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If you are tired of paying more rent than a mortgage on a home for a modest price, it may be time to consider a small dollar mortgage.
You may have to look around to find a lender that offers small dollar mortgages, but some work with nonprofits or create their own loan programs to help people buy homes and build personal wealth.
Here’s a closer look at small dollar mortgages and where to get one.
What is a small mortgage?
A small dollar mortgage is generally viewed as a loan of $ 100,000 or less, which is much less than the nationwide average mortgage loan amount of $ 184,700 in 2019. While these loans make up a small fraction of the total Mortgages Issued every year, they are vital for low and middle income families trying to buy a home.
Why Small Dollar Mortgages Are Hard To Get
The main reason small dollar mortgages are difficult to find and secure is because lenders make less money on them than they do on larger mortgage loans. This is enough to deter many lenders from even offering them.
Lenders incur some of the same fixed costs – about $ 7,000, according to the Mortgage Bankers Association – for processing and servicing any mortgage, whether it’s a small dollar or not Jumbo Loans. This results in a lower profit margin on small loans. Lenders also earn a smaller commission compared to larger mortgages.
If you’re buying a cheaper home and want to get a small mortgage on it, you’re likely to run into another problem as well – competing with bidders paying for everything in cash, which is much more attractive to most sellers.
Where to find a small mortgage
Small dollar mortgages are available from select lenders, as well as nonprofits and government agencies.
Banks, credit unions, and online lenders typically do not post their minimum mortgage loan amounts on their websites. However, you can expect that it will be difficult to find someone to give you home loans less than $ 50,000. Community banks and credit unions may be more likely to help as they focus on local customer service.
There are some lenders who have started programs to fill the small credit gap. For example, Key Bank, a Cleveland-based financial institution with offices in 15 states, does not have a minimum mortgage amount for its community mortgage program.
Lenders, nonprofits, and / or government agencies have begun to work together to meet small dollar mortgage needs. Some examples are:
- The Home Loan Opportunity Fund. A partnership between Pinnacle Bank and the nonprofit The Works Inc. is running a program in the Memphis area that includes a pool of $ 2 million for mortgage loans up to $ 50,000. The Works provides credit advice and lending to first-time buyers.
- MicroMortgage Marketplace. A pilot launched in 2020 by Fahe, a nonprofit mortgage lender, and the Homeownership Council of America, offers small dollar mortgages in Louisville and parts of southern Indiana. Mortgages are available under $ 100,000.
Small Dollar Mortgage Requirements
Many of the requirements for a small dollar mortgage loan are likely to be similar to traditional 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 sponsored loans can get you credit scores in the 500 range.
- A job that offers a stable income to pay off the mortgage.
- ON Debt-Income Ratio (DTI) that’s 43% or less.
- ON deposit from 10% to 20%, although some loan programs allow you to make little to no down payment.
Mortgage costs in small dollars
Depending on the program, applicants may need to be aware of these costs when applying for a small mortgage and buying a home:
- interest: Because lenders may not make as much money on a small dollar mortgage as they do on a more expensive loan, they may charge a higher interest rate.
- Closing costs: The cost may be lower than average because the loan is smaller than most and / or you are part of a program that limits fees. Regardless, be prepared to have some funds available at the time of closing or to include certain costs in the loan.
- expertise: You will likely have to pay for the appraisal, you should make sure you hire a home inspector, and you may also have to pay 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. However, the MicroMortgage program allows buyers to fund the entire loan without paying PMI.
Alternatives to Small Mortgages
- Other mortgage loan options: You may find that some programs such as Federal Housing Administration (FHA) Loans or Fannie Mae’s HomeReady program – allowing you to get a loan on a home you didn’t know you could afford. This is especially true for first-time buyers, who are often geared towards specific loan and grant programs. You might also find that condo-specific loans, such as those offered by the FHA, might be ideal.
- Private loan: You could try to finance the required amount through an unsecured one private loanbut they often require higher interest rates than a mortgage. In addition, some personal loan lenders have placed restrictions on using personal loans to finance a home purchase. So be sure to ask your lender.
- Hire purchase: This option gives you the option to use part of your monthly rent payment towards a down payment on the property and you have the option to buy the property at the end of your lease. However, this arrangement is difficult to find in a hot housing market.
Small dollar mortgages can provide an entry point into home ownership in situations where it otherwise seemed impossible. With a little research and financial preparation, you could find that there is a program in your community that works for you.