.

Since small mortgages aren’t as widely available as larger mortgages, you may have trouble finding lenders who offer them. We’ll tell you why, where to look and how to qualify.

Here’s what you need to know about small mortgages:

What is a small mortgage loan?

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

Point: Some lenders use the term “mini-mortgage” to refer to a home equity loan, but this article focuses on first mortgages, also known as purchase mortgages.

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

kind of house Site Purchase price Deposit Desired mortgage amount
Single parent family Houston $250,000 $150,000 $100,000
Condominium Bismarck, North Dakota $100,000 $10,000 $90,000
Townhouse philadelphia cream $75,000 $3,000 $72,000

Why small mortgages are hard to get

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

Less profit for lenders

Small mortgages are hard to get because they’re not as profitable for lenders – not because they’re necessarily riskier.

The reason they’re not as profitable is that lenders must follow the same basic procedures — like carefully underwriting each loan — and adhere to the same regulatory requirements to process most mortgages, regardless of loan amount.

Example: A major regulatory requirement is the repayment capacity rule. It limits the amount that lenders can charge borrowers in points and fees to obtain a qualified mortgage, such as a conventional or government-guaranteed loan. The cap is 3%, 5% or 8% of the loan amount, depending on the loan amount.

For example, if a lender cannot make more than $3,000 on a $100,000 mortgage, but it costs them more than $9,000 to issue the loan, issuing similar small mortgages will not be profitable.

To make small mortgages profitable, lenders can charge higher interest rates, but they are still limited to the amount they can charge under the repayment capacity rule.

Don’t miss: FHA Loans: A Complete Guide for First-Time Home Buyers

Popularity of Ineligible Mortgages

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

This gives lenders more flexibility with loan terms and allows them to decide what a borrower can afford to repay. So, if you have a non-traditional income (for example, you’re self-employed) or low credit, you may have an easier time qualifying for a non-qualifying mortgage than a qualifying mortgage.

However, this accessibility also makes non-qualified mortgages riskier for lenders and therefore non-QM loans represent only a small part of the mortgage market. Some lenders do not offer non-QM loans, and those that do may charge higher fees or interest rates to compensate for the added risk.

Compare: USDA vs. FHA Loans: Which Loan is Better?

Collateral value

Another problem is that cheaper homes are less valuable collateral.

The homes people want to buy with small mortgages may be in economically depressed areas with weak housing markets. These homes are more likely to lose value and not be worth enough to cover the lender’s losses after foreclosure.

Minimum mortgage amount you can borrow

Mortgage lenders have different minimum mortgage amounts. You’ll probably have an easier time finding a small mortgage if you want to borrow at least $50,000.

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

Lender Minimum mortgage amount
rocket mortgage No minimum
Federal Naval Credit Union $50,000
Vermont Federal Credit Union $10,000
Carrington Mortgage Services No minimum
KeyBank No minimum
Pentagon Federal Credit Union $50,000

How to find 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 as easy.

You may be more likely to find a small mortgage at these types of institutions:

  • credit unions
  • Small community banks
  • Community Development Financial Institutions

Credit unions can be a good place to start when shopping for small mortgages. Since they are non-profit organizations, credit unions can be more flexible with whom they lend and offer options that are better suited to low- and middle-income homebuyers.

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

Credible can help you find a good mortgage rate on a conventional loan. Within minutes, you can see pre-qualified rates from all of our partner lenders. Checking rates with us is free and secure – and it won’t affect your credit.

Credible makes getting a mortgage easy
  • Instant simplified pre-approval: It only takes 3 minutes to see if you qualify for an instant simplified pre-approval letter, without affecting your credit.
  • We keep your data private: Compare rates from multiple lenders without your data being sold or spammed.
  • A modern approach to mortgages: Complete your mortgage online with banking integrations and automatic updates. Speak to a loan officer only if you want to.

Find Rates Now

Small Mortgage Requirements

Qualifying for a small mortgage is no different than qualifying for a standard mortgage. As always, the requirements will depend on the type of loan you are applying for as well as the lender’s guidelines.

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

Requirements vary by lender, but here are some guidelines you may need to follow:

  • Credit score: At least 500
  • Income: Planned to be stable and reliable for at least three years after closing
  • Debt to income ratio (DTI): No more than 50%
  • Deposit: At least 3.5%
Good to know: You are unlikely to qualify if you meet only the minimum requirements for each category. Lenders typically require you to offset a low credit score with a high down payment and lower DTI, for example. Having enough cash reserves to cover at least three months of mortgage payments after closing can also help you qualify.

To verify: Mortgage Closing Costs: What They Are and How to Reduce Them

Alternatives to Small Mortgages

If you are unable to find a small mortgage, you may want to consider one of these options. However, they all have significant downsides 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, existing debts and credit history.

Although personal loans are not how most people buy single family homes, townhouses or condos, they are a common form of financing for mobile homes and small homes.

Personal loans generally have higher interest rates and shorter terms than mortgages, so you might be looking at a relatively high monthly payment.

Proprietary financing

With owner financing, you make payments directly to the seller of the home. 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 are well qualified.

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

Also see: What is a seller’s repossession mortgage and how does it work?

Rent with option to buy

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

A major risk of lease-purchase agreements is that if the landlord is unscrupulous or irresponsible, you can overpay for housing during the rental phase and never own the house. Again, be careful and talk to a real estate attorney if this option sounds appealing to you.

Home Equity Loan

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

Credible can help you compare mortgage rates from multiple lenders – you can see your pre-qualified rates from our partner lenders in the table below in just minutes.

Loading widget – purchase rate chart

Learn more: Private mortgage insurance (AMP): what is it and how does it work?

About the Author

Amy Fontinelle

Amy Fontinelle is an authority on mortgages and credit cards and contributes to Credible. His work has been published in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, etc.

Read more

Comments are closed.