Do lenders have minimum mortgage amounts?

August 25, 2022 - 6 min read

What’s the lowest mortgage amount you can get?

Home prices aren’t necessarily sky-high everywhere in the country. And some homeowners only need to refinance a small loan balance.

This can sometimes pose a problem. Mortgage lenders have a minimum loan amount when buying or refinancing a home. Often, the minimum mortgage amount starts around $125,000, although a few lenders might go as low as $50,000.

The good news is that minimum loan amounts are specific to each financial institution. So some are more lenient than others. In this case, it pays to shop around and find a lender willing to work with you.

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Minimum mortgage amounts

Many mortgage lenders publish their maximum loan limits. However, few publish their minimum mortgage amounts. But most — maybe all — impose one.

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It’s important to understand that minimum mortgage amounts are determined by the lender. Major loan programs — including conforming loans, FHA, VA, and USDA loans — do not impose a minimum loan amount. But individual lenders almost always set their own “floors” and may charge additional fees for small mortgage amounts that fall below their minimums.

Many lenders set their minimum mortgage amounts around $100,000, $125,000, or even $150,000. Others may be willing to go lower, accepting loan values starting around $50,000. But if you want such a small mortgage loan, you should be prepared to shop around for a lender with flexible policies.

Why do lenders have minimum mortgage amounts?

You may think the closing costs you pay on a home purchase loan or a refinance are steep. But underwriting costs borne by the lender are also considerable. And since mortgage fees are largely based on the loan amount, taking on very small loans can actually result in lenders losing money.

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According to the Mortgage Bankers Association, lenders had “production expenses” of over $10,600 per loan in the first quarter of 2022. Those ever-increasing expenses mostly comprise staff costs. But they also included rent, heat, power, office equipment, and all the other overheads every business has. As a result, the profit on each mortgage originated that quarter plummeted to just $223.

Given that most of those lending costs are fixed, small loans are bound to result in hefty losses for lenders.

Penalties for small mortgage loans

Many of the costs of originating a mortgage are fixed, such as those for underwriting and processing. However, some lenders charge borrowers a percentage of the loan amount. For a $30,000 mortgage, a one percent origination fee ($300) won’t come close to covering the lender’s costs. So you may pay several additional fees or “points” to get a smaller loan.

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Even lenders who offer smaller mortgages often penalize borrowers who want them. You might, perhaps, have to pay an extra 0.25, 0.5, or even 1.0 points on closing. (One point is equal to one percent of the loan amount, or $100 for every $10,000 borrowed.)

Keep in mind that paying a full point on a $50,000 loan costs you just $500. And all the lender is doing is trying to offset some of the loss it’s going to take originating your loan.

Small mortgage loan requirements

Aside from finding a lender willing to work with you, the size of your mortgage does not affect your eligibility. Loan requirements for each mortgage program are generally the same regardless of loan amount.

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  • Conventional mortgage: Many first-time home buyers will qualify with a credit score of 620 and a down payment amount of 3 percent. However, conventional loans require private mortgage insurance (PMI) with a down payment that is less than 20 percent. PMI can be canceled once you reach an 80% loan-to-value ratio (LTV)
  • FHA loan: Backed by the Federal Housing Administration, FHA loans require only 3.5% down and a minimum credit score as low as 580. But you’re on the hook for mortgage insurance premiums (MIP) until you refinance to a different type of mortgage, move, or pay off your loan
  • VA loan: Guaranteed by the Department of Veterans Affairs, this type of loan is only for active-duty service members and veterans. No down payment or ongoing mortgage insurance is required. Credit scores will vary by lender, but often 620
  • USDA loan: Backed by the U.S. Department of Agriculture, this type of mortgage requires no down payment and credit score eligibility is often 640. Must purchase a single-family home in a qualifying rural area

It’s not just lenders who are hit with high costs when originating low-value mortgages. Your closing costs will likely represent a much bigger proportion of your loan than they would if you were borrowing big.

That’s because many of those closing costs are fixed — or are disproportionately expensive — for small advances. Your home inspection, title search, appraisal, and some other upfront costs are all proportionately more expensive the less you’re borrowing.

All this means it’s worth running the figures for other loan options that might meet your needs better.

Where to find a small mortgage loan

Small mortgages can be offered by select lenders and local government partnerships. But you’ll need to do some digging. Here are a couple of tips on where to start your search.

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  • Investigate local lenders. Research credit unions, community banks, and online speciality lenders. In some states, lenders partner with nonprofits and government agencies to provide small mortgage loans
  • Find the right real estate agent. A real estate agent or Realtor who has experience finding lower-price homes can help you find the right lender or loan program for your situation

It’s always important to shop around for the best mortgage deal. But that’s even more true when you have a low loan amount. Since many lenders impose fees on small mortgages, you should carefully compare offers and find a lender that won’t over-charge based on its minimum mortgage amount.

Alternative small mortgage loan options

Fortunately, a standard mortgage isn’t your only home loan option. Borrowers with small mortgage amounts might be able to use one of these alternatives:

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Home equity loans and HELOCs

Home equity products come in two main flavors: home equity loans (HELs) and home equity lines of credit (HELOCs). These are both “second mortgages,” which means they sit alongside your existing, main mortgage. You can also use these loans to borrow a smaller amount if your home is already paid off.

Home equity loans tend to have fixed rates and come with costs similar to those of first mortgages — title charges, appraisal fees, etc. Home equity loan rates are also higher than those fora. first mortgage. But they don’t usually include penalties for lower loan amounts.

HELOCs usually have variable rates and their setup costs are low (or even zero), regardless of your loan amount.

Compared with first mortgages, HELs and HELOCs tend to:

  • Have only slightly higher interest rates
  • Come with lower closing costs
  • Have shorter loan terms, often 5-15 years

“For an easier experience with a small loan amount, home equity solutions are likely your best option,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. They each come with their own pros and cons, and you need to be sure you thoroughly understand those.

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Personal loans and credit cards

If you want to borrow from your equity but can’t get a refinance or home equity loan, personal loans or even credit cards can be helpful. However, these come with higher or much higher rates and can prove expensive.

They do have the advantage of not being secured by your home, so there’s less worry about foreclosure. And their relatively short lives mean you could be debt-free sooner. Just make sure you have a plan to pay down card balances quickly.

Still, when borrowing tens of thousands, a home equity product (cash-out refinance, HEL, or HELOC) is likely to offer the lowest total cost of borrowing. And, unless you’re desperate, that should be your primary focus.

Today’s mortgage rates

Savvy home buyers may like the idea of a smaller down payment amount, lower monthly mortgage payments, and owning a home faster. But finding a lender with a lower minimum mortgage amount may be difficult.

Still, by researching your local housing market and comparing rate quotes from multiple lenders, you may find the right loan program for you. Get started with the link below.

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Peter Warden
Authored By: Peter Warden
The Mortgage Reports Editor
Peter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.