If you’re thinking of diving into this fast-paced housing market, you must first cross the hurdle of getting pre-approved for a mortgage. How much you can borrow is determined not only on an individual level (creditworthiness, how much you can afford, etc.), but also at an industry level. You may not realize that lenders have both maximum and minimum amounts they can lend, so let’s take a closer look at those limits and dispel some of the misconceptions.
What is the minimum amount I can borrow?
Though it may seem today like affordable housing is just a myth, there are options out there for low- and middle-income buyers. In fact, in the greater Lansing area there are currently 180 homes listed under $100,000. The question is, is there a loan program out there for homes with a smaller price tag?
Any mortgage under $100,000 is generally considered a small-dollar mortgage or micro mortgage. However, the exact amount tied to the definition may differ by lender and institution.
Michael Bleicher, vice president and senior mortgage banker with Dart Bank, says some lenders have lower minimums – maybe $40,000 or $60,000 – while others, including Dart, don’t set a specific limit. However, Bleicher does say the decision to fulfill a small-dollar mortgage depends on several factors.
“It can get tricky the lower you go because lenders are only allowed to charge a certain percentage for closing costs,” he said. “A number of mortgage costs are fixed and don’t vary with size, so as a percentage, they can add up quickly. If your closing costs are above a certain percentage, the loan falls into the ‘high-priced mortgage loan’ category and the lender may not be able to do it.”
Regardless of the specific amount, small-dollar mortgages are typically harder to secure than their larger counterparts. According to U.S. Census Bureau data, in 2020 43% of homes sold below $80,000 were financed with a mortgage. The National Association of REALTORS® says this is because “In many of these communities, investors, armed with all-cash deals, are buying up these affordable properties and turning them into rental units.”
And keep in mind, small-dollar mortgage borrowers still need to qualify for their loan, and the criteria doesn’t shift just because the amount is smaller. While specific numbers may vary a bit by lender, some of the typical requirements include a 620 credit score or higher, a 3% down payment or higher, a 45% debt-to-income ratio or lower, and proof of steady employment and income for the last two years.
What’s the most I can borrow?
Just as there is a minimum that lenders allow for a mortgage, there is also a maximum. Each year, the Federal Housing Finance Agency (FHFA) adjusts the amount qualifying consumers can borrow with a conforming loan, or what most of us consider a “traditional mortgage.”
In 2022, the borrowing limit for a single-unit home in most parts of the country is $647,200, up from $548,250 in 2021. Mortgages that exceed the conforming-loan limit are classified as “non-conforming” or “jumbo” loans.
Non-conforming loans aren’t sold on the secondary market in the same manner as conforming loans are with the government-sponsored enterprises. Instead, they are owned and serviced by the institution that offers the loan, so they carry a greater risk for the lender.
“While qualifying criteria doesn’t change much between a $80,00 mortgage and a $200,000 mortgage, things do shift when you cross that conforming loan limit,” said Bleicher. “Terms and conditions vary from lender to lender, but typically, the interest rate is higher, the minimum down payment is higher, and the lender may require a higher credit score and a lower debt-to-income ratio.”
Whether you are looking for a lower-priced home, a higher-priced home, or one that falls somewhere in the middle, having a preliminary conversation with a professional local lender is critical.
“It’s never too early to have a consultation,” said Bleicher. “We can review your financial situation, discuss the type of property you want to buy, and look at the available options. There have been many times in which I was able to show a prospective buyer a financial option or solution they did not know about, so it’s worth making that first call to get your questions answered.”
For a list of local, reputable lenders, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.