A less expensive home does not always mean an easier mortgage.
Many mortgage expenses, including appraisal, title, processing and compliance costs, don't fall in proportion to the loan balance. Those fixed costs can represent a much larger share of a $75,000 mortgage than a $300,000 mortgage, potentially making smaller loans less economical to originate and more expensive for borrowers relative to the amount financed.
The 21st Century ROAD to Housing Act addresses the issue in three ways. The law allows HUD to create an FHA small-dollar mortgage pilot, requires the CFPB to study loan originator compensation practices and directs the CFPB to evaluate how qualified-mortgage points-and-fees thresholds affect smaller loans.
These provisions could eventually improve access to small-dollar mortgages. They do not create an immediately available loan program or guarantee that every lender will offer mortgages under $100,000.
Small-Dollar Mortgage Basics
| Topic |
What Buyers Should Know |
| Loan size |
The FHA pilot defines a small-dollar mortgage as having an original principal balance of $100,000 or less. |
| Property |
For the FHA pilot, the loan must be secured by a one- to four-unit property used as the borrower’s principal residence. |
| FHA pilot |
HUD may establish a pilot within one year of enactment. The law does not require HUD to launch it. |
| Loan originator compensation |
The CFPB must report on whether different compensation structures affect the availability of smaller mortgages. |
| Points and fees |
The CFPB must evaluate how existing qualified-mortgage thresholds affect loans below $100,000. |
| Current availability |
Mortgages under $100,000 are already possible, but lender minimums, borrower qualifications and property eligibility vary. |
What Is a Small-Dollar Mortgage?
For the potential FHA pilot authorized by the ROAD to Housing Act, a small-dollar mortgage is a loan with an original principal balance of $100,000 or less. The mortgage must be secured by a one- to four-unit property that serves as the borrower’s principal residence.
The original principal balance is the amount borrowed when the mortgage begins. It is different from the home’s purchase price, its appraised value and the buyer’s down payment.
For example, consider a buyer purchasing a home for $115,000 and making a $20,000 down payment. Before accounting for any financed mortgage insurance or other adjustments, the buyer would need a $95,000 mortgage. The transaction could fall within the pilot’s small-dollar definition because the loan balance is no more than $100,000, even though the purchase price is higher.
A buyer purchasing a $95,000 home with a small down payment could also need a mortgage below $100,000. The threshold applies to the amount financed, not the price of the home.
Other small-dollar provisions in the law use slightly different language. The loan originator compensation section generally covers federally backed or conventional mortgages with an original principal obligation of no more than $100,000. The points-and-fees section applies to mortgages with an original principal obligation of less than $100,000.
Why Can Small-Dollar Mortgages Be Difficult to Obtain?
Fixed Costs Represent a Larger Share of the Loan
Mortgage lenders incur costs to process, underwrite, document and close a loan. A transaction may also require an appraisal, title work, credit reports, flood determinations, recording fees and other services.
Many of those expenses do not fall proportionately when the loan amount decreases. An appraisal may require similar work whether the borrower needs a $75,000 mortgage or a $275,000 mortgage.
For illustration, $4,000 in total closing costs equals about 5.3% of a $75,000 loan. The same $4,000 equals about 1.5% of a $275,000 loan. The borrower must still review the actual Loan Estimate because costs differ by transaction, property and location.
The law recognizes this issue by requiring any FHA pilot report to describe the fixed costs associated with mortgages and how those costs affect lenders’ ability to earn a market-rate return on small-dollar loans.
Loan Originator Compensation May Be Tied to Loan Size
Loan originators may be paid through a salary, commission or a combination of the two. When compensation includes a percentage of the loan amount, a smaller mortgage may produce less compensation even though the originator must complete many of the same steps required for a larger loan.
Federal rules also restrict compensation practices to protect borrowers from incentives that could increase loan costs or steer consumers toward unfavorable terms. Any attempt to address small-dollar lending must account for those consumer protections.
The ROAD Act does not immediately remove or rewrite loan originator compensation restrictions. It requires the CFPB to study compensation practices and report on how different approaches affect small-dollar mortgage availability.
Points-and-Fees Limits Can Be Harder to Meet on Smaller Balances
Points and fees are certain upfront charges connected to obtaining a mortgage. Depending on the transaction, they may include origination charges, mortgage broker compensation and certain fees paid to lender affiliates. The federal definition is technical and does not include every amount listed under closing costs.
A mortgage generally must remain within applicable points-and-fees limits to receive qualified-mortgage protections. Because some loan expenses are fixed, those costs can consume a larger percentage of a smaller balance.
For example, a $2,500 charge equals 3.33% of a $75,000 loan but only 1% of a $250,000 loan. The example does not determine whether the charge legally counts toward a specific points-and-fees test. It shows why percentage-based limits can affect small loans differently.
Lower-Priced Properties Can Present Collateral Challenges
Some lower-priced homes are older or need repairs. Depending on the mortgage program, problems involving the roof, foundation, electrical system, plumbing, heating, water supply or general safety may need to be addressed before closing.
Appraisals can also be more complicated in areas with few recent comparable sales. Title defects, unpaid taxes, liens, boundary issues or unclear ownership may delay or prevent financing regardless of the loan amount.
A low purchase price does not override standard underwriting. The borrower must still meet applicable credit, income, debt-to-income ratio and documentation requirements. The property must also meet the lender’s collateral standards and the rules of the selected loan program.
What Could the FHA Small-Dollar Mortgage Pilot Test?
The act gives HUD, acting through the FHA, authority to establish a pilot within one year after enactment. HUD is permitted to create the program but is not required to do so.
If HUD proceeds, the pilot may include:
- Direct payments to participating lenders to encourage small-dollar mortgage originations
- Adjustments to certain FHA-imposed terms and costs
- Grants to borrowers for down payments, closing costs, appraisals or title insurance
- Outreach informing potential borrowers that small-dollar mortgages are available
- Technical assistance for participating lenders
The pilot could test whether direct financial support, revised FHA processes or technical assistance make small mortgages more practical for lenders to offer. It could also provide data about which regions, including rural areas, have the greatest need for these loans.
The law does not specify final eligibility requirements, participating lenders, grant amounts or application procedures. Those details would depend on future HUD guidance.
If established, the pilot would end four years after its launch. HUD’s authority to start a new pilot expires three years after the law’s enactment.
How Does the Law Address Loan Originator Compensation?
The CFPB must submit a report to Congress within 270 days examining loan originator compensation practices throughout the residential mortgage market.
The report must examine several compensation structures, including salaries, percentage-based commissions, volume-based compensation and combinations of salary and commission. It must analyze how those approaches affect small-dollar mortgage availability and discuss potential barriers to originating smaller loans.
The law specifically directs attention to compensation practices used by community development financial institutions. These institutions commonly serve borrowers and communities that may have limited access to traditional financing.
The required report does not itself change how loan originators may be paid. Any future regulatory changes would need to balance mortgage availability with safeguards intended to prevent steering, abusive pricing or incentives that conflict with the borrower’s interests.
How Could Points-and-Fees Limits Affect Smaller Mortgages?
The ROAD Act requires the CFPB, in consultation with HUD and the FHFA, to evaluate how the qualified-mortgage thresholds in federal regulations affect small-dollar originations. The evaluation is due within 270 days of enactment.
Under federal mortgage rules, applicable points-and-fees limits vary based in part on the loan amount. The thresholds are intended to limit excessive upfront charges and preserve important consumer protections.
Fixed transaction costs can make those limits more difficult to satisfy on a small balance. A fee that represents a modest percentage of a larger mortgage may represent a much higher percentage of a mortgage under $100,000.
The required evaluation could help regulators determine whether the existing structure unnecessarily limits responsible small-dollar lending. The enacted provision does not specify what the CFPB’s conclusion must be or guarantee a particular regulatory change.
Who Could Benefit From Greater Small-Dollar Mortgage Availability?
Expanded access could be particularly relevant for:
- Buyers in lower-cost housing markets where homes remain available for less than national median prices
- Rural buyers purchasing modestly priced homes
- Buyers considering older starter homes
- Borrowers who make a larger down payment and need only a modest mortgage balance
- Households seeking to finance a home rather than rely on cash, personal loans or other alternatives
The potential benefit will depend on whether HUD establishes the pilot, how agencies respond to the required studies and whether lenders choose to offer qualifying loans. Buyers would still need to meet underwriting and property requirements.
What Can Buyers Do Now?
Ask About Minimum Mortgage Amounts
Some lenders set minimum loan amounts based on their products, costs or investor requirements. Ask early whether the lender originates mortgages in the amount you need.
Compare Total Closing Costs
Review the interest rate, annual percentage rate, lender charges, third-party costs and estimated cash needed to close. A low rate does not by itself identify the least expensive option.
Compare Available Loan Programs
Depending on the borrower and property, possible options may include FHA, USDA or conventional financing. State housing finance agencies, community banks, credit unions, community development financial institutions and local housing programs may also offer products for lower-cost homes.
Program availability and qualification requirements vary. USDA financing, for example, is limited by property location, income eligibility and other program rules.
Inspect the Property
A home inspection can identify repair needs that may not be obvious during a showing. An inspection is separate from the appraisal and helps the buyer evaluate the property’s condition.
Budget for Repairs and Ownership Costs
Older or lower-priced homes may need updates shortly after purchase. Account for repairs, property taxes, homeowners insurance, utilities and ongoing maintenance when deciding what you can afford.
The Bottom Line
The ROAD to Housing Act recognizes that mortgages under $100,000 can be difficult to offer even when the borrower and property otherwise qualify. It responds with a possible FHA pilot and required federal reviews of loan originator compensation and points-and-fees thresholds.
Those provisions could lead to new support for borrowers or regulatory changes that make responsible small-dollar mortgages easier to originate. The immediate effect is limited because HUD and the CFPB must still complete their work. Buyers seeking a smaller mortgage should continue comparing lenders and current loan programs rather than waiting for a new federal option.
Frequently Asked Questions
Can I Get a Mortgage for Less Than $100,000?
Yes. Mortgages under $100,000 are available, but not every lender offers them. Approval depends on the lender’s minimum loan amount, the borrower’s qualifications, the property and the selected mortgage program.
Does the ROAD Act Guarantee Small-Dollar Mortgage Approval?
No. The act does not require lenders to offer small-dollar mortgages or approve applicants. Borrowers must still meet credit, income, debt, documentation and occupancy requirements, and the property must qualify for financing.
Is a Small-Dollar Mortgage the Same as a Small Down Payment?
No. A small-dollar mortgage refers to the amount borrowed. A buyer can make a large down payment and need a mortgage of $100,000 or less. A buyer can also make a small down payment on a lower-priced home and still have a mortgage below that threshold.
When Will the FHA Pilot Begin?
There is no confirmed launch date. The law allows HUD to establish the pilot within one year of enactment, but it does not require HUD to create it. Program availability would depend on a future HUD announcement and implementation details.
Why Are Closing Costs High Relative to Small Mortgages?
Many closing expenses are fixed or do not decline proportionately with the loan balance. Appraisal, title, processing and compliance costs therefore represent a larger percentage of a small mortgage than they do of a larger loan.
%20(1).jpg?quality=80&width=150)
.jpg?quality=80&width=800)
