April 20, 2021

How To Get A Small-Dollar Mortgage

Bob Musinski READ TIME: 4 MIN.

If you're tired of paying more in rent than you would on a mortgage for a modestly priced home, it might be time to look into a small-dollar mortgage.

You may have to shop around to find a lender that offers small-dollar mortgages, but some partner with nonprofits or create their own loan programs to help people attain homeownership and build personal wealth.

Here's a closer look at small-dollar mortgages and where you can get one.

What Is a Small Mortgage?

A small-dollar mortgage is generally considered to be a loan of $100,000 or less, which is much lower than the national average mortgage loan amount of $184,700 in 2019. While these loans are a small share of the overall number of mortgages issued each year, they are vital to low- and middle-income families who are trying to buy a home.

Why Small-dollar Mortgages Are Hard to Get

The primary reason small-dollar mortgages are difficult to find and secure is that lenders make less money on them than they would on larger mortgage loans. This is enough to keep many lenders from offering them at all.

Lenders incur some of the same fixed costs – about $7,000, according to the Mortgage Bankers Association – for processing and servicing every mortgage, whether it's a small-dollar or jumbo loan. That results in a smaller profit margin on small-dollar loans. Lenders also earn a smaller commission compared to larger mortgages.

If you want to buy a lower-priced home and finance it with a small-dollar mortgage, it's likely you'll also encounter another problem – competing with bidders who pay all in cash, which is much more attractive to most sellers.

Where to Find a Small-dollar Mortgage

Small-dollar mortgages are available at select lenders, as well as through nonprofits and government agencies.

Traditional Lenders

Banks, credit unions and online lenders don't usually disclose their minimum mortgage amounts on their websites, but you can assume it will be difficult to find anyone who will give you less than a $50,000 housing loan. Community banks and credit unions might be more likely to help because of their focus on local customer service.

There are a few lenders that have started programs to address the small-dollar loan gap. For example, Key Bank, a Cleveland-based financial institution with branches in 15 states, has no minimum mortgage amount for its Community Mortgage Program.

Partnerships

Lenders, nonprofits and/or governmental agencies have started working together to fill the need for small-dollar mortgages. A couple of examples include:

  • The Home Loan Opportunity Fund. A partnership between Pinnacle Bank and nonprofit organization, The Works Inc., runs a program in the Memphis area that has a pool of $2 million for mortgage loans up to $50,000. The Works provides first-time homebuyers with credit counseling and loan origination.
  • MicroMortgage Marketplace. A pilot project launched in 2020 by Fahe, a nonprofit mortgage lender, and the Homeownership Council of America provides small-dollar mortgages in Louisville and parts of Southern Indiana. Mortgages are available under $100,000.

    Small-dollar Mortgage Requirements

    Many requirements for small-dollar mortgages are likely similar to conventional loans, such as:

  • A credit score of at least 620, although your interest rate will be better if your score is at least 760. Some government-backed loans will allow you to have a credit score in the 500 range.
  • A job that provides a steady income to pay for the mortgage.
  • A debt-to-income (DTI) ratio that is 43% or lower.
  • A down payment of 10% to 20%, although some loan programs will allow you to make little to no down payment.

    Small-dollar Mortgage Costs

    Depending on the program, applicants need to watch for these expenses when applying for a small-dollar mortgage and buying a home:

  • Interest rates: Because lenders might not make as much money on a small-dollar mortgage as they would on a more expensive loan, they might charge a higher interest rate.
  • Closing costs: It's possible costs could be lower than average because the loan is smaller than most and/or you're part of a program that limits fees. Regardless, prepare to have some funds at closing or to roll certain costs into the loan.
  • Expertise: You'll likely need to pay for the appraisal, you'll want to make sure you hire a home inspector and you might also need to foot the bill for a real estate attorney.
  • Mortgage insurance: If you don't have a 20% down payment, lenders usually charge private mortgage insurance (PMI) as part of the monthly mortgage payment. In the MicroMortgage program, however, buyers can finance the entire loan without paying PMI.

    Alternatives to Small Mortgages

  • Other mortgage loan options: You might find that some programs–such as Federal Housing Administration (FHA) loans or Fannie Mae's HomeReady program–will allow you to get a loan on a house you didn't know you could afford. This is especially true for first-time homebuyers who are often targeted for special loan and grant programs. You might also find that condo-specific loans, such as ones the FHA offers, might be ideal.
  • Personal loan: You could try to finance the amount you need through an unsecured personal loan, but they often require higher interest rates than a mortgage. What's more, some personal loan lenders set restrictions on using personal loan funds to finance the purchase of a home, so be sure to check with your lender.
  • Rent-to-own: This option gives you a chance to put some of your monthly rent payment toward a down payment on the property, and you'll have the option to buy the property at the end of your lease. However, this arrangement is hard to find in a hot housing market.

    Bottom Line

    Small-dollar mortgages can offer an entry point into a lifetime of homeownership in situations where it didn't seem possible otherwise. With a little research and financial preparation, you might find that there is a program that works for you in your community.

    by Bob Musinski

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