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The Department of Veterans Affairs sponsors the VA loan program to help eligible military members and surviving spouses become homeowners. If you’re interested in how to get a VA loan, you’ll need to first make sure you meet the government’s requirements and then find a VA-approved lender and seek preapproval for a loan.

Getting preapproved for a home loan can give you an idea of how much you’ll be able to afford. Having a VA loan preapproval letter in hand can also give you some leverage when it’s time to make an offer. Here’s a closer look at how to get preapproved for a VA home loan.

What Is a VA Loan?

A VA loan is a mortgage loan that’s backed by the federal government. The Department of Veterans Affairs works with a network of approved lenders that grant VA loans to eligible military members (including members of the National Guard and the Reserve) and surviving spouses. Should a borrower default on a VA loan, the federal government steps in to help the lender recoup some of its losses.

What is a VA loan good for? There are four ways that borrowers can use them.

•   VA purchase loans allow you to buy a home through an approved lender.

•   Native American Direct Loans (NADL) help Native American veterans or veterans married to Native Americans buy, build, or improve a home on federal trust land.

•   Interest Rate Reduction Refinance Loans (IRRRL) can help make existing VA-backed loans more affordable through interest rate reductions.

•   Cash-out mortgage refinance loans can help eligible borrowers tap into their home equity to withdraw cash, while refinancing into a new loan.

In terms of how to get a VA loan, each of these options has different requirements that borrowers need to meet.

💡 Quick Tip: Apply for a VA loan and borrow up to $1.5 million with a fixed- or adjustable-rate mortgage. The flexibility extends to the down payment, too — qualified VA homebuyers don’t even need one!^{†^}

How Does VA Home Loan Preapproval Work?

Mortgage loan preapproval simply means that a lender has reviewed your financial situation and made a tentative offer for a loan. It doesn’t constitute final approval for a mortgage, but getting preapproved is often beneficial, as a mortgage preapproval letter can give you an edge if you’re vying with another buyer for a particular property.

VA home loan preapproval works much the same as any other type of mortgage preapproval, with one extra step: Before you apply for the loan, you’ll need to get a Certificate of Eligibility (COE) from the VA. This document shows your lender that you’re eligible for a VA loan, based on your service history and duty status. The minimum service requirements for a COE depend on when you served. You can request a COE online through the VA website.

After you have the COE, you’ll need to give the lender some basic information about your household income, assets, and how much you’re hoping to borrow in a process called prequalification. This will allow you to see — often in just a few minutes — what kind of mortgage terms you might qualify for. From there, you can choose a lender and go through the next step, preapproval.

How to Get a VA Home Loan Preapproval Letter

Getting a VA home loan preapproval letter is a relatively straightforward process. Here’s what you’ll need to do.

•   Obtain your COE from the Veterans Administration.

•   Choose a VA-approved lender.

•   Complete the lender’s preapproval application.

Let’s get into the details of securing a VA home loan preapproval. First, you’ll need certain documents on hand to apply for the COE, and those documents are specific to your military status. If you are a veteran, you’ll need a copy of your discharge or separation papers. Active-duty service members will need to furnish a statement of service signed by their commander, adjutant, or personnel officer. This statement needs to include your full name, Social Security number, date of birth, date you entered duty, duration of any lost time, and the name of the command providing the statement. You can find full details and an online COE application on the VA website.

Once you have your COE and have found a prospective lender, the lender will likely ask to see certain documents to verify your income and financial situation, including:

•   Tax returns

•   Pay stubs

•   Bank account statements

•   Investment account statements

You may also need to provide a valid photo ID, your date of birth, and Social Security number. This information is needed to process a hard credit check, which can impact your credit score.

After your lender has everything it needs to process your preapproval, it will review your finances and complete a hard check of your credit history. Assuming your credit score and income check out, and there are no issues with your COE, you should be able to get a preapproval decision within a few days.

How to Buy a Home With a VA-Backed Loan

Home mortgage loans offered through the VA are attractive for a few reasons. For one thing, you can buy a home with no down payment required. For another, VA loans can offer more attractive interest rates than other types of mortgage loans.

Now that you know how to get a VA home loan, if you’d like to buy a home with a VA-backed loan, getting preapproved is the first step. Again, VA loan preapproval can give you an idea of how much you’ll be able to borrow, which can help you narrow down your search for a property. Once you find a home that you’re interested in, making an offer is the next step.

You can use a VA-backed loan to buy:

•   Single family homes with up to four units

•   Condos in a VA-approved project

•   Manufactured homes

VA loans can also be used to build a home. You’ll need to have the home appraised and evaluated to make sure that the property is structurally sound and that its value aligns with the amount you want to borrow. If there are no issues, you can move on to the closing to sign final paperwork and pay the VA loan funding fee.

This fee is a one-time payment VA borrowers are required to make to help cover the costs of the VA loan program. The amount you’ll pay for the funding fee depends on factors like whether you’re a first-time homebuyer and how much money you put down on the home, if any. Some buyers may pay no fee at all, or have it refunded.

Recommended: Cost of Living by State

Who Is Eligible for a VA Loan?

Eligibility for a VA loan is a two-pronged test. You’ll need to be able to obtain a COE from the government and you’ll need to be able to meet the lender’s credit score and income requirements.

COE requirements depend on your duty status and time served. Generally, you’re eligible if you are:

•   An active-duty service member who has served at least 90 days continuously.

•   A veteran who served at least 24 months continuously or 90 days of active duty.

•   A National Guard member who has served at least 90 days of active duty.

•   A Reserve member who has served at least 90 days of active duty.

These requirements assume that you served between August 2, 1990 and the present day. If you’re a veteran, National Guard member, or Reserve member who served before August 2, 1990, the service requirements are different.

You may also be able to get a COE under other conditions. Here are a few examples (find a complete list on the VA website):

•   Are a surviving spouse of an eligible service member

•   Are a Public Health Service officer

•   Served as an officer of the National Oceanic and Atmospheric Administration (NOAA)

•   Served as a midshipman at the United States Naval Academy

If you don’t meet any of the requirements to get a COE for a VA loan, then you’ll need to consider other home loan options.

How to Get Preapproved for a VA Home Loan

VA loans can be attractive to buyers since the VA doesn’t require a down payment or private mortgage insurance. If you’re wondering how to get approved for a VA loan, here are a few tips to qualify for a mortgage.

•   Consider your credit. The VA loan program has no minimum credit score requirement but the higher your score, the better your odds of being approved. A higher credit score can also help you get a lower interest rate on your loan.

•   Know your budget. Estimating how much you can afford when buying a home is important for ensuring that you don’t go over budget. If you know that you’re going to be looking at homes in the $300,000 range, for instance, then you wouldn’t want to ask for $500,000 when you’re trying to get preapproved.

•   Check the lender’s requirements. Researching VA lenders can help you find the one that’s the best fit for your needs and situation. Comparing minimum credit score requirements and income requirements can help you weed out lenders that are less likely to approve you.

Ideally, you should request preapproval from just one lender but that doesn’t mean you can’t shop around first by prequalifying with several lenders to compare rates.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

How to Find a VA Lender

The simplest way to find a VA lender is to use the resources available on the Department of Veterans Affairs website. You can also search for VA-approved lenders online. For instance, you might try searching for “VA lender near me” or “VA lender online application” to see what results turn up. If you aren’t sure a VA loan is right for you, check out a home loan help center to get more ideas for how to finance a home purchase.

Recommended: Cost of Living in California

How to Choose the Best VA Lender for You

One of the most important considerations when weighing how to get a VA loan is choosing a lender to work with. Comparing VA lenders is similar to comparing lenders for different types of mortgage loans, including conventional or FHA options. Here are some key things to consider as you shop around:

•   VA loan interest rates

•   Closing costs the lender charges, including origination fees

•   Minimum credit score and income requirements

•   Whether you have the option to buy points if that interests you

•   How long it typically takes for the lender to close a VA loan once you’re approved

It’s also a good idea to check out reviews from previous buyers to see what they have to say about a particular lender. The better the lender’s reputation is overall, the easier they might be to work with.

Tips on the VA Home Loan Preapproval Process

VA home loan preapproval may seem a little tedious with all the information that you need to provide. But it’s important that you don’t skip this step, as preapproval can work in your favor when it’s time to buy a home.

Here are a few tips for ensuring that your VA home loan preapproval goes as smoothly as possible.

•   Carefully read through the instructions for completing the application before you begin.

•   Organize your documents beforehand so that you’re not scrambling to find information later.

•   Review your application before submitting it to make sure you haven’t overlooked anything and there are no errors.

•   Opt for an online application process if possible, which could save you some time.

How long does it take to get a VA loan? While you might be able to get preapproved the same day or the next business day, closing can take anywhere from 30 to 60 days. That’s important to know as you plan out your home purchase.

The Takeaway

VA loans can offer some attractive benefits to homebuyers, and getting preapproved is usually to your advantage. It’s important to take your time to find the right lender to work with so you can get the best loan terms possible.

SoFi offers VA loans with competitive interest rates, no private mortgage insurance, and down payments as low as 0%. Eligible service members, veterans, and survivors may use the benefit multiple times.

Our Mortgage Loan Officers are ready to guide you through the process step by step.

FAQ

Can you get preapproval for a VA loan?

Yes, it’s possible to get preapproved for a VA home loan. You’ll need to find a VA-approved lender to work with and verify that you’re eligible to get a loan through the VA program. Having VA loan preapproval doesn’t guarantee that you’ll qualify for a mortgage, however.

What do I need to get preapproved for a VA loan?

To get preapproved for a VA loan, you’ll need to find a VA-approved lender. Next, you’ll need to provide the lender with some information about your finances, along with a Certificate of Eligibility. You can obtain this document from the Veterans Administration.

How long does it take to get a VA loan preapproval?

Assuming that you have all of the necessary documents and information to process your preapproval application, it may be possible to get a decision the same day. VA loan preapproval shouldn’t take more than a few days to obtain if you’ve checked off all the lender’s requirements.

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^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
^{^}SoFi VA ARM: At the end of 60 months (5y/1y ARM), the interest rate and monthly payment adjust. At adjustment, the new mortgage rate will be based on the one-year Constant Maturity Treasury (CMT) rate, plus a margin of 2.00% subject to annual and lifetime adjustment caps.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOHL-Q325-041

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What is a second mortgage loan? For many homeowners who need cash in short order, a second mortgage in the form of a home equity loan or home equity line of credit is a go-to answer. A second mortgage can help you fund anything from home improvements to credit card debt payoff, and for some, a HELOC serves as a security blanket.

You can probably think of many things you could use a home equity loan or HELOC for, especially when the rate and terms may be more attractive than those of a cash-out refinance or personal loan. Just know that you’ll need to have sufficient equity in your home to pull off a second mortgage. In this guide, we’ll discuss this and more about how to take out a second mortgage and when you might consider it.

What Does It Mean to Take Out a Second Mortgage?

What is a second mortgage loan? It’s a loan secured by your home that’s typically taken out after your first mortgage. Less commonly, a first and second mortgage may be taken out at the same time in the form of a “piggyback loan.”

An “open-end” second mortgage is a revolving line of credit that allows you to withdraw money and pay it back as needed, up to an approved limit, over time. A “closed-end” second mortgage is a loan disbursed in a lump sum.

And since we’re looking at what it means to take out a second mortgage, it’s worth noting that it’s not called a second mortgage just because you probably took it out after your original mortgage. The term also refers to the fact that if you can’t make your mortgage payments and your home is sold as a result, the proceeds will go toward paying off your first home mortgage loan and only then toward any second mortgage and other liens (if anything is left).

How Does a Second Mortgage Work?

A home equity line of credit (HELOC) and a home equity loan, the two main types of second mortgages, work differently but have a shared purpose: to allow homeowners to borrow against their home equity without having to refinance their first mortgage.

Second Mortgage Interest Rates

HELOCs may have lower starting interest rates than home equity loans, although HELOC rates are usually variable — fluctuating over time. Home equity loans have fixed interest rates. In general, the choice between a fixed- vs variable-rate loan has no one universal winner.

Cost of a Second Mortgage

Home equity loans and HELOCs come with closing costs and fees of about 2% to 5% of the loan amount, but if you do your research, you may be able to find a lender that will waive some or all of the closing costs. Some lenders offer a “no-closing-cost HELOC,” but it will usually come with a higher interest rate.

Repayment Terms and Requirements

If you’re wondering how a second mortgage works, that depends. The way you receive funds and repay each kind of second mortgage differs. You generally receive a home equity loan as a lump sum and, since it usually comes with a fixed interest rate, pay it back in equal monthly installments, making it easy to plan for. With a HELOC, you’ll get an initial draw period during which you can take out funds at will, up to a preset limit. You’ll have a minimum payment to make each month but can pay back the principal and draw it out again. During the repayment period that follows, you’ll pay back the loan, generally at an adjustable rate.

To qualify for a HELOC or a home equity loan, you’ll need to have sufficient equity in your home – generally enough so that after you take out the second mortgage, you’ll retain 20% or, at minimum, 15% equity. Lenders’ requirements vary, but typically they will want to see a credit score of at least 620. They will also look at your debt-to-income (DTI) ratio, which compares your monthly debt obligations with your monthly income, and generally will want it to be 43% or lower.

Example of a Second Mortgage

Let’s look at an example of how to take out a second mortgage. Say you buy a house for $400,000. You make a 20% down payment of $80,000 and borrow $320,000. Over time you whittle the balance to $250,000.

You apply for a second mortgage. A new appraisal puts the value of the home at $525,000.

The current market value of your home, minus anything owed, is your home equity. In this case, it’s $275,000.

So how much home equity can you tap? Often 85%, although some lenders allow more.

Assuming that you’re borrowing 80% of your equity, that could give you a home equity loan or credit line of $220,000.

After closing on your loan, the lender will file a lien against your property. This second mortgage will have separate monthly payments.

Types of Second Mortgages

To evaluate whether you qualify for a second mortgage, in addition to seeing if you meet a certain home equity threshold, lenders may review your credit score, credit history, employment history, and debt-to-income ratio when determining your rate and loan amount.

Here are details about the two main forms of a second mortgage.

Home Equity Loan

A home equity loan is issued in a lump sum with a fixed interest rate. Terms may range from five to 30 years.

Recommended: Exploring the Different Types of Home Equity Loans

Home Equity Line of Credit

A HELOC is a revolving line of credit with a maximum borrowing limit.

You can borrow against the credit limit as many times as you want during the draw period, which is often 10 years, as long as you keep the funds sufficiently replenished. The repayment period is usually 20 years.

Most HELOCs have a variable interest rate. They typically come with yearly and lifetime rate caps.

Piggyback Loan

A piggyback loan is a second mortgage you take out at the same time as your first mortgage in order to help fund your down payment so you can avoid paying private mortgage insurance (PMI). People generally have to pay PMI when they buy a home and make a down payment on a conventional loan of less than 20% of the home’s value.

Here’s how it works, if you have only a 10% down payment, you might take out a mortgage for 80% of your purchase price and a piggyback loan, typically at a higher and probably variable rate, for 10% of the purchase price to put toward your down payment so you’ll have the full 20%.

Second Mortgage vs Refinance: What’s the Difference?

A mortgage refinance involves taking out a home loan that replaces your existing mortgage. Equity-rich homeowners may choose a cash-out refinance, taking out a mortgage for a larger amount than the existing mortgage and receiving the difference in cash.

Taking on a second mortgage, on the other hand, leaves your first mortgage intact. It is a separate loan.

To determine your eligibility for refinancing, lenders look at the loan-to-value ratio, in part. Most lenders favor an LTV of 80% or less. (Current loan balance / current appraised value x 100 = LTV.)

Even though the rate for a refinance might be lower than that of a home equity loan or HELOC, refinancing means you’re taking out a new loan, so you face mortgage refinancing costs of 2% to 5% of the new loan amount on average.

Homeowners who have a low mortgage rate will generally not benefit from a mortgage refinance when the going interest rate exceeds theirs.

Pros and Cons of a Second Mortgage

What does it mean to take out a second mortgage, all in all? It’s a big decision, and it can be helpful to know the advantages and potential downsides before diving in.

Pros of a Second Mortgage

Relatively low interest rate. A second mortgage may come with a lower interest rate than debt not secured by collateral, such as credit cards and personal loans. And if rates are on the rise, a cash-out refinance becomes less appetizing.

Access to money for a big expense. People may take out a second mortgage to get the cash needed to pay for a major expense, from home renovations to medical bills.

Mortgage insurance avoidance via piggyback. A homebuyer may take out a first and second mortgage simultaneously to avoid having to pay private mortgage insurance (PMI) if they have less than 20% for the down payment for a conventional mortgage. A piggyback loan, or second mortgage, can be issued at the same time as the initial home loan and allow the buyer to meet the 20% threshold and avoid paying PMI.

People generally have to pay PMI when they buy a home and make a down payment on a conventional loan of less than 20% of the home’s value.

A piggyback loan, or second mortgage, can be issued at the same time as the initial home loan and allow a buyer to meet the 20% threshold and avoid paying PMI.

Cons of a Second Mortgage

Potential closing costs and fees. Closing costs come with a home equity loan or HELOC, but some lenders will reduce or waive them if you meet certain conditions. With a HELOC, for example, some lenders will skip closing costs if you keep the credit line open for three years. It’s a good idea to scrutinize lender offers for fees and penalties and compare the APR vs. interest rate.

Rates. Second mortgages may have higher interest rates than first mortgage loans. And the adjustable interest rate of a HELOC means the rate you start out with can increase — or decrease — over time, making payments unpredictable and possibly difficult to afford.

Risk. If your monthly payments become unaffordable, there’s a lot on the line with a second mortgage: You could lose your home.

Must qualify. Taking out a second mortgage isn’t a breeze just because you already have a mortgage. You’ll probably have to jump through similar qualifying hoops in terms of home appraisal and documentation.

Common Reasons to Get a Second Mortgage

Typical uses of second mortgages include the following:

•   Paying off high-interest credit card debt

•   Financing home improvements

•   Making a down payment on a vacation home or investment property

•   As a security measure in uncertain times

•   Funding a blow-out wedding or other big event

•   Covering college costs

Can you use the proceeds for anything? In general, yes, but each lender gets to set its own guidelines. Some lenders, for example, don’t allow second mortgage funds to be used to start a business.

Funding Major Home Improvements

Building a garage or upgrading your kitchen are the kind of home improvements you could fund with a second mortgage. What’s more, if you itemize your federal taxes, some or all of the interest you pay on your second mortgage may be tax deductible if it’s used on home improvements. Consult with your tax adviser for the most up-to-date information.

Covering Education Expenses or Debt Consolidation

Getting a better interest rate on debt is a significant reason many people take out second mortgages. A second mortgage, especially a HELOC, can be an appealing way to finance education. Typically, its rates are lower than those of private student loans. Still it’s worth looking into federal loans, which may have even lower rates and don’t put your home at risk if you default.

Consolidating debt is another reason people take out second mortgages. Rather than paying often hefty credit card rates, for example, you could take out a second mortgage, pay off the high-interest debt, and pay back the second mortgage at a more reasonable rate over time. You can also use a home equity loan in particular to pay off multiple debts so that you’ll just have one predictable bill each month.

How to Get a Second Mortgage

If you’ve decided that a HELOC or home equity loan is the right choice for you, here’s how to get a second mortgage. Begin by assessing what you need and evaluate how much you can afford in payments each month.

Next, review typical requirements and evaluate how well you match up. Remember that requirements may vary somewhat from lender to lender.

After you’ve brushed up your credentials, start researching lenders. You might be able to get a slightly lower rate from the lender who provided your primary mortgage, but it’s worth looking around at the options and negotiating terms. Take into account whether you have enough to pay for closing costs or whether you’ll need to look for a no-closing-costs option or a lender who will waive the fees.
Once you’ve made a decision, submit your application If you’re approved, the lender will likely want to conduct an appraisal of your property. If all goes well, you’ll soon be signing papers and closing your loan.

The Takeaway

What’s the point of a second mortgage? A HELOC or home equity loan can provide qualifying homeowners with cash fairly quickly and at a relatively decent rate. If you prefer not to have a second mortgage, you may want to explore a cash-out refinance, which is another way to put some of your home equity to use.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is a HELOC a second mortgage?

Perhaps you’ve been wondering, “Is a HELOC a second mortgage?” The answer is yes: A HELOC (home equity line of credit) is one kind of second mortgage. It’s a revolving line of credit, but it is secured by your home, just as your mortgage is, and if you default on it, you risk losing your home.

Can you refinance a second mortgage?

You may be able to refinance a second mortgage, either on its own or in combination with your primary mortgage. If you’re interested in the combination refi, one major factor that determines whether you can refinance a second mortgage along with the first is whether you’ll have the 20% equity typically required.

Does a second mortgage hurt your credit?

You may be wondering, “What does it mean to take out a second mortgage when it comes to your credit?” Shopping for a second mortgage can cause a small dip in an applicant’s credit score, but the score will probably rebound within a year if you make on-time mortgage payments.

How much can you borrow on a second mortgage?

Many lenders will allow you to take about 85% of your home equity in a second mortgage. Some allow more.

How long does it take to get a second mortgage?

Applying for and obtaining a HELOC or home equity loan takes an average of two to six weeks.

What are alternatives to getting a second mortgage?

A personal loan is one alternative to a second mortgage. A cash-out refinance is another.

Can you have multiple second mortgages?

In theory you can have more than one second mortgage on the same property, but in practice it may be difficult. Lenders may subject your application to extra scrutiny or simply have a policy against it. If you buy a vacation property, it may be possible to get a second mortgage as well as a primary mortgage loan for the second home in addition to your primary and secondary mortgage on your primary residence.

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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q325-028

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How does a home equity loan work? First, it’s important to understand that the term home equity loan is simply a catchall for the different ways the equity in your home can be used to access cash. The most common types of home equity loans are fixed-rate home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing. The best type of home equity loan option for you will depend on your specific needs, so it’s helpful to know the characteristics of each to do an informed home equity loan comparison.

What Are the Main Types of Home Equity Financing?

When folks think of home equity loans, they typically think of either a fixed-rate home equity loan or a home equity line of credit (HELOC). There is a third way to use home equity to access cash, and that’s through a cash-out refinance.

With fixed-rate home equity loans or HELOCs, the primary benefit is that the borrower may qualify for a better interest rate using their home as collateral than by using an unsecured loan — one that is not backed by collateral. Some people with high-interest credit card debt may choose to use a lower-rate home equity loan to pay off those credit card balances, for instance.

This does not come without risks, of course. Borrowing against a home could leave it vulnerable to foreclosure if the borrower is unable to pay back the loan. A personal loan may be a better fit if the borrower doesn’t want to put their home up as collateral.

How much a homeowner can borrow is typically based on the combined loan-to-value ratio (CLTV ratio) of the first mortgage plus the home equity loan. For many lenders, this figure cannot exceed 85% CLTV. To calculate the CLTV, divide the combined value of the two loans by the appraised value of the home. In addition, utilizing a home equity loan calculator can help you understand how much you might be able to borrow using a home equity loan. It’s similar to the home affordability calculator you may have used during the homebuying process.

Of course, qualifying for a home equity loan or HELOC is typically contingent on several factors, such as the credit score and financial standing of the borrower.

Fixed-Rate Home Equity Loan

Fixed-rate loans are pretty straightforward: The lender provides one lump-sum payment to the borrower, which is to be repaid over a period of time with a set interest rate. Both the monthly payment and interest rate remain the same over the life of the loan. Fixed-rate home equity loans typically have terms that run from five to 30 years, and they must be paid back in full if the home is sold.

With a fixed-rate home equity loan, the amount of closing costs is usually similar to the costs of closing on a home mortgage. When shopping around for rates, ask about the lender’s closing costs and all other third-party costs (such as the cost of the appraisal if that will be passed on to you). These costs vary from bank to bank.

This loan type may be best for borrowers with a one-time or straightforward cash need. For example, let’s say a borrower wants to build a $20,000 garage addition and pay off a $4,000 medical bill. A $24,000 lump-sum loan would be made to the borrower, who would then simply pay back the loan with interest. This option could also make sense for borrowers who already have a mortgage with a low interest rate and may not want to refinance that loan.

Recommended: What Is a Fixed-Rate Mortgage?

Home Equity Line of Credit (HELOC)

A HELOC is revolving debt, which means that as the balance borrowed is paid down, it can be borrowed again during the draw period (whereas a home equity loan provides one lump sum and that’s it). As an example, let’s say a borrower is approved for a $10,000 HELOC. They first borrow $7,000 against the line of credit, leaving a balance of $3,000 that they can draw against. The borrower then pays $5,000 toward the principal, which gives them $8,000 in available credit.

HELOCs have two periods of time that borrowers need to be aware of: the draw period and the repayment period.

•   The draw period is the amount of time the borrower is allowed to use, or draw, funds against the line of credit, commonly 10 years. After this amount of time, the borrower can no longer draw against the funds available.

•   The repayment period is the amount of time the borrower has to repay the balance in full. The repayment period lasts for a certain number of years after the draw period ends.

So, for instance, a 30-year HELOC might have a draw period of 10 years and a repayment period of 20 years. Some buyers only pay interest during the draw period, with principal payments added during the repayment period. A HELOC interest-only calculator can help you understand what interest-only payments vs. balance repayments might look like.

A HELOC may be best for people who want the flexibility to pay as they go. For an ongoing project that will need the money portioned out over longer periods of time, a HELOC might be the best option. While home improvement projects might be the most common reason for considering a HELOC, other uses might be for wedding costs or business startup costs.

How Interest Rates Work on a HELOC

Unlike the rate on a fixed-rate loan, a HELOC’s interest rate is variable and will fluctuate with market rates, which means that rates could increase throughout the duration of the credit line. The monthly payments will vary because they’re dependent on the amount borrowed and the current interest rate.

When you take out a HELOC, you’ll start out in the draw period. Once you take out funds, you’ll be charged interest on what you’ve withdrawn. With some HELOCs, during the draw period, you’re only required to pay that interest; others charge you for both interest and principal on what you’ve withdrawn. During the repayment period, you won’t be able to withdraw money any longer, but you will need to make regular payments to repay the principal and interest on what you withdrew.

Home Equity Loan and HELOC Fees

Home equity loans and HELOCs both come with closing costs and fees, which may be anywhere from 1% to 5% of the loan amount. What those fees are and how you pay them, however, can vary by loan type. HELOCs may involve fewer closing costs than home equity loans, but often come with other ongoing costs, like an annual fee, transaction fees, and inactivity fees, as well as others that don’t pertain to home equity loans.

Generally, under federal law, fees should be disclosed by the lender. However, there are some fees that are not required to be disclosed. Borrowers certainly have the right to ask what those undisclosed fees are, though.

Fees that require disclosure include application fees, points, annual account fees, and transaction fees, to name a few. Lenders are not required to disclose fees for things like photocopying related to the loan, returned check or stop payment fees, and others. The Consumer Finance Protection Bureau provides a loan estimate explainer that will help you compare different estimates and their fees.

Home Equity Loan and HELOC Tax Deductibility

Since the passage of the One Big Beautiful BIll Act in July 2025 made permanent the mortgage deduction provisions of the Tax Cuts and Jobs Act of 2017, interest on home equity loans and HELOCs is only deductible if the funds are used to buy, build, or substantially improve the home securing the loan. What’s more, there’s a max of $750,000 on the amount of mortgage interest you can deduct ($375,000 each for spouses filing separately). Checking with a tax professional to understand how a home equity loan or HELOC might affect a certain financial situation is recommended.

Cash-Out Refinance

Mortgage refinancing is the process of paying off an existing mortgage loan with a new loan from either the current lender or a new lender. Common reasons for refinancing a mortgage include securing a lower interest rate, or either increasing or decreasing the term of the mortgage. Depending on the new loan’s interest rate and term, the borrower may be able to save money in the long term. Increasing the term of the loan may not save money on interest, even if the borrower receives a lower interest rate, but it could lower the monthly payments.

With a cash-out refinance, a borrower may be able to refinance their current mortgage for more than they currently owe and then take the difference in cash. For example, let’s say a borrower owns a home with an appraised value of $400,000 and owes $200,000 on their mortgage. They would like to make $30,000 worth of repairs to their home, so they refinance with a $230,000 mortgage, taking the difference in cash.

As with home equity loans, there typically are some costs associated with a cash-out refinance. Generally, a refinance will have higher closing costs than a home equity loan.

This loan type may be best for people who would prefer to have one consolidated loan and who need a large lump sum. But before pursuing a cash-out refi you’ll want to look at whether interest rates will work in your favor. If refinancing will result in a significantly higher interest rate than the one you have on your current loan, consider a home equity loan or HELOC instead.

When to Consider a Cash-Out Refinance

A cash-out refinance is worth looking into when you’ve built up equity in your home but feel that your mortgage terms could be better – and you need a lump sum. Let’s say you want to renovate your kitchen, and you need $40,000. You’ve had your mortgage for a few years but your credit score has improved since you got it and you could be eligible for a significantly better interest rate now. That combination of factors makes a cash-out refi worth considering. If a refinance would not make sense for you, then a cash-out refi wouldn’t, either. Instead, you might want to consider another kind of loan.

Pros and Cons of Cash-Out Refinancing

Cash-out refinances involve both advantages and drawbacks. Here are some of the most significant.

Comparing Home Equity Financing Options

The different types of home equity loans all allow you to draw on the equity you’ve built in your home to access funds. But each type has different strengths and weaknesses, and the best type of home equity loan option for you will depend on your situation and the characteristics of the loan.

Which Type Is Right for You?

If you’re content with your mortgage – you don’t think you could get a better rate and your payments fit your budget – and you need a lump sum all at once, a home equity loan might make the most sense. To consolidate high-interest debt, buy a boat, or take a once-in-a-lifetime vacation, this might be a good option.

If your mortgage is fine and you need funds for a project that’s going to require withdrawals over time, a HELOC might be a good fit. Say you’re financing your child’s college education or starting a new business – having a line of credit to draw on when you need it could be extremely helpful.

Finally, if you’re looking for a lump sum and you feel that your mortgage isn’t a good fit, a cash-out refinance could be for you. Perhaps you could get a lower interest rate now or you’d like your term to be shorter and can afford the higher payments. In that case, a cash-out refinance could be useful.

Factors to Consider Before Choosing

As you do your home equity loan comparison and think about your options, it’s important to consider carefully what will really work best for you. Here are some questions to review.

•   Will you be able to handle the additional debt in your budget?

•   Do you need an upfront cash sum or access to funds over time?

•   Can you realistically improve significantly on your current mortgage terms?

•   Is what you stand to gain worth more than the price of your closing costs and any other fees involved?

•   Are you okay with payments that vary or would you prefer knowing that your payments will stay the same?

•   Are you comfortable knowing that your lender may be able to foreclose on your home if you can’t make your payments?

The Takeaway

There are three main types of home equity loans: a fixed-rate home equity loan, a home equity line of credit (HELOC), and a cash-out refinance. Just as with a first mortgage, the process will involve a bank or other creditor lending money to the borrower, using real property as collateral, and require a review of the borrower’s financial situation. Keep in mind that cash-out refinancing is effectively getting a new mortgage, whereas a fixed-rate home equity loan and a HELOC involve another loan, which is why they’re referred to as “second mortgages.”

While each can allow you to tap your home’s equity, what’s unique about a HELOC is that it offers the flexibility to draw only what you need and to pay as you go. This can make it well-suited to those who need money over a longer period of time, such as for an ongoing home improvement project.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

What is the downside of a home equity loan?

The primary downside of a home equity loan is that the collateral for the loan is your home, so if you found yourself in financial trouble and couldn’t make your home equity loan payment, you risk foreclosure. A second consideration is that a home equity loan provides you with a lump sum. If you are unsure about how much you need to borrow, consider a home equity line of credit (HELOC) instead.

How much does a $50,000 home equity loan cost?

The exact cost of a $50,000 home equity loan depends on the interest rate and loan term. But if you borrowed $50,000 with a 6.50% rate and a 10-year term, your monthly payment would be $568 and you would pay a total of $18,129 in interest over the life of the loan.

Can you use a home equity loan for anything?

Typically, you can use a home equity loan for just about anything you want to. Common reasons for taking out a home equity loan are to consolidate higher-interest debt, to pay for medical bills, and to fund major home repairs or upgrades. It’s important to remember that your house serves as collateral for the loan, so you want to be sure your use is worth the risk.

How do I qualify for a home equity loan?

To qualify for a home equity loan, you generally need to be a homeowner with at least 20% equity in your home. You’ll also need to have a credit score of at least 620 and a debt-to-income ratio of no more than 43%. Typically, lenders will want to see that you have a steady, reliable source of income and will be able to pay back the loan.

What is the difference between a HELOC and a cash-out refinance?

A home equity line of credit (HELOC) and a cash-out refinance are both ways of tapping your home equity to get cash, but they work differently. With a HELOC, you use your home as collateral to get a revolving line of credit, which lets you take out cash as you need it, up to a set limit, during the initial draw period (usually 10 years). During the repayment period that follows, you repay principal and interest on what you’ve borrowed. A cash-out refinance involves refinancing your mortgage for more than you currently owe and taking the difference as a cash lump sum.

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^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SOHL-Q325-022

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Owning a home — or another type of property — with another person comes with all sorts of complications attached. Along with figuring out who’s responsible for washing the dishes and what color to paint the bathroom, you also have to define who owns what.

That’s where joint tenancy comes in. Joint tenancy means that both (or all) parties have 100% ownership in a home (or other kind of property, like a bank account), rather than each owning a 50% share. Right of survivorship means that, if one of the owners passes away, the other(s) will automatically assume full ownership of the property.

Let’s take a closer look at joint tenancy with right of survivorship (JTWROS), as well as viewing some specific examples so you can see exactly how it works in action.

What Is a Joint Tenant With Right of Survivorship (JTWROS)?

Joint tenancy with right of survivorship is — as mentioned — co-ownership in an asset like a home or bank account with assumed ownership after one party’s death. So a joint tenant with right of survivorship is any one person in that ownership position.

With JTWROS, two or more people jointly own an entire asset — rather than each owning some proportional measure of the asset’s value.

Requirements for Joint Tenancy With Right of Survivorship

In order to establish joint tenancy with right of survivorship, all parties involved must meet four criteria known as the “four unities” of joint tenancy. They must have:

•   Acquired the asset at the same time

•   Obtained the same title document

•   Received an equal share of interest in the property

•   Gotten an equal right to own and use the whole property

Keep in mind that specific laws around JTWROS vary by state, so to fully understand how it works where you live, you’ll need to look up your own state’s laws. For example, in California, the default state is for co-owners of property to be tenants in common — which is a different type of ownership structure (more on that below). You should always look up your own local laws, or speak to a local legal expert, in order to ensure you fully understand your ownership rights.

Understanding Joint Tenancy With Right of Survivorship: Examples

Definitions are all well and good — but how does JTWROS work in practice?

One of the most common examples of joint tenancy with right of survivorship is when a married couple purchases a home together. Say Rebecca and Jane buy their first home as young newlyweds, preparing to build a family and a life together.

If both Rebecca and Jane meet the four unities of joint tenancy — including purchasing the home together and having both of their names on the home’s deed — they can share 100% ownership of the home, rather than each of them laying claim to 50% of the home’s value. That means that, if either one of them were to pass away, the other would immediately assume full ownership of the home rather than having to go through the process of probate. (Of course, it also means that neither Rebecca nor Jane could choose to leave the home to someone else — including their children — without first terminating the joint tenancy.)

You could also choose to enter into a joint tenancy with right of survivorship with a non-spouse. Say you and two friends choose to purchase a condo in Seattle together, which you plan to rotate between you as a vacation home. So long as you meet the four unities and specify it at the time of purchase, you can all share 100% ownership of the condo. That said, none of you would be able to leave the condo to your children in your will, sell your share of the property, or even specify what proportion of the property value you own. In order to do any of that, you’d need to be in a tenancy in common. So as you’re thinking about a home mortgage loan, a down payment, and other details around a home purchase, it’s important to think about how you want ownership expressed on the deed as well.

Other Examples of Joint Tenancy With Right of Survivorship (JTWROS)

Although we’ve been talking primarily about homeownership in this article, keep in mind that joint tenancy with right of survivorship can apply to other sorts of ownership and property, too. For example, a married couple or pair of business partners might hold a bank account in joint tenancy with right of survivorship. The same may hold true of personal property, such as a vehicle, when purchased jointly.

Different Types of Joint Tenancy

In order to fully understand joint tenancy, you have to understand tenancy in common — which is the primary alternate ownership structure.

Tenancy in common allows mutual owners to designate proportional ownership (rather than sharing 100% ownership), and any tenant can sell their portion of the property whenever they choose. In addition, the right of survivorship clause does not hold, and each tenant-in-common can leave their share of ownership to a beneficiary in their will if they so choose.

Joint Tenancy with Right of Survivorship	Tenancy in Common
Each tenant enjoys full ownership of the shared property.	Tenants may designate proportional ownership: 50/50, 60/40, etc.
If one tenant dies, full ownership is automatically bestowed on the surviving tenant(s).	If one tenant dies, they can will their share of the property’s ownership to anyone they want.
The four unities must be met in order for joint tenancy to be established.	Tenancy in common can be established without meeting the four unities.

What Are the Tax Implications of JTWROS?

Part of the reason some people choose to enter into a joint tenancy with right of survivorship is to avoid probate — the lengthy, and often costly, legal process by which a person’s assets are assigned to new owners after their death. Still, it’s important for tenants to understand that JTWROS comes with certain tax implications.

For example, if your joint tenant is not your spouse, and the value of your shared property is higher than the annual gift tax exclusion ($19,000 in 2025), the transferral of ownership at the time of their death could trigger the federal gift tax. You may also be subject to estate taxes if the value of your shared property exceeds the IRS’s threshold for that tax — $13,990,000 in 2025.

Always check with a qualified tax professional to be sure you understand the tax implications of shared property ownership.

Advantages and Disadvantages of JTWROS

As you’ve seen by now, joint tenancy with right of survivorship has both advantages and disadvantages. Here are some of them at a glance.

Benefits of JTWROS

•  Right of ownership is automatically transferred at the time of a tenant’s death, avoiding the lengthy probate process and simplifying estate planning for families and married couples.

•  All tenants claim equal ownership over the asset, be it a home, bank account, or vehicle.

Drawbacks of JTWROS

•  No tenant can choose to leave their share of ownership to an heir in their will.

•  Because all tenants share 100% ownership of the property, if one tenant has financial trouble, this trouble affects other tenants even if their finances are in better shape. (For example, if two people share joint tenancy of a vehicle and one falls deeply enough into debt for their car to be repossessed, the other will, obviously, also be unfairly penalized in the process.)

When Does Joint Tenancy With Right of Survivorship Make Sense?

Joint tenancy with right of survivorship can be a great choice for families or married couples whose long-term financial goals and life plans are woven together — and who both have similar financial histories and habits. On the other hand, for those purchasing an asset together in the short term, or in situations where one tenant may have serious debt while another does not, joint tenancy with right of survivorship may not be the best choice.

How to Enter a JTWROS Agreement

Ensuring that a joint purchase is a JTWROS has everything to do with the wording on the asset’s title or deed — so it’s important to ensure that your mortgage lender, bank account representative, or whomever you’re making a purchase from, understands your intention to enter into a joint tenancy with right of survivorship at the time the asset is acquired.

The Takeaway

Joint tenancy with right of survivorship is an ownership structure in which all parties share 100% ownership of an asset such as a home, joint brokerage account, or vehicle. If one of the tenants dies, the ownership is automatically transferred to the other(s), which makes it a common choice for married couples and families.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is the primary advantage of being a joint tenant with right of survivorship?

One reason married couples and families so frequently choose this ownership structure is that ownership of the property is automatically conferred to the surviving tenant if the other party dies — which avoids the lengthy probate process and doesn’t require anyone to move at a very difficult emotional time.

Which tenancy is best for married couples?

Although every couple is different, many married couples choose a joint tenancy with right of survivorship to simplify their estate planning.

What is a primary feature of property held in joint tenancy?

Property held in joint tenancy is owned 100% by all parties involved — rather than each party owning a proportional share of the property’s value.

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Photo credit: iStock/PeopleImages

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This article is not intended to be legal advice. Please consult an attorney for advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q325-038

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What is a purchase-money mortgage loan? With this nontraditional kind of mortgage, the seller finances part or all of the property for the buyer, who usually does not qualify for traditional financing.

Keep reading to learn more about what a purchase-money mortgage loan is and the benefits and drawbacks of using one.

Purchase-Money Mortgage Definition

A purchase-money mortgage is also known as owner financing. The seller extends credit to the buyer to purchase the property. This can be a portion of the sale price or the full price.

In other words, the buyer borrows from the seller instead of from a traditional lender. The seller ultimately determines the interest rate, down payment, and closing costs. Both parties sign a promissory note. They record a deed of trust or mortgage with the county. The seller usually retains title until the financed amount is paid off.

A purchase-money loan is a nontraditional financing method that may be needed when the buyer cannot obtain one of the other different mortgage types for purchasing the property.

The promise to pay is secured by the property, so if the buyer stops paying, the seller can foreclose and get the property back.

If you’re considering a purchase-money mortgage, it may be useful to use a mortgage calculator tool to help you determine what potential payments on a purchase-money mortgage might be.

Recommended: How to Buy a Foreclosed Home the Simple Way

How Does a Purchase-Money Mortgage Work?

Not all buyers are in financial situations that make it easy for them to get a conventional home loan. Even diligent shopping for a mortgage may not help them get the home loan they need.

If a buyer has a profitable business, for example, but doesn’t have two years of tax returns to prove steady cash flow, most mortgage lenders won’t take on the risk.

Enter a purchase-money mortgage. With the right property, seller, and situation, a buyer could finance the home with a purchase-money mortgage. The seller would offer terms to the buyer — usually a higher interest rate and a short repayment term, with a balloon mortgage payment at the end — and the buyer would enter into the agreement. The seller would hold title until the loan payoff.

Buyers and sellers who work with seller financing often intend for the purchase-money mortgage to be refinanced into a traditional mortgage with a lower mortgage payment at a later date.

Purchase-Money Mortgage Example

Let’s say a homebuyer wants to purchase a $450,000 house. They have a down payment of $100,000 and are making a good salary but underwent a bankruptcy two years ago and can’t qualify for a traditional mortgage. They might be able to arrange with the seller to get a purchase-money mortgage for the remaining $350,000 with a balloon payment at the end of five years. By then, they should be eligible for a traditional mortgage.

Types of Purchase-Money Mortgages

Purchase-money mortgages can come in several forms.

Land Contract

A land contract (also called a contract for deed) is simply a mortgage from the seller. The buyer takes possession of the property immediately and pays the seller in installments.

Land contracts are often for five years or less, ending with a balloon payment.

Lease-Purchase Agreement

In a lease-purchase agreement, the buyer agrees to rent the property for a specified amount of time and then enter into a contract to purchase the property at a price that’s the current market value or a bit higher.

For this and a lease-option agreement, the seller typically requires a substantial upfront fee, an above-market lease rate, or both. Part of the monthly rent payment goes toward the purchase price.

Lease-Option Agreement

A lease-option agreement is similar to a lease-purchase agreement in that the buyer agrees to first rent the property for a specified amount of time. But with this agreement, the buyer has the option to purchase the property instead of making a commitment to purchase it.

Assumable Mortgage

Sometimes the seller may have a mortgage that has more favorable terms than are common at the point they wish to sell the home. When that’s the case, the buyer may be able to simply take on that mortgage, with the same terms, and continue to make payments when the seller leaves off. This requires that the mortgage lender approves, of course, and is typically more common with government-backed loans. The buyer may need to pay the seller for their equity, as well.

Hard Money Loan

A hard money loan is generally a short-term high-interest loan made by private investors, often for buyers who want to purchase commercial property. It may make sense if the buyers anticipate that they will be able to refinance within a few years, for example, if their credit will improve significantly.

Pros and Cons of Purchase-Money Mortgages for Buyers

Like any kind of loan, a purchase-money mortgage may have benefits and drawbacks for potential buyers.

Pros and Cons of Purchase-Money Mortgages for Sellers

Sellers will also want to consider carefully the plusses and minusses of purchase-money mortgages.

Recommended: How to Navigate the Mortgage Preapproval Process

The Takeaway

If you’re able to secure financing from a seller, a purchase-money mortgage may be a good fit — assuming you have an exit plan for a few years down the road. It’s smart for both buyers and sellers to know the risks and rewards of a purchase-money mortgage.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Who holds the title in a purchase-money mortgage?

The seller controls the legal title; the buyer gains equitable title by making payments.

Can a bank issue a purchase-money mortgage?

Yes, but it is not common. A buyer might pay for a house with a bank mortgage, cash, and a property seller mortgage. Both the mortgage issued by the third-party lender and the seller financing are considered purchase-money mortgages.

Does a purchase-money mortgage require an appraisal?

Not if the seller does not require one. With owner financing, the seller sets the terms, which may not include an appraisal.

Is a purchase-money mortgage the same as seller financing?

A purchase-money mortgage is essentially the same as seller financing, though there are several kinds of purchase-money mortgage, including land contracts and lease-purchase options, among others.

Should you buy with a purchase-money mortgage?

In general, if you can get a traditional mortgage, you may be better off with that, since typically you’ll get a lower interest rate and a longer term. However, if you can’t qualify for a traditional mortgage but can afford to make the necessary payments, a purchase=money mortgage can be a way to get a home sooner. Just be sure you understand the terms and have a plan to make sure you can refinance when the term is up.

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Photo credit: iStock/MicroStockHub

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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