December 8, 2020 – By Zach Wichter
Low mortgage interest rates have not helped all homeowners and homebuyers equally.
Facing a demand spike, many lenders have tightened qualifications for new loans, making small mortgages more difficult to get than ever. That makes it all that much harder to get financing in some inner-city and rural areas where home prices are lower.
Lenders have long shied away from extending home loans valued at less than $100,000 for a variety of reasons, but that doesn’t mean they’re impossible to get, even now.
If you’re looking to purchase or refinance a property with a small mortgage, here are some things to know and advice on how to secure your loan.
Why are small mortgages hard to get?
Small loans can be less attractive for banks because they don’t offer as much return on investment.
Mortgages take more or less the same amount of work to process, no matter their value. So, whether a bank is extending a $50,000 loan or a $500,000 one, the costs to the lender associated with processing the application are similar — but they can charge higher fees on a more-expensive loan.
“There’s simply not enough money in the deal between closing costs, attorney’s fees” and other processing expenses, said Clete Thomas, a community outreach coordinator at American Consumer Credit Counseling.
Banks are so busy now, he added, “they’re going to prioritize what they can get to, and they’ll take the larger mortgages over the smaller ones.”
What can I do if I need a small mortgage?
Your best bet is to work with a smaller lender like a credit union or local bank.
“They’re more likely to do loans that size,” Thomas said. Borrowers should also try to “go to the institution where they have their checking and savings accounts. That can help as well.”
Banks are usually a little more generous and flexible with existing customers.
If you’re looking to refinance, a home equity line of credit (HELOC) can be a good alternative to cash-out refinancing on a small mortgage.
“Banks are much more likely to do a smaller home equity line of credit,” Thomas said. “The downside to those are, it’s an adjustable rate and after 10 years, the credit line freezes and then you have to pay it back in a matter of 10 to 15 years.”
Do I have alternatives if I can’t get a mortgage?
Options like rent-to-own or owner financing can be helpful if you’re struggling to get a mortgage, but these arrangements can be complicated and wind up costing the borrower more in the long run.
“I would always advise somebody to hire an attorney before they sign that contract and make sure they read the fine print,” Thomas said.
Rent-to-own is when a company purchases the house for you, and then acts as your landlord until you save up enough to buy it from them. Part of your monthly rent will usually go toward an eventual down payment on the property. For tenants, these deals can be risky because they may wind up forfeiting that money if they don’t eventually buy the house.
Owner financing, as the name suggests, is when you deal directly with the seller for financing, rather than going through a bank. It can involve less paperwork than a traditional mortgage, but often comes with a higher interest rate.
Thomas said if you qualify for a mortgage, you’re usually better off finding a traditional lender who will work with you, rather than going with one of these other options.
How does credit fit in?
Credit affects your ability to get a mortgage generally — and your interest rate — but your score won’t make a huge difference in terms of how much mortgage you’ll qualify for.
“Either you qualify or you don’t,” Thomas said. “If you have low credit scores, FICO scores, however you want to word it, step one is to pull your credit report and take a look at whatever is causing the problem.”
Check out Bankrate’s guide for more detailed advice on how to improve your credit.
If you’re struggling to qualify for a mortgage, boosting your credit score will make it easier, no matter what size loan you’re looking to take out.
Bottom line
Amid high demand for mortgages, lenders can be pickier about which applications they accept. That favors higher-dollar borrowers, and means it may be more difficult than ever to get a small loan.
There are some ways to get a small mortgage now, but it may take some extra legwork to find a suitable lender.
If you need a mortgage for less than $100,000 and have some flexibility in your timeline, waiting may be the best idea.
Mortgage rates are expected to start rising again in the coming months, which should translate to less demand for new loans.
“As the demand slows, these will be, not necessarily more attractive to the bank, but the bank still has to lend money,” Thomas said. “Certainly, if the market slows down, these smaller mortgages would be easier to obtain. Not easy, but less difficult.”
