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We Tell You About The Challenge of Getting a Small Mortgage

We Tell You About The Challenge of Getting a Small Mortgage

Any way you look at it, $100,000 is a lot of money. But in the world of mortgage loans, it's not much money and the low amount can make getting a loan more difficult instead of easier.

For homebuyers in rural or other low-cost areas, or people buying small vacation properties or refinancing low loan amounts, loans for less than $100,000 can be difficult to get and sometimes impossible from major lenders. There are other options, such as small lenders and credit unions, but borrowers will likely pay higher interest rates.

"Mortgages under $100,000 are difficult to get," says Adam Funk, a certified financial planner in Troy, MI. "That is about the break even point where revenues and expenses to process a loan meet. If a broker can't earn enough revenue to cover the expenses then she wouldn't do the deal."

A rookie mortgage broker might work on the deal for the experience, Funk says, or a local bank or credit union may do it with the hope of the customer using its other services. Or the banker may work on salary instead of commission, keeping expenses down.

Small loan may not cover bank's costs

"If you're looking for only a $50,000 mortgage, expect to pay a higher interest rate than published rates and plan to cover the closing costs yourself out of pocket," he says. "Figuratively speaking, there is a lot of paper to be pushed to transact a mortgage, it doesn't matter how large or small the loan amount.

Just the office and wage expenses to originate the loan might be at least $3,000, says Funk, who gives the example of a $50,000 loan at 4 percent interest earning only $2,000 per interest per year. That might not be enough to cover a bank's origination and annual administrative and compliance expenses for a loan, he says.

Government regulations limit how high of an interest rate a bank can charge, so small-loan borrowers may have to pay more closing costs out of their own pocket, Funk says. (more…)

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