In this article, we will:
Home prices are not skyrocketing across the country. Furthermore, some homeowners only need to refinance a small portion of their loan balance. But, do banks and mortgage companies have a minimum loan amount that you must meet in order to buy or refinance a home?
There is no minimum mortgage amount for government-backed mortgage programs (FHA, VA, and USDA)
There is no minimum loan amount for Fannie Mae and Freddie Mac home loans.
However, mortgage lenders nearly usually impose minimum mortgage amounts and/or additional fees for lesser loans.
Many of the costs associated with mortgage origination are fixed, such as those for underwriting and processing. Most lenders, however, charge borrowers a percentage of the loan amount. A 1% origination fee ($300) won’t even come close to covering the lender’s costs on a $30,000 loan. In order to get a lower loan, you may have to pay a few extra points.
Who’s interested in minimum mortgage amounts?
“What’s the maximum amount I can borrow?” a common question in the mortgage industry.
” Anyone who asks, “What’s the smallest sum you can lend me?” is quite uncommon.
Most loan officers will respond, “We have no explicit lower limitations on new borrowing,” after recovering from the shock of such a question. You can bet your shirt that their next word will be “But,” if you can find a willing partner.
Very few lenders specify the lowest possible loan amount. The majority, if not the majority, impose one. We’ll get to the bottom of it in a moment.
Small loans make sense — for borrowers, that is
That is regrettable. Because many people want to borrow a small amount of money and pay it back over several years or decades at a very low interest rate.
Some people may want to buy in a low-priced area. It’s also easy to imagine people with small mortgage balances benefiting from such loans.
Perhaps they want to assist an adult child in obtaining a downpayment for a home. Or perhaps a family wedding is on the horizon. Perhaps they are dealing with unexpected medical bills. Or perhaps their house is showing signs of wear and tear and could benefit from some minor renovations. There is no way they want to be saddled with a $250,000 debt, which was the typical new mortgage in 2017. However, a relatively painless $30,000 or $40,000 would be extremely beneficial.
The problem is that they’d need a lot of luck to find a mortgage lender who would be prepared to lend them so much money.
Why do lenders require minimum mortgage advances?
You may believe that the closing costs on a purchase or refinance mortgage are exorbitant. However, those borne by the lender are significant as well.
In the fourth quarter of 2017, lenders had “production expenses” of $8,475 per loan, according to the Mortgage Bankers Association. Those ever-increasing expenses were mostly made up of staff costs. They did, however, include rent, heat, power, office equipment, and all of the other expenses that every business has. This resulted in a $237 profit on each mortgage that was sold throughout the quarter.
There was a time when the average mortgage was $254,291 — or $254,291 to be precise. Because the majority of those costs are fixed, small loans are bound to result in significant losses.
According to these numbers, one expert concluded that the origination fees for a $6,000 loan are independent of its size. It’s no surprise that lenders are wary of small mortgages.
In practice, what is the minimum mortgage?
Each lender is free to set any minimum for new loans and refinances. As a result, determining the lowest loan amount available is impossible.
However, you’ll be lucky to find someone willing to lend you less than $50,000. Many lenders will not work with borrowers who want twice as much, if not more. Some lenders, for example, set a $125,000 loan value as a minimum. In other words, you should expect to shop around for your small mortgage.
Penalties for unsecured loans
Even lenders who provide smaller mortgages frequently penalize borrowers who seek them. You may have to pay an additional.25,.5 or even 1.0 point at closing.
Don’t get too worked up. A full one-point payment on a $50,000 loan costs you only $500. And all the lender is doing is attempting to offset some of the loss that will be incurred in originating your loan.
When it comes to low-value mortgages, it’s not just lenders who face high costs. Closing costs will most likely account for a much larger portion of your loan than they would if you were borrowing a large sum.
Since closing fees are sometimes predetermined or disproportionately high for minor advances, this is the case. The lower your loan amount, the more expensive your home inspection, title search, appraisal, and other charges will be.
All of this suggests that it’s worthwhile to run the numbers on other types of borrowing that might better suit your needs.
Loans for home equity
Home equity products are classified into two types: home equity loans (HELs) and home equity lines of credit (HELCs) (HELOCs). They’re both types of second mortgages, which means they’ll sit alongside your primary mortgage.
Even if you don’t have a first mortgage, you can get a home equity loan.
Home equity loans are typically fixed and come with costs similar to first mortgages — title charges, appraisal fees, and so on — as well as higher interest rates than first mortgages. They do not, however, usually include penalties for lower loan amounts.
Even if you take out a HELOC for a little amount, the interest rate and set-up expenses are often low or even free.
HELs and HELOCs, in comparison to first mortgages, tend to:
- Interest rates are only marginally higher.
- Lower closing costs are included.
- Have shorter terms, typically ranging from five to fifteen years
They each have their own set of advantages and disadvantages, which you should be aware of.
Other types of borrowing
Personal loans or even credit cards can be useful for small amounts. However, these have higher or much higher rates and can be costly.
They do have the advantage of not needing to be secured on your property. Because of their short lifespans, you could be debt-free sooner. Just make sure you have a plan in place to pay off your credit card balances as soon as possible.
When borrowing thousands of dollars, a home equity product (mortgage, refinance, HEL or HELOC) is the most cost-effective option. And, unless you’re desperate, that should be your main priority.