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Buying a house seems like a straightforward process. You find the right place and get a mortgage loan to make a purchase. However, in various regions, home prices are too low to apply for traditional home loans. This is where small-dollar mortgage loans come into the picture.
Definition of Small-Dollar Mortgage Loans
Any home loan under $100,000 is considered to be small-dollar mortgages. As per the National Association of Realtors report*, in the year 2019, less than 10 percent of all single-family or condominium purchases in the USA were for less than $100,000. Most of the lenders have a minimum mortgage amount that they can make. This is because the cost of making the loan available at those prices outweighs the profit they can make from the fees and the interest.
Small Mortgage Lenders
Those looking for homes in the low price range should turn to state or local lenders to offer the best financing solutions. For instance, in Louisville, the number of small-dollar housing loans doubled the national average in 2019. State-sponsored affordable housing scheme triggered the demand for small-dollar loans. Kentucky Housing Corporation contributed 224 small-dollar mortgages, whereas other lenders accounted for about 157 loans. Small-dollar home loans are better handled by state agencies, small lenders, and credit unions. This is because they either keep funding local or have government subsidies.
Small Dollar Loan Requirements
Most of the loan requirements of traditional home loans** apply to smaller housing loans as well. This could include a minimum of 3 percent down payment, a high credit score of 620 or above, proof of stable income, and others. A 45% debt to income ratio or lower is also a requirement of many lenders. As these loans are much smaller, the monthly payments and down payment amount are significantly low.
However, the borrowers must be aware that the home loan interest rates could be significantly higher than you come across in traditional loans. This helps compensate the lenders for the low profits that they make via such loans. Also, the closing costs could be significantly higher than expected as many lenders charge minimum fees regardless of the size of the loan.
What’s the Minimum Mortgage Amount that could be Borrowed?
Several lenders charge a minimum mortgage amount that you can discuss with them. It generally varies from $25,000-$50,000, depending on the provider.
Tips on how to find a Small Mortgage Loan
It is quite challenging to find and get qualified for small dollar mortgage loans. There are various reasons associated with this. The primary reason is that buyers financing a home purchase face tough competition from real estate investors. They can make a cash payment to the buyer in one go. Also, lenders receive a low return from smaller loans and are not keen on offering small mortgage loans.
Here are some tips that will help you find small home loan lenders with much ease.
Look for local mortgage lenders
You can check out credit unions, community banks, and private lenders for small-dollar mortgage loans. You can also ask your colleagues, friends, or family members for recommendations. Research online and check reviews of lenders before choosing anyone. Make sure that they have good reviews and provide good service. Stay away from those who have a long history of complaints.
Compare multiple quotes
You need to compare mortgage offers from at least three to five lenders, including their estimated fees, interest rates, and loan terms. Feel free to speak to them and ask questions if you have any.
Find a real estate agent
You can also speak to a few real estate agents before committing to them. Find an agent who has expertise in selling low-priced homes and can help you narrow down your search with much ease.
Pros and cons of Small Mortgage Loans
There are both positives and negatives of opting for small mortgage loans.
Pros
The down payment amount is significantly lower – Opting for a small mortgage loan implies that you will be paying a low down payment. For instance, if you have taken a $90,000 loan, then the minimum down payment amount would be just $2,700.
Your monthly payments are lower – when you are borrowing a less amount, your monthly payments will be lower.
You can pay the mortgage quickly – if you have any extra income that you can dispose of towards payments, you can pay off the mortgage faster than you intend to.
Cons
Closing costs may be higher – As lenders charge a minimum fee over small-dollar mortgage loans and do not make much profit them, the closing costs could be significantly higher than you expect.
You will have fewer options to choose from – It is difficult to find low-priced homes as you compete with the real estate investors who can pay cash upfront.