Minimum Loan Amount
Most home buyers and refinance mortgage loan borrowers know about maximum loan amounts. FHA has a maximum loan amount of $271,500 in most parts of the country unless the property is located in a high cost area. Many areas of California are in high cost areas where the maximum is capped at $625,500. With conventional loans, the maximum loan amount is $417,000 unless the property is located in a high cost area. Again, many counties in the state of California is considered high cost and loan limits can be as high as $625,500 on conventional loans. Most mortgage lenders have a minimum loan amount requirement. There are no federal mortgage lending guidelines with regards to minimum loan amount. Minimum loan amount requirements depends on each particular lender. Some mortgage lenders may have a minimum loan amount requirement of $50,000, others may have it set at $75,000. Most mortgage lenders have minimum loan amount requirements of $100,000.
Why Do Mortgage Lenders Have Minimum Loan Amount Requirements
As stated in the earlier paragraph, most mortgage lenders have minimum loan amount requirements set at $100,000. However, there are mortgage lenders that will go down to as low as $50,000 loan amount. The reason mortgage lenders have minimum loan amount requirements is because it requires the same amount of work to originate, process, underwrite, fund, and service a $50,000 mortgage loan as it does a $400,000 mortgage loan. Mortgage lenders and mortgage loan officers get paid on a percentage of the loan amount. For example, if a mortgage lender makes 1.0% of any mortgage loan amount, then the mortgage lender will make $500 on a $50,000 mortgage loan where the mortgage lender will make $4,000 on a $400,000 mortgage loan. Whether a mortgage lender originates a $50,000 mortgage loan or $400,000 mortgage loan, the amount of work required and paperwork required is exactly the same. Bottom line is that it is not cost effective for a mortgage lender to originate, process, underwriter, fund, and service a small size loan. There are many instances where mortgage lenders can lose money originating mortgage loans under $100,000.
Mortgage Regulations On Small Sized Loans
The CFPB, Consumer Financial Protection Bureau, is a newly created government agency that is in charge of mortgage regulations and its purpose is to protect consumers against predatory lending and make sure that all mortgage companies and mortgage loan officers are in compliance. Mortgage regulators are always creating new rules and regulations to protect the consumer and to make sure that home mortgage loan borrower’s understand what they are getting into. Qualify Mortgage, QM, was created to cap fees charged by mortgage lenders of no greater than 3%. Unfortunately, sometimes the creation of new rules and regulations end up hurting home buyers with smaller loan sizes than helping them. To meet high cost rules, 3% of a $300,000 mortgage loan is $9,000 and there is plenty of wiggle room for fees, costs, and other charges for the mortgage loan borrower to go through with the mortgage loan and should cover the mortgage broker’s yield spread premium plus underwriting fees and doc fees. However, on a $50,000 mortgage loan, a mortgage company normally has a $1,000 underwriting fee, $500 processing fee, and the yield spread premium ( Mortgage Broker Commission ) may be 2.5% which is $1,250. The total so far is $2,750. The maximum the mortgage lender is allowed to charge is no more than 3% of the $50,000 which is $1,500. The $2,750 is far greater than the $1,500 allowed by mortgage regulations and due to this, the mortgage lender cannot do the loan. This 3% QM regulation is hurting the smaller borrower.