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Many people consider homeownership a rite of passage, a part of the American Dream, and a key way to build wealth. But recently, as home prices and mortgage interest rates have risen, some may wonder, “Is buying a home a good investment, no matter what?”

It can be challenging to gather enough funds for a down payment, qualify for a mortgage, and then afford all of the costs that go along with homeownership, such as property taxes, maintenance expenditures, and utilities. But to live in a place you love while building equity can be a win-win.

So if you’re wondering “Is buying a house a good investment?” vs. investing your money, you’ll have to take a closer look at how homeownership relates to your personal financial situation. Read on to learn how to evaluate what will be the right decision for you, starting with important questions to contemplate.

Is It a Good Investment to Buy a House?

In order to determine if buying a home is a good investment for you, you’ll need to estimate the amount of time you plan to own the house and the real estate marketplace dynamics.

•   If you don’t plan to own the house for at least five years, you may not break even when you sell the home. When you buy a home, you pay for more than just the house and those costs can add up. You’re often paying for appraisals, mortgage application fees, inspections, movers, real estate agent fees, and that can total thousands of dollars.

In order to recoup all those fees, conventional wisdom says you need to wait at least five years for your home to appreciate before selling it. If you plan to live somewhere for less than five years, it could make the most financial sense just to rent property.

•   You may also want to consider other aspects of whether it’s a good time to buy a house. For example, is it a hot or cool market? Are you likely to wind up in a bidding war (and possibly overpay) because there isn’t enough supply to meet demand? Are interest rates likely to fall over the next year? These dynamics can impact whether now is the right time to jump into the housing market.

💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.

Do You Have Sufficient Savings to Buy a House?

In order to buy a home, you’ll generally have to take out a mortgage to finance your home purchase. But that’s not the only expense. These costs must also be covered:

•   Before you even get to the mortgage stage, you’ll have to save for a down payment (which is often anywhere between 3% and 20% of the property’s purchase price) and closing costs, which are typically 2% to 5% of the loan amount. This can mean a significant chunk of change.

•   There are continuing costs you’ll have to account for, such as home insurance, property taxes, general maintenance, and emergency home repairs.

When you are renting, if the kitchen sink springs a leak, your landlord will take care of it. But when you own a home, those repairs will be entirely your responsibility. Having an emergency fund saved up will help you deal with unexpected costs associated with homeownership.

Also, if you are purchasing a house as an investment vs. using it as a primary residence, can you afford to buy a house while still renting? That is a situation in which you will want to map out your cash flow and make sure you are prepared if you can’t flip or rent the property as quickly as anticipated. An emergency fund could also be invaluable in that scenario.

Are You Confident in the Housing Market?

The housing market rises and falls; take a close look to evaluate current trends. Home prices skyrocketed during the Covid-19 pandemic and have continued to rise recently. This can make it difficult for first-time homebuyers to find a suitable home that is in their price range. It’s important to be prepared as you start to look at homes. Understand your budget and make sure you have saved enough money to make a down payment on the property.

Also be sure that you understand how mortgage rates can impact the affordability of housing and what your home shopping budget looks like.

💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

Are You Ready for the Responsibility?

When you own your own home, you have a lot of freedom to make the space completely your own. With all of this flexibility comes a lot of responsibility. If the house has a yard, you’ll be responsible for regular maintenance and upkeep.

Will you need to pay for a new roof soon? Buy a lawn mower? If you live in an area with harsh winters, will you need to get a snow blower or hire someone to clear the driveway after each snowstorm? These costs can add up.

So make sure you are ready for the financial responsibility that comes with owning a home before you make the purchase. You’ll have to account for repairs, improvements, general upkeep, insurance, and taxes. Not only does all of this cost money, it will take your time and attention as well, which isn’t necessarily the case when you rent. If you’re not ready to always be “on call” for your property’s needs, it could be a homebuying mistake to purchase.

Recommended: Should I Sell My House?

Are You Willing to Live with a Long-Term Loan?

Buying a home can mean you’re taking on a loan for perhaps 15 or 30 years. That’s a major undertaking. Part of the process of learning how to buy a house is educating yourself on how mortgages work and the different types available. Generally, there are two types: fixed rate and adjustable-rate mortgages.

•   A fixed-rate mortgage keeps your payment level over time, typically 15 or 30 years, because the interest rate remains stable.

•   The interest rate on an adjustable-rate mortgage loan fluctuates over time. The rate usually starts out lower than a fixed-rate loan but often rises in later years.

To see what a mortgage could mean for your finances, take a look at an online mortgage calculator to compare different types of loans and see what your costs might look like. If a loan could be part of your life for three decades, you want to make sure you’re comfortable with it.

Remember that while it may seem daunting to take on a 30-year obligation, a mortgage helps you build equity in an asset that generally increases in value as time passes. Is a house a good investment? Historically, yes, if you take the long view.

Over the years, homeowners build up equity in the house as they methodically pay off more and more principal with each monthly payment. Many smart borrowers pay extra each month toward the principal to pay off the mortgage sooner.

Recommended: Quiz: Should You Buy or Rent a Home?

Pros and Cons of Buying a Home as an Investment

Before a major financial move, it’s important to consider the benefits and downsides. You’ll want to know what are the pros and cons of buying a starter home or a subsequent property. Consider these points.

Pros of Buying a House

Here are some of the upsides of buying and owning a home:

•   You will build equity in your home over time, which can help you grow your wealth. Your home value may appreciate as well.

•   There may be tax advantages to homeownership, such as deducting mortgage interest.

•   Paying your mortgage payments on time can help build your credit.

•   You can renovate the property as you see fit, which is not typically the case with rental units.

•   You likely have a good idea of your monthly housing costs for the long term. If you are renting, you could face significant fluctuations.

•   There’s a feeling of security for many people when they know they own their home.

Cons of Buying a House

Next, it’s wise to consider the disadvantages of buying a home:

•   You typically need to pay for the down payment and closing costs, which can be a significant financial hurdle.

•   You are likely locking into long-term debt, and it can take a while to build equity.

•   There is no guarantee that your home’s value will grow over time.

•   The costs related to owning a home can be significant. This includes expenses like property taxes and insurance, as well as home repairs.

•   You will have less flexibility if you need to move for a job, say, or want to relocate to be closer to friends and family. Selling a house can involve time, energy, and money.

The Takeaway

Buying a house is a big decision. Whether it will be a good investment for you depends on many individual factors. But being careful to consider your finances, your goals, and the market in the area where you’d like to live can help you make a smart, well-informed choice.

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 it wise to buy a house as an investment?

Whether it’s wise to buy a house as an investment will depend on many factors, such as your personal finances and current economic and real estate trends, as well as whether the property is a place that’s a good home for you to live in for at least several years.

Is buying a house worth it in 2025?

Buying a house in 2025 can be challenging because home prices and mortgage rates have been rising. However, if you can afford the monthly mortgage payments, plus the down payment and ongoing costs of homeownership, it may still be the right move for you.

Is owning a home an asset?

In general, a home is considered an asset. Yes, you typically have a mortgage, which is a liability, but on the plus side, you are building equity while you have a place you enjoy living.

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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.

*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.

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.

SOHL-Q325-002

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If you’ve been exploring alternative financing to a mortgage, you might be wondering, what is a land contract? A land contract is a real estate transaction where the buyer and seller agree to an installment loan without the services of a bank, but with some recorded interest of the buyer in the property. The seller retains the title until the purchase amount is paid in full.

Land contracts are an alternative financing tool for buying property. If you’re up against a situation where your finances or your desired property don’t qualify for a traditional mortgage, you’ll want to take a closer look at whether or not a land contract makes sense. Land contracts, however, do have their limits.

In this article, we’ll cover what a land contract is and how it works, with examples. We’ll show how it compares with a mortgage and explain how it can sometimes be turned into a traditional home loan. Finally, we’ll go through the pros and cons of a land contract and list some alternatives.

What Is a Land Contract?

A land contract is a seller-financed real estate contract where the buyer makes installment payments until the full purchase price is paid. Once the buyer has paid in full, then the seller transfers the deed to the buyer. It’s comparable to a lease-to-own arrangement and is also known as a an installment sales contract. A land contract is not to be confused with a land loan, also known as a lot loan, which is used to purchase a plot of land. Nor is it the same as a real estate options contract, in which a buyer pays a premium to have the option to purchase a property during a specific window of time.

Land contracts are incredibly flexible, with the terms decided on by the buyer and seller. They’re often used when a buyer is unable to qualify for a traditional mortgage, the property does not meet lender requirements for a mortgage, or when the purchaser is buying a house from a family member.

Land contracts are usually set up with owner financing so the arrangement to pay the seller is temporary. It’s common to see a balloon payment at the end, with the expectation that the buyer will obtain traditional financing from other sources or pay off the loan entirely.

Land contracts can be risky for the buyer, and past uses of land contracts have been predatory. This is because the seller holds the title while the buyer is responsible for paying for the maintenance and repairs of the property. If the buyer gets behind on payments, the seller can demand the buyer vacate the property. If you are considering a land contract, it’s wise to also look into first-time homebuyer programs which might be another way to make ownership possible.

How Does a Land Contract Work?

With a land contract, the buyer receives what is called “equitable title” for the property. The buyer takes on many of the responsibilities of a homeowner, including paying for the upkeep and repairs on the property.

The city of Detroit, which at one point had more land contracts than traditional home mortgage loans, outlines four parts of the land contract.

Step 1: Research the home and review the contract

Some things you may want to look for before entering into a land contract include:

Ownership. Look for the name of the owner listed on official records (usually at your county clerk’s office). Prospective buyers have been duped into signing contracts with people who are not the property owners. (Getting a title report can help provide clarity.).

Liens and debts. Does the owner have any liens recorded against the property? Again, it’s likely you’ll need to check the county recorder’s office for this information.

Sales price. Is the sales price in line with what other properties of a similar size, age, and condition?

Condition of the home. Take into account what repairs need to be made and how much they will cost.

Review the contract: What deposit and installment amounts is the buyer expected to pay the seller? What are the other costs the buyer is responsible for? Are there any red flags in the language of the contract? It would be wise to hire a real estate attorney to review a land contract before signing.

Step 2: Sign the contract

Buyers can expect to bring payment and identification to signing. Forms you may be expected to fill out include: land contract, memorandum of land contract, property transfer affidavit, and principal residence exemption. Buyers will also want to read any disclosures the seller is required to provide, such as a lead disclosure.

Step 3: File contracts and uphold terms of the agreement

Be sure that the land contract is recorded. Obtain insurance and change utilities over to your name. Make sure you pay property taxes and make your scheduled installment payments.

Step 4: Exit the land contract

When the full amount is paid off — either with regular payments or by obtaining another mortgage — buyers will receive the deed to the property. Be sure to have the deed officially recorded and file a property transfer affidavit.

Land Contract Examples

Some examples of situations that might make a land contract a sensible alternative include:

•   Buyer credit scores. Buyers with poor or no credit can sometimes find a path to homeownership through a land contract.

•   Condition of the home. Homes that won’t pass inspection or meet lending guidelines will have trouble being financed with a traditional mortgage.

•   Value of the home. Low-value homes may not be worth enough to qualify for a mortgage.

•   Banks may view a community as high risk. Some banks may not offer mortgages based on the location of the property.

Recommended: How to Make an Offer on a House

Land Contract vs Mortgage: How Do They Compare?

When you’re comparing a land contract with a mortgage, the key difference is who has ownership of the property. When a buyer secures a mortgage, the title of the property is transferred into their name. With a land contract, the title isn’t transferred to the buyer’s name until the purchase price is paid in full. There are other key differences, as outlined in the following comparison chart.

	Land Contract	Mortgage
How the title is handled	Title conveyed when paid in full	Title conveyed when buyer secures a mortgage and closes
Foreclosure procedures	Seller can take back the property without going through the foreclosure process	Has legal foreclosure protections
How the buyer pays for the property	Buyer pays the seller directly	Buyer pays a lender
Who is involved in the contract	Contract made between buyer and seller	Contract involves a third-party lender
Closing costs	Avoids many closing costs	Has many closing costs
Who’s responsible for upkeep of the property?	Buyer	Buyer

How to Turn a Land Contract Into a Traditional Mortgage

A land contract ends when it is paid in full. However, buyers don’t need to have paid the full amount to exit the land contract. Ideally, after a few years, the buyer is able to obtain a mortgage, pay off the land contract, and secure the title to the property. When the buyer pays on their own mortgage instead of paying a seller directly, they’ll have actual ownership and more legal protections. These are the steps buyers can follow to get a traditional mortgage following a land contract.

1.    Improve your credit score if it is on the lower end

2.    Build up your cash reserves and/or equity in the property

3.    Get prequalified for a mortgage

4.    Choose a lender, provide them with the land contract and installment history, and close on a loan

5.    Pay off the land contract and receive the deed.

Pros and Cons of Land Contracts

Land contracts can be complicated, so it’s important to evaluate all the pros and cons of how they work.

Pros

•   Land contracts are much more flexible than traditional mortgages

•   Land contracts avoid large closing costs.

•   Buyers can purchase properties that lenders are unwilling to underwrite.

•   Fixer-uppers and low-priced homes can fall into this category.

•   Buyers with low or no credit can purchase property with a land contract.

Cons

•   Buyers can be taken advantage of by sellers in a land contract.

•   The buyer has no control over the seller’s title.

•   Situations, such as the death of the seller, can upend a land contract before the title is conveyed.

•   Buyers usually have to pay a higher interest rate on a shorter term, which could mean much higher payments than a traditional mortgage.

•   Buyers do not have the legal protections of the foreclosure process and may lose all principal and installment payments made if they fail to meet the terms of the contract.

•   The buyer may not be able to transfer the contract to another buyer should they change their mind and wish to exit the agreement.

Alternatives to a Land Contract

If you’re looking at buying property with a land contract, you’ve probably also come across these alternatives:

Owner financing. A land contract is a type of owner financing, but an owner can also help a buyer finance a home outright. With a land contract, the seller has more power to take back the property should the buyer miss payments. With owner financing, there may be a promissory note and mortgage recorded. (Owner financing is also known as a purchase-money mortgage.)

Lease with the option to purchase. With this type of contract, the buyer acts more like a renter and the seller as landlord. The buyer pays a fee to have the option to buy the property at the end of the lease period at a predetermined price.

Recommended: Can You Put an Offer on a Contingent House

The Takeaway

Land contracts have their place, but they also have limitations. When you’re ready to switch over to a traditional mortgage, you can have full interest in the property, meaning, the property is titled in your name and there are more legal protections on your side when it comes to foreclosure.

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 main disadvantage of a land contract to the seller?

Sellers may need to take on the role of landlord since the financing to the buyer bypasses a lender. Land contracts also delay getting paid in full for the property.

What is the interest rate on a land contract in Michigan?

As per state law, the maximum interest rate that can be charged on a land contract in Michigan is 11%.

Does a land contract have to be recorded in Indiana?

To be valid in Indiana, a land contract must be recorded with the county recorder. If it’s not recorded, the contract isn’t enforceable and disputes are difficult to resolve in court.

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Photo credit: iStock/skynesher

*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.

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.

SOHL-Q325-019

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When you don’t qualify for a mortgage, you may be wondering if you have any options for buying a home. One avenue you might be researching is how lease-to-own works.

Lease-to-own, also known as rent-to-own, is a way to begin the process of purchasing a property by renting it first. The main benefit of lease-to-own is that it allows the tenant time to build up credit and savings. It also grants the tenant time to see if the area and neighborhood are a good fit for their needs. We’ll break it all down for you so you can decide if a lease-to-own agreement makes sense for your situation.

What Is Lease-to-Own?

A lease-to-own is an agreement between a landlord and a tenant that gives the tenant the right to buy the property after a specified amount of time. A portion of the rent paid may accumulate and be used for a down payment in the purchase transaction (the portion of rent held for the buyer is also known as “rent credit”).

Buyers may want to learn more about what a lease-to-own agreement is for a number of reasons, such as an inability to qualify for a traditional mortgage. The lease period allows the buyer to:

•   Build their credit

•   Save for a larger down payment

•   Increase their income

•   Try out the neighborhood

How Does Lease-to-Own Work?

The first step in entering into a lease-to-own agreement is to find a lease-to-own property. Since a lease-to-own agreement is a contract directly between a buyer and a seller, buyers need to find sellers who are willing to enter this type of arrangement. It can be difficult, since most sellers prefer a conventional sales arrangement. With lease-to-own, the seller continues to carry the mortgage while collecting rent from the buyer. After a period of time, the buyer will have the option to purchase and will seek a home mortgage loan of their own to help pay for the property.

To find a lease-to-own home, try one of these ideas:

•   Use a real estate agent. Some agents specialize in rent-to-own programs and may be able to help you negotiate a lease-to-own contract with a seller or point you in the direction of a local program.

•   Search a database. Some websites list homes that may be available for lease-to-own. You may be able to find these homes on websites such as HomeFinder.com or Renttoownlabs.com.

•   Find a lease-to-own program. Some homes may be offered as part of a program similar to first-time homebuyer programs. With Divvy Homes, for example, you find a home, the organization buys it, and then you sign a three-year lease (which can be renewed). At the end of the lease, the buyer agrees to purchase the property.

•   Look for “For Sale By Owner” yard signs or online advertisements. A lease-to-own agreement may be worked out directly with the owner of the property.

Once you’ve found a property, you’ll need to ask for documentation to prove that the seller truly owns the property and is up to date on property taxes and mortgage payments. Sometimes would-be buyers enter an agreement only to find that the house is in foreclosure.

If everything checks out, the buyer and the landlord will sign a lease-purchase agreement. A lease-purchase agreement is more complex than either a lease or a real estate purchase contract — it’s a contract where the lease agreement is tied to a purchase contract. What that means is once the lease period ends, the buyer agrees to purchase the property for a price set at the beginning of the contract. (Some deals are lease-option agreements, in which the buyer has the option to purchase the property but also has the flexibility to walk away; you can hire a real estate attorney to help you create the contract that best suits your needs.)

The buyer puts down a deposit, which can be used to secure the option to purchase the property at a later date.

Later, after the lease period comes to a close, the purchase agreement is executed. The buyer must first find financing to buy the property at the previously agreed-upon price. It may also be possible to renew the lease for another year if the buyer doesn’t have the credit or down payment requirements ready.

In the purchase contract, there’s typically a fair amount of rent credit that the buyer can use toward the down payment on the home if they’re able to move forward with financing.

Recommended: What Is a Duplex? Features, Pros and Cons

What Is a Lease-Purchase Agreement?

Let’s dig deeper into what a lease-purchase agreement actually is. A lease-purchase agreement is a real estate contract consisting of two parts: a lease agreement and a purchase contract. In a lease-purchase agreement, a buyer leases a property with the intent of purchasing it down the road. At the end of the lease agreement, the buyer must secure funds, usually with a mortgage, to purchase the property.

Lease-to-own agreements are structured contracts that include the following:

•   Names of the parties

•   Beginning and end date

•   Option money fee

•   Amount of purchase price

•   Amount of rent credit (generally 20%-50% of the rent)

•   Exclusions/inclusions of personal property (such as a washer and dryer)

Lease-purchase agreements require the buyer to purchase the property in the future. A breach of one agreement voids the other. In other words, if the buyer breaks the lease agreement (by missing rent payments, for instance), they may not be able to purchase the property.

Recommended: Is Investing in Single-Family Homes a Good Idea?

How to Structure a Lease-Purchase Agreement

Since a lease-purchase agreement is complicated, it needs to be structured to delineate terms and responsibilities clearly. Some examples include:

•   Determine dates and length of contract. A lease-purchase agreement should have clear beginning and end dates and should spell out what should happen at the end of the lease agreement. Some experts recommended a year or less.

•   List what the option fee is. The lease-purchase agreement will clearly disclose what the fee, if any, is for entering into the lease-purchase agreement.

•   Determine how the rental agreement will work. You’ll have a lease contract that looks much like any other lease agreement when you’re a renter. Your landlord, the seller, may require a deposit, for example, and have guidelines for how the property is to be used. If the property is a condo, there may be bylaws that govern whether you can be in a lease-to-own agreement with the owner. There could also be restrictions on whether you can rent out an extra room while you are a tenant, or whether you can use the property as an Airbnb.

•   Set the future purchase price. A lease-purchase agreement will include the home’s future purchase price. Properties can appreciate and renters may want to be sure they’re not going to pay a price that increases every year. Since you are locking in a price, it would be wise to have a home inspection just as you would with a home you might purchase outright. After all, if the house has a serious flaw, that could be costly to repair and could affect its value — and in some agreements, the leaseholder is responsible for upkeep.

•   Decide on how much of the rent will go toward the purchase price. This is negotiated between the buyer and seller. It is also known as “rent credit.” Sellers should be wary of allowing too much rent credit as this could allow legal issues to creep in.

•   Clarify roles on home upkeep. In a lease-to-own situation, it’s less clear what party is responsible for maintenance and repairs. Be sure to spell this out in the contract before you sign. Tenants planning to become owners should be wary of making improvements that could become the property of the landlord.

•   Seller should continue paying taxes and insurance. As the seller is still the owner, they should be responsible for taxes and insurance.

Pros and Cons Of a Lease-Purchase Agreement

There are some pros and cons to consider if you’re looking at a lease-purchase agreement.

Pros

•   Provides a path to homeownership for buyers who might not qualify for a mortgage or have a down payment

•   Locks in the purchase price with a contract

•   Allows the buyer time to build up credit

•   Gives a buyer time to increase income

•   Helps buyers save for a down payment

•   Makes it possible for the buyer to “test out” the neighborhood

•   Buyer can earn rent credit or rent equity to go toward the down payment

Cons

•   Buyer may have higher monthly rent or upfront fees

•   Buyer could lose their deposit, option fee, and rent equity if the purchase doesn’t work out

•   Buyer may not qualify for a mortgage when the contract is up

•   House could be in bad shape

•   Seller could be a scammer who doesn’t own the home, is behind on taxes, doesn’t keep the home in good repair, or is in danger of being foreclosed on

The Takeaway

For a lease-to-own situation to make sense, you’ll want to look at the fine print. Consider the fees, interest rate, terms, rental contract, and property condition. If you need to get into a house ASAP and don’t have the right credit score or down payment, then a lease-to-own agreement might make sense. If the terms of a lease-to-own contract are not favorable enough for your situation, see what it takes to get back on track towards qualifying for a 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

Is it a good idea to lease-to-own?

Whether or not a lease-to-own program is worth it is highly dependent on an individual’s situation. It can be a great idea for those who want to build up their credit, need time to save more money for a down payment, or want to see if the area is really one they want to live in, but they’ll need to research the property and work with an attorney to ensure their rights are protected in the agreement.

What is the downside to lease-to-own?

If you’re a buyer and the lease-to-own arrangement doesn’t work out, or if the property owner fails to pay property taxes or make their mortgage payments, you may risk losing your deposit, down payment, and any equity you’ve earned with your rental payments.

What is the difference between lease-to-own and lease?

With lease-to-own programs, the renter may have the obligation (or an option) to purchase the property at the end of the contract. Also, it’s common for part of the money the renter pays in rent to accumulate toward their purchase price. None of this applies with a standard lease agreement.

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Photo credit: iStock/PeopleImages

*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
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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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-Q325-017

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Buying a house is an exciting milestone, but it can also be stressful — especially if you’re self-employed and have to jump through extra hoops to secure a loan. Self-employed borrowers may have even more difficulty when applying for a jumbo loan for a more expensive house.

Below, we’ll walk through jumbo loans for the self-employed: types of loans available, typical requirements, and what the lending process is like.

What Are Jumbo Loans for the Self-Employed?

Each year, the Federal Housing Finance Agency (FHFA) sets a maximum limit on the dollar amount of mortgages that government-sponsored Freddie Mac and Fannie Mae will purchase. Loans within those limits are called conforming loans.

But what if you want a more expensive house and need a larger mortgage? That’s where jumbo loans come in. Jumbo loans, also called non-conforming loans, pose a higher risk to the lender and thus come with stricter requirements for borrowers.

Self-employed individuals can get conforming mortgages just like any other borrowers, though they may be asked for additional documents to prove their income. (The same is true when it comes to personal loans for the self-employed.) But what about jumbo loans for self-employed individuals? Are those possible?

Many lenders allow self-employed individuals to apply for and secure a non-qualified mortgage, also called a non-QM loan. Lenders enable borrowers to qualify for a non-qualified mortgage using alternative methods, particularly for income verification. Some examples of non-QM loans include 1099-only loans, bank statement loans, and investor cash flow loans.

1099-Only Loan

A 1099-only loan is just what it sounds like. Self-employed individuals typically receive 1099s, not W-2s, at tax time. Though lenders usually review an applicant’s W-2s, a self-employed individual may be able to apply for a jumbo loan by showing 1099s from previous years. Loan requirements will vary by lender.

Why not just look at previous tax returns? All 1099 income appears on your tax return, after all. However, self-employed workers write off business expenses to lower their taxable income and reduce their overall tax burden. An individual who brings in good money but has a lot of write-offs may have a harder time qualifying based on their tax return, which shows adjusted gross income, but could qualify based on their 1099s.

Bank Statement Loan

Another route that self-employed individuals can take to get a jumbo mortgage loan is through bank statements alone. Again, requirements will vary by lender, but lenders offering bank statement mortgages will often approve self-employed individuals for jumbo loans with just recent bank statements (personal or business) demonstrating income, rather than with traditional tax documents.

Investor Cash Flow Loan

Self-employed individuals who want to diversify by purchasing an investment property may be able to get a jumbo loan with no income verification at all. Instead, with an investor cash flow loan, borrowers can get a loan by using the anticipated cash flow from the rental property.


💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $3 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.

Challenges Faced by Self-Employed Borrowers

These non-QM loan options for self-employed borrowers address typical challenges that self-employed borrowers face when applying for a mortgage, particularly a jumbo mortgage. For instance, self-employed borrowers:

•   Can’t produce W-2s to verify their income or employment.

•   May have a lot of write-offs on their tax return that make it look like they earn less.

•   May otherwise need to provide a lot of complicated business documents for underwriting.

Recommended: Benefits of Being an Entrepreneur

Jumbo Loan Underwriting Guidelines

Jumbo loans may allow you to buy a more expensive home, but you’ll have to meet a lot of strict requirements, self-employed or not. Below are the core underwriting guidelines that lenders use when considering jumbo loan applications:

•   Credit score: Credit score requirements for jumbo loans will vary by lender, but expect to need a higher credit score than you’d need for a more traditional loan. A credit score of 700 or above should do the trick, although some lenders will have more lenient standards, while some may have tighter restrictions for a second home or investment property.

•   Debt-to-income ratio: Lenders may have varying income requirements for jumbo loans, but they’ll also look at your debt-to-income (DTI) ratio. If you have significant monthly debt obligations compared to your monthly income, you may not qualify for a jumbo loan.

•   Cash reserves: For certain loans and certain applicants, lenders may require you to have mortgage reserves — liquid assets (money in a bank account or certificate of deposit, stocks and bonds, or vested retirement funds, for instance) set aside to cover a certain number of months’ worth of housing costs. The money you’ll spend on your down payment and closing costs is not considered part of your cash reserves. For a jumbo loan, it’s possible you’ll need to have six to 18 months’ worth of reserves.

Tips for Increasing Chances of Approval

As a self-employed borrower, it’s crucial that you work on your credit score, reduce your monthly debts, and have strong evidence of solid monthly income before trying to qualify for a mortgage, particularly a jumbo loan. Here are a few tips to increase your chances of approval:

•   Work on your credit score first: Having a high credit score is one of the major requirements for approval. If you’re right beneath the 700 threshold, it may be worth it to wait a few months if you’re actively working on maintaining a good credit score.

•   Pay off outstanding debts: An easy way to decrease your DTI (and thus increase your chances of approval) is to pay off debts before buying a house. Stop accruing new credit card debt, and work on paying off existing debts before applying. If you’re able to knock out your credit card debt or pay off your car before applying for a jumbo loan, you may have a better shot.

•   Collect all the documentation you can: Having documentation of your income and employment is key. As a self-employed individual, it might be worth it to work with an accountant to compile all the paperwork.

Understanding the Jumbo Loan Process

The jumbo loan process is similar to the standard conforming loan process, but it may take longer. Here are the general steps for getting a jumbo loan:

1.    Make sure you’re qualified: Review your credit score, DTI, and cash reserves to make sure you’re likely to get approved for a jumbo loan. Gather all the necessary documents.

2.    Find a lender: Not every lender offers jumbo loans to self-employed borrowers. Do some research to find out which lenders will offer you the best chances. Loan terms and interest rates will vary depending on the lender, the current market, and your finances. Get preapproved for a loan.

3.    Make an offer on a home: Once you have funding approved, find a house you love and put in an offer.

4.    Get an appraisal: As with a conforming mortgage, the lender will require a home appraisal to ensure the home is worth what you’re borrowing.

5.    Close on the home: Because jumbo loans are larger, expect to need a larger down payment. Closing costs will also be higher. Because jumbo loans pose more risk to lenders, the timeline between the offer and closing may take longer than for a traditional home loan.

💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

Pros and Cons of Jumbo Loans for Self-Employed Individuals

Jumbo loans are possible for self-employed individuals, but there are also some drawbacks to consider. Self-employed borrowers should keep the tough requirements in mind when considering purchasing a home above the FHFA conforming loan limits, but if they really want that more expensive home, it could be worth the effort.

Here are the pros and cons to consider:

Pros

•   Higher loan limits: Self-employed individuals who make enough money to justify buying a house priced above conforming loan limits can get jumbo loans to finance their dream home.

•   Flexible underwriting: By using non-QM loans, self-employed borrowers can use documentation like 1099s or bank statements instead of W-2s and tax returns to demonstrate their income and employment.

Cons

•   Higher interest rates: Jumbo loans may have higher interest rates because they pose a greater risk to the lender.

•   Stricter qualification criteria: Anyone applying for a jumbo loan should be prepared for stricter qualification criteria, but self-employed borrowers may have even more hurdles to clear. Lenders might want to see multiple years’ worth of income — and the income, credit score, and DTI thresholds may be higher than for a conforming loan.

Recommended: What to Consider When Choosing a Mortgage Lender

The Takeaway

Self-employed individuals may have a tougher time getting approved for a jumbo loan, but it’s not impossible. Having a strong credit score and low DTI are important, but having the proper documentation to demonstrate stable income is also crucial.

When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.

SoFi Mortgage Loans: We make the home loan process smart and simple.

FAQ

How many years of tax returns do I need to provide for a jumbo loan?

Typical borrowers will need to provide at least two years of tax returns to get a jumbo loan. Self-employed individuals, however, may need to provide additional documentation to get approved for funding.

Can I use 1099 income to qualify for a jumbo loan?

Some lenders allow you to use 1099 income to qualify for a jumbo loan. Self-employed individuals who don’t receive any W-2 income may want to consider lenders that offer 1099-only loans.

What is a 1-year self-employed mortgage and how does it work?

Lenders typically want to see at least two years of stable income. Borrowers who have been self-employed for just one year, however, may be able to get a mortgage from specific lenders.This mortgage can be more challenging to get: Lenders will need borrowers to demonstrate the stability of their income, the financial strength of their business, and a promising business outlook. Usually, the self-employed borrower needs to have been in the industry longer than a year, even if they’ve only been self-employed in said industry for a year.

Are there any special requirements for 1099 home loans?

Each lender will have its own requirements for a 1099 home loan, like minimum credit score, maximum DTI, and loan limits. Check a lender’s requirements before applying.

What is the minimum credit score required for a jumbo loan?

Credit score requirements for jumbo loans vary by lender, but typically, you’ll need at least a 700 score to qualify. Before applying, ask potential lenders what their minimum credit score requirements are. Some lenders may approve loans for borrowers with scores below 700, but interest rates may be higher.

How much of a down payment do I need for a jumbo loan?

Down payment requirements for jumbo loans vary by lenders. Many lenders require that you put at least 20% down for a jumbo loan, but in some cases, lenders may approve jumbo loans with as little as 10% down.

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Photo credit: iStock/SeventyFour

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.

*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.

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

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.

SOHL-Q325-020

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If you like paying fewer property taxes, you’ll like the homestead exemption. A homestead exemption, sometimes also called a primary residential exemption, is where you only pay property taxes on a portion of your home’s market value. Eligibility for the homestead exemption is usually dependent on the home being used as your primary residence.

To understand more about what the homestead exemption is and how it could affect your taxes, we’re covering the bases, including what a homestead exemption is and how it works, automatic vs. declared homestead exemptions, who qualifies for a homestead exemption, how to file for a homestead exemption, and which states have homestead exemptions.

By the end, you should have a better idea of how to reduce your taxes with a homestead exemption if it isn’t already applied to your property.

What Is a Homestead Exemption?

To clarify, there are two different scenarios that are both described as the homestead exemption.

1.    A homestead exemption can refer to a reduction in taxes offered when the property is used as a primary residence.

2.    A homestead exemption can also describe the amount of equity in a home legally protected from creditor liens. Read up on homestead exemption rules by state if you want to better understand this protection.

Both require the owner to live in the property as their principal residence, but they differ from there. The first applies to taxes and the second protects a homeowner’s equity from creditors during adverse life events. The first is the more common application and is the focus of this article.

How Does a Homestead Exemption Work?

At a very basic level, a homestead exemption works something like this:

1.    You live in the home as your primary residence.

2.    Apply for the homestead exemption (if your taxing entity doesn’t automatically apply it). Be sure to include all required documents.

3.    Receive a discount on your property taxes as determined by your taxing entity. The discount can be a percentage or a set dollar amount. If you have a home mortgage loan on your primary residence, remember that if your property taxes are included in mortgage payments, your mortgage servicer will pay this for you from your escrow.

4.    Continue receiving the homestead exemption. It renews automatically for most taxing entities.

Recommended: Best States to Retire in for Taxes

Automatic Homestead vs Declared Homestead

Automatic vs. declared homestead refer to two different things.

•   Automatic. Many taxing entities may automatically apply the homestead tax exemption when you purchase the home. If you do need to apply for the homestead exemption, you usually only need to do it once. It’s typically renewed annually after your first application.

•   Declared. A Declaration of Homestead is a legal document homeowners can file with their taxing entity to protect their home from creditors.

Who Qualifies for a Homestead Exemption?

Generally, homeowners who live in the home as their principal residence may qualify for a homestead exemption. Corporations or other entities that own properties do not qualify for a homestead exemption. If you have helped a family member purchase a home through a family opportunity mortgage, talk with a tax preparer about whether this property is eligible for the homestead exemption given that it is technically considered owner-occupied.

Other requirements may include:

•   Having all your vehicles registered in the county where you want a homestead exemption

•   Not having a homestead exemption for any other property

•   Sending in the homestead exemption application by the deadline

Examples of a Homestead Exemption

The amount of the exemption varies depending on your taxing entity. Here are a couple of examples of how the homestead exemption works in Texas and Florida.

•   In Texas, you may qualify for a $140,000 exemption. If your home is valued at $300,000 for tax purposes, you’ll only pay taxes on $160,000.

•   In Florida, you can receive up to a $50,000 exemption. If your home is valued at $400,000 for tax purposes and you qualify for the homestead exemption, you’ll only be taxed on $350,000.

Limitations of the Homestead Exemption

You cannot have a homestead exemption on more than one property. Also, if you move and plan on keeping the home as a rental property, it won’t qualify for the exemption. The homeowner bears the responsibility for notifying the taxing entity and it’s possible that the taxing entity can place a Homestead Tax Lien on your home.

How to File a Homestead Exemption

In many cases, you’ll be sent paperwork from your local taxing entity for the homestead exemption (usually your county assessor). If they do not send it, you can find the forms for filing for a homestead exemption on your local tax assessor’s website. Information that you can expect to provide includes:

•   Name

•   Property address

•   Identification, such as a driver’s license

•   Social Security number

•   Car registration (this is to help prove residency)

Recommended: First-Time Homebuyer Programs

States With Homestead Tax Exemptions

Most states offer some form of homestead exemption or credit. Only New Jersey and Pennsylvania do not offer an exemption at all.

Pros and Cons of a Homestead Exemption

If you’re able to qualify for a homestead exemption, it will reduce the tax on your property and may help make your home more affordable. This is a huge benefit and makes the pros and cons of the homestead exemption a very short list.

Pros

•   Reduces the amount of property taxes paid

Cons

•   You may need to file paperwork by a deadline

•   Second homes don’t qualify for the homestead exemption

Recommended: Pros and Cons of Buying a Starter Home

The Takeaway

The tax break you get with a homestead exemption could be substantial. If you qualify for it, make sure that you’re getting it. Be aware of when you need to file paperwork (if at all), and what you need to include with your application to ensure you’re paying the proper property tax rate for those living in it as their primary residence.

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

How much is the homestead tax credit in Iowa?

The homestead tax credit for Iowa is $4,850 of your primary residence’s taxable value.

How much does homestead exemption save in Georgia?

The amount saved in Georgia for the homestead exemption varies by county. The city of Decatur has an exemption amount of $40,000 while Fulton County and Atlanta offer $30,000 off assessed value on the County taxes, $2,000 off on the school taxes, and, if the resident is in the City of Atlanta, an additional $30,000 exemption for city operations, parks, and schools.

How does the Indiana homestead exemption work?

Homeowners in Indiana can qualify for a deduction of 60% of the property’s assessed value or a maximum of $48,000, whichever is less.

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Photo credit: iStock/fizkes

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.

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.

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-Q325-018

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