Logic dictates that it’s harder to get approved for a mortgage loan when you want to borrow a lot more than what’s normally allowed. But the same can be true of small mortgage loans: If you need to finance less than $100,000, you might encounter difficulty.
Find out why getting approved for a small mortgage amount can be challenging, what criteria lenders value, minimum amounts permitted, ways to improve your odds of getting approved for a lower amount, and where to turn if you get turned down for a mortgage loan.
Why getting a small mortgage loan can be difficult
Lenders are less willing to approve mortgages involving smaller borrowed amounts, and that trend has been growing since 2004. The Urban Institute reports that between 2018 and 2021, the number of mortgage loans originated with loan amounts less than $100,000 dropped compared to loans of $100,000 or more, which increased.
And according to Pew Charitable Trusts, only about one in four properties that sold for less than $150,000 were financed using a mortgage loan from 2018 to 2021, versus 71% of higher-cost residences.
What’s behind this trend? Small mortgages simply aren’t as lucrative to lenders as larger loans. The costs of processing and servicing a loan are relatively consistent regardless of loan size — so the smaller the loan, the less profit a lender earns from the interest charged. This issue is especially pronounced in areas with high property values, where a small loan represents only a minor fraction of typical property costs.
Dennis Shirshikov, adjunct professor of economics at City University of New York, calls it “a classic case of high effort for less reward from a lender’s perspective.”
Doug Van Soest, co-founder of So Cal Home Buyers, agrees: “Low loan-to-value ratios can slam the brakes on your homeownership dreams. Lenders love juicy chunks of your property value backing their loan, meaning smaller mortgage requests often attract stricter requirements and result in getting declined.”
Another factor driving lender hesitancy: it’s more challenging to find comparable property sales. In markets where property values are generally high, locating comparable sales at lower price points becomes difficult. This scarcity of comps complicates the appraisal process and can lead to reluctance on the part of lenders to approve smaller loans due to potential inaccuracies in property valuation.
It’s about the loan amount, not the home’s worth
The struggle to obtain financing in these situations has more to do with the amount you want to borrow than the property’s value. As Shirshikov explains, “Lenders often hesitate to provide small loans not because of the home’s worth but due to the lower returns on the smaller loan amount.”
And this is true even if you plan to make a large down payment. Say you wanted to purchase a home today listed for the current national median sales price of $387,600 — a home of average size and quality, not necessarily a fixer-upper or distressed property.
If you put down $300,000, requiring only an $87,600 loan, you might still face difficulty getting that loan approved.
Minimum amounts lenders allow
While loan products often have limits on the maximum you can borrow, the minimum amounts allowed aren’t quite as clearly defined.
- Conventional loans: Most lenders set a practical minimum around $50,000, though this varies.
- FHA loans: Minimums are subject to regional variances, typically starting around $5,000 — though in practice, lender minimums tend to be higher.
- VA loans: No official minimum borrowing amount, but lenders typically set their own floor — often aligning with the conventional minimum.
- USDA loans: No official minimum, but lender preferences often result in practical minimums starting around $50,000.
Keep in mind that even if a lender has approved a loan for $50,000 or less in the past, that doesn’t guarantee your small loan request will be approved. Lenders evaluate each application individually, and eligibility criteria are subject to change.
How to improve your chances of getting small mortgage loan approval
To increase the likelihood of your small mortgage loan getting approved, it’s smart to follow best practices. Shirshikov recommends: “Offer a substantial down payment, improve and maintain a strong credit score, and demonstrate a stable income and low debt-to-income ratio. In addition, seek lenders known for flexibility such as local banks or credit unions.”
Personal finance expert Baruch Silvermann, CEO of The Smart Investor, echoes that advice: “Try talking to your own bank first. They want to keep your business, and explaining your situation to them might help. They’ll likely be more willing to assist loyal customers, especially those with higher amounts in their accounts. Banks value long-term relationships, so leverage that.”
Be sure to shop around and compare different lenders and loan programs carefully, as well. It’s also worth considering requesting a slightly higher loan amount — lenders may be more inclined to approve a marginally larger loan since it’s more profitable for them. That doesn’t mean taking on more debt than you can handle, but rather finding a balance that works for both you and the lender.
Alternatives to consider
Per Pew Charitable Trusts, when potential purchasers of lower-cost homes can’t get a small mortgage loan, they usually pursue one of three options: cancel or postpone the purchase (which usually results in renting or living with loved ones or friends), buy using cash, or resort to alternative financing options.
If you got turned down for a small conventional mortgage loan, consider applying for a government-backed FHA loan, for which the minimum loan amount may be as low as $5,000. Or, if you are an eligible veteran, military member, or surviving spouse, you may qualify for a VA loan. Alternatively, if you can purchase a home in an approved rural area, a USDA loan may be worthwhile.
Already own a home and are pursuing financing to purchase a second residence? Think about tapping your first home’s equity via a home equity loan or home equity line of credit (HELOC). The former typically charges a higher fixed rate than a mortgage loan, while the latter usually charges variable rates after an initial fixed-rate period.
A secured or unsecured personal loan can offer another viable alternative. Unsecured loans do not require collateral but charge higher interest rates and have stricter credit requirements; secured loans provide lower interest rates but require collateral (like your home) that you can lose if you default.
As Silvermann notes, “Personal loans usually offer up to $50,000, but there are some personal loan lenders who provide up to $100,000, like SoFi or LightStream. The benefits of personal loans include faster approval times and less stringent eligibility criteria, making them particularly accessible to individuals with lower credit scores. However, both secured and unsecured personal loans have higher interest rates than mortgage loans, and the maximum loan amounts may be less than you need.”
You can also try getting a loan from a hard money lender, which focuses more on the collateral you put up than your finances and credit score. Just be prepared to pay more via this option, as hard money lenders usually charge higher interest rates and offer loans with shorter terms.
Already own your home and looking to access your equity instead? Explore home equity options with Refi.com — we can help you find the right solution, whether that’s a home equity loan or HELOC.
