Not everyone sets out to buy a $500,000 house. In fact, the vast majority of homes sold are between $100,000 and $250,000 in value. If you’re on the low end of that price range or even below it, getting a mortgage may be surprisingly difficult, even though there are plenty of homes purchased in the five-figure range. If you’re buying a smaller house, a home in a small town, a duplex or a mobile home, you may not need a six-figure mortgage to make the purchase. Fortunately, there are some things you can do if you’re having trouble finding a lender who will issue such a mortgage.
TL;DR (Too Long; Didn't Read)
There is no legally mandated mortgage minimum, but homebuyers may have trouble getting loans for less than $50,000.
Minimum Mortgage Amount
There is no federally mandated minimum for mortgage loans. A lender could issue a loan for a dollar if it chose to do so. With that said, though, lenders also have the right to set a minimum for the loans they’ll consider issuing. This will mostly apply to you if you’re below $50,000. Bank of America has a minimum mortgage amount of $25,000, while SunTrust Bank sets its minimum at $40,000. If you’re buying a manufactured home, you’ll also find that some lenders won’t issue loans for them, including Bank of America and SunTrust.
A lender’s servicing costs for a loan are the same whether you’re taking out a $500,000 loan or a $10,000 one. They can bump up interest rates to compensate for this, but it still likely won’t be enough to cover the amount they’re spending. Additionally, federal regulations have made it difficult for banks to have closing costs that are considered high in proportion to the loan being issued for them, making it even more likely that a lender will set a minimum mortgage amount.
Getting a Manufactured Home Loan
The nature of the home you’re buying may also affect your ability to get a loan. This particularly applies to the manufactured homes that are the best option for some homebuyers. The problem with getting a loan for a manufactured home is that not all of these homes are considered “real estate,” which is required for a lender to see it as mortgageable. It will need to be at least 400 square feet and sit on an approved foundation. It also must be taxed as real property. In this case, you should be able to get either a conventional or government-backed loan.
Where manufactured homes can get that denied stamp is when they’re on wheels or charged fees by the Department of Motor Vehicles. In these cases, lenders tend to see them as vehicles rather than houses. You may be able to meet mortgage requirements for this type of home as long as it’s a relatively new house and you can pay 5 percent down. However, you will find that interest rates are higher when you’re asking for this type of loan. You’ll also find that the lender is more interested in the condition and age of a manufactured home, which is related to the fact that manufactured houses tend to depreciate in age, whereas standard homes usually appreciate over time.
Getting a Small Loan
If you’re looking for a small mortgage loan amount, it can be discouraging to get a no from the first few places you check. You may have assumed that going to a large corporate lender was the best choice since they regularly issue loans for homes. Whatever the situation, a rejection from one, two or even three lenders doesn’t mean you can’t get a loan for that amount.
With smaller loans, you may find that a local bank or credit union is the best option. While there are fewer of these than there once were, these lenders often have more flexibility when it comes to minimum mortgage requirements. They don’t have to meet corporate standards and worry about profit margins. Lastly, they tend to set supporting the local community as a top goal, which means you’re a name and face rather than a number. Even if you’re interested in purchasing a manufactured home, a smaller lender may be better equipped to help than corporate-owned banks.
Personal Loans for Homebuying
Although it wouldn’t be a wise idea for a large-value home mortgage, personal loans can be a viable option for a small mortgage loan amount. One downside to the personal loan option is that a mortgage loan allows you to repay over a long time period, usually 15 or 30 years. You’ll also have a harder time finding the low interest rates you’ll see with a mortgage. Lastly, you may find that you can’t tax deduct the interest you pay on a personal loan as you could for a mortgage.
For that reason, a personal loan should probably be a last resort. Finding a lender that will provide a loan for a lower dollar amount or manufactured home would put you in a better financial situation moving forward. If you have no luck locally, you may be able to locate an online lender that specializes in loans for the type of home you hope to buy.
Qualifying for a Home Loan
No matter what price range you’re looking at, there will be lender-specific mortgage requirements, many of which are the same from one financial institution to the next. For a conventional loan, you’ll need a credit score of at least 620, with some lenders requiring it to be 640 or above. You’ll also need a debt-to-income ratio of 43 percent, but you might find some lenders that require it to be 50 percent or above. You’ll need a down payment, although some lenders will let you buy a home with as little as 3 percent down. If your down payment is less than 20 percent, you’ll be on the hook for private mortgage insurance, which will mean that you’ll pay at least 0.15 percent of your loan balance in fees for PMI on an annual basis.
Many homebuyers find that an FHA loan is open to them where other loans aren’t. You can get an FHA loan with a credit score as low as 500 if you’re willing to put down 10 percent. You can get a loan with a credit score of 580 or above if you put 3.5 percent down. Debt-to-income ratios range from 31 to 43 percent, depending on whether all of your monthly debt is taken into account. Some lenders only look at front-end costs like your mortgage payment, property taxes and insurance, while others look at all of your debt.
Homebuying Assistance Programs
If you’re a first-time homebuyer and the minimum mortgage amount has you stuck, a first-time homebuyer program may be the answer. For those buying in a rural area, a USDA loan may be able to cover you. With a USDA loan, payments are fixed and no down payment is required. Veterans also have the option of a VA loan, which also requires no down payment. Lenders may also steer you toward government-sponsored programs like Fannie Mae or Freddie Mac. However, if you simply want a smaller house, these loans won’t help unless the lender is willing to issue a loan for that amount.
These types of assistance programs are precisely why people seek out a small mortgage loan amount in the first place. While taking part in a neighborhood revitalization program, a homebuyer may find a great opportunity to purchase an affordable property, only to be denied a mortgage for that amount. With so many lenders competing for consumer dollars, though, homebuyers should be able to shop around and find someone who will take on the loan.
- LendingTree: Why It Can Be Difficult to Get Small Mortgage Loans
- The Mortgage Reports: Getting a Loan on a Manufactured Home
- Mymortgageinsider.com: Small Mortgage Loans: Do Lenders Do Them Any More?
- LoveToKnow: Where Can I Get a Loan to Buy a Manufactured Home?
- LendingTree: Today’s Minimum Mortgage Requirements
- Bankrate: 9 Grants and Programs to Help You Buy Your First Home
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.