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You’ve found it: your dream home. And it’s dreamy enough that you’ve put in an offer. But then the appraiser comes back with its report — and the figure is substantially lower than the agreed-upon sales price. This difference is what’s known as an appraisal gap.

An appraisal gap can certainly be a major inconvenience in the homebuying process — but fortunately, there are options, including renegotiating with the seller or walking away from the sale entirely. Below, we’ll outline everything you need to know about appraisal gaps, including ways to deal with them.

Why Would an Appraisal Gap Occur?

An appraisal gap happens when the appraised value of the home you intend to buy is lower than the agreed-upon purchase price.

It’s possible that you’re in a hot real estate market, and buyers competing for homes are engaging in bidding wars that push up home prices beyond their material value. Even if you weren’t engaged in a bidding war yourself, the seller’s price might reflect a rapid rise in local market prices.

Or maybe the seller simply overestimated when setting their asking price. While a seller’s market increases the chances of an appraisal gap, sometimes they just happen — no matter what’s going on in the real estate market in your area. The property valuation the seller used to price the house may simply be different from the appraiser’s estimate.

Impact of Appraisal Gaps

Obviously, spending more on a home than it’s worth has a variety of consequences, both on the buyer’s finances and on the home purchase process itself. Here’s a closer look.

Effects on Home Purchase

If you’re like most Americans — and especially first-time homebuyers — chances are you’re planning to use a mortgage loan to purchase your home. But lenders don’t typically approve mortgages for more than the home’s fair market value. (In fact, it was probably your lender that required the home appraisal that showed the appraisal gap in the first place, for precisely this reason.)

Obviously, this means an appraisal gap could cause trouble for those trying to qualify for a mortgage by lowering the amount the bank is willing to lend and increasing the amount of cash the buyer needs on hand to successfully make the purchase.

Even if you could successfully take out a loan for more than the home’s appraised value, you’d be starting your purchase with negative equity, which would substantially lengthen the time frame it would take to start building wealth in your home.

Financial Implications

Along with hitches in the homebuying process, an appraisal gap could have substantial financial implications, too. For example, you may need to dig up additional cash in order to cover the gap — or crack your knuckles and head back to the table to renegotiate with the seller.

In some circumstances, an appraisal gap might even cause you to walk away from the deal entirely — potentially leaving your earnest money (typically 1% to 2% of the purchase price) on the table. The specifics depend on the wording in your purchase contract, which we’ll come back to in just a minute.

What to Do if an Appraisal Gap Occurs

If you’re facing an appraisal gap, there are a few different ways to resolve it.

Renegotiate with the Seller

So long as you’re not contractually bound to cover an appraisal gap by an appraisal gap coverage clause in your contract, you may be able to renegotiate a new purchase price with the seller — one that lines up better with the home’s appraised value.

Cover the Gap Yourself

Perhaps the most straightforward way to resolve an appraisal gap is to simply pony up. Of course, this “simple” fix isn’t necessarily easy for every buyer, given that appraisal gaps can be on the order of tens of thousands of dollars — on top of all the other expenses that come up at the closing table. If you take this route, you might start by asking the seller to meet you in the middle, with each of you covering half the amount.

Dispute the Appraisal

It may be a hassle — and it may not result in any changes — but you could also ask your lender for a review of the appraisal to ensure the value was correctly calculated. You can make a reconsideration of value (ROV) request with your lender. An ROV lets you explain more about why you think the home is worth more than the original appraisal states, including any additional or updated information. You might even get a new appraisal done if your lender will allow it, but it would likely be an additional expense out of your pocket. If you had an appraisal waiver the first time (in which an automated tool is used to estimate the home’s value) you might request an in-person appraisal. But be warned that a second appraisal could return a home value that is higher or lower than your first appraisal.

Cancel the Contract

Finally, of course, if the appraisal gap is simply too much to bear, you can always walk away. Be forewarned, however: If you cancel without an appraisal gap contingency in your contract, you may lose the earnest money you’ve put on the table.

Preventing Appraisal Gaps

Which of the above options are available to you will depend, again, on your purchase contract, which may have an appraisal gap contingency or appraisal gap coverage clause written into it.

•   An appraisal gap contingency is a section of the purchase agreement that gives the buyer the right to walk away from the deal if an appraisal gap occurs, without losing the earnest money.

•   An appraisal gap coverage clause, on the other hand, states that the buyer is responsible for covering an appraisal gap. But it can also be used to cap how much of an appraisal gap you’re willing to cover as the buyer. For instance, it may say that you agree to cover an appraisal gap of up to $20,000 — but if the difference climbs beyond that, you have the right to walk away without financial penalty.

Writing in an appraisal gap coverage clause can be a useful tool in a seller’s market, when you’re bidding against other would-be purchasers. It can help ensure you don’t spend more than you can afford. On the other hand, if you’re unwilling to foot the bill of any appraisal gap whatsoever — even if it makes you a slightly less competitive buyer — consider adding an appraisal gap contingency to your contract.

The Takeaway

An appraisal gap — the difference between the appraised value of the home you’d like to buy and the agreed-upon purchase price — can be a fly in the home-purchase ointment. But not everything is lost, particularly if you have your purchase contract written in a way that circumvents the problem in the first place. If necessary, prepare to negotiate and possibly spend more out of pocket to complete your home purchase.

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.

FAQ

Who is responsible for covering an appraisal gap?

It depends. If there’s an appraisal gap coverage clause in the purchase contract, the buyer is likely responsible for covering an appraisal gap — though only up to specified limits. (Appraisal gap coverage clauses are common in competitive markets, where sellers have more leverage.) However, if your contract includes an appraisal gap contingency, you may be able to take the seller back to the table and renegotiate a lower purchase price — or walk away from the sale entirely.

Can a low appraisal be challenged or appealed?

Yes. If you think the home has been valued at a lower price than is accurate, you can put in what’s called a reconsideration of value (ROV) request with your lender. An ROV gives you the opportunity to explain more about why you think the home is worth more than the original appraisal states, including any additional or updated information. However, it’s no guarantee that the appraisal gap will close 100% — or at all.

How common are appraisal gaps in the home-buying process?

Appraisal gaps don’t happen in the majority of sales — but they’re not uncommon, either. It’s somewhat more likely that an appraisal gap will happen in a hot real estate market, when multiple bids from prospective buyers could push the purchase price up beyond the home’s fair market value.

Photo credit: iStock/andresr

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 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.

SOHL-Q324-018

If you’re planning to sell an investment property or your own home this year, it’s important to be aware of the potential impact capital gains tax could have on your bottom line. Otherwise, you could end up with less money than you thought to put toward your next real estate purchase or another financial goal.

Fortunately, there are strategies that can enable sellers to avoid capital gains tax on real estate, either by legally deferring or avoiding paying taxes altogether on their real estate gains. Read on for some basic info on how the capital gains tax works and how you might be able to minimize the tax burden after a successful sale.

Understanding Capital Gains Tax on Real Estate

Selling a piece of real estate for more than you paid is usually something to celebrate — but don’t party too hard just yet. If the value of the property has increased substantially, you may have to make a hefty payment to the IRS to cover the capital gains tax on your profit.

The amount you might be taxed on your sale can depend on a few different details, including how long you owned the property, if it was your primary residence when you sold it, how much you made on the sale, and your household income that year. Here are some factors to consider:

Short-Term vs. Long-Term Capital Gains

The length of time you owned the property before selling it will determine whether your profit is a short-term or long-term capital gain. That could make a significant difference in how, and how much, it’s taxed — as well as in how to avoid capital gains tax on real estate sales.

•   If you sell the property after owning it for only a year or less, for example, the profit is considered a short-term capital gain, and you’ll be taxed at your ordinary income tax rate for the year you made the sale.

•   If you sell after holding the property for more than a year, on the other hand, the profit is considered a long-term capital gain, which makes it subject to preferential capital gains tax rates.

Long-Term Capital Gains Tax Rates

Whether you’re selling your primary residence or an appreciated investment property, the tax rate (0%, 15%, or 20%) that applies to your long-term capital gain will be based on your taxable income and filing status that year. Here’s what the rates look like for 2024:

Potential Exemptions

Before you start calculating (and stressing out about) what you might owe, however, it’s important to note there are exemptions that might help you reduce or even avoid paying taxes on your capital gains. These include the “home sale exclusion,” which can be used by homeowners who are selling their primary residence, and the “1031 exchange,” which allows investors to defer the taxes on a real estate sale by reinvesting their profit into a similar property. Here’s a look at how each strategy might benefit you, depending on your specific circumstances.

Deferring Capital Gains Tax with a 1031 Exchange

A 1031 exchange (named for Section 1031 of the Internal Revenue Code) allows those who invest in real estate to defer the tax obligation on a property they’ve sold by using the proceeds to replace it with a similar, or “like-kind,” property. This is how it works:

Qualifying for a 1031 Exchange

The property used as a replacement in a 1031 exchange must meet three basic requirements:

•   It must be a long-term investment. The property can’t be a quick “flip.” And it can’t be your personal home.

•   It must generate income while you own it through rental or some other use. You can’t buy the property and just hold onto it with a plan to sell it later.

•   It must be of the same “character and class” as the property it’s replacing. The replacement property doesn’t necessarily have to be used for the same purpose as the one that’s been sold, though. As long as both properties are used as investment properties that earn income, they generally can qualify as a like-kind exchange.

Deadlines and Rules

You can make a direct swap with another property owner to complete a like-kind exchange — if you can find the right property for your purposes. More often, though, sellers use a qualified intermediary (QI) to facilitate a “delayed” exchange. With this type of transaction, proceeds from the sale of your original property go directly to the QI to hold in escrow, and you must find and purchase a replacement property within a preset timeline following two main deadlines:

•   The 45-Day Rule: Within 45 days of closing on the original property, you must designate a replacement property — or properties — in writing to the QI; and

•   The 180-Day Rule: You must close on the new property within 180 days of selling the original property.

These two periods run concurrently, so you may want to find a real estate agent who can help you locate a new property before you complete the sale of the old one. Make sure you’re familiar with how to get a mortgage loan and the different types of mortgage loans before you begin the process of closing on the original property, and line up a home mortgage loan for the new property, should you need one.

Reverse Exchanges

You also may choose to do a reverse exchange, using those same 45- and 180-day deadlines, and still qualify for the 1031 tax deferral. In this case, you would transfer a qualifying replacement property to an intermediary, identify a property you already own that you want to sell, and complete the sale within 180 days of closing on the new property.

Reporting a 1031 Exchange to the IRS

You must notify the IRS of the 1031 exchange by submitting Form 8824 with your tax return for the year the exchange took place. It’s important to hold on to financial documents and keep good records, including descriptions of the properties involved, closing dates, and other details of the transaction. (Because this can be a complicated process to complete and report, you may want to consult with a tax professional before proceeding.)

Recommended: Investment Property Mortgage Rates

Saving on Taxes with the Home Sale Exclusion

Investors aren’t the only ones who can benefit from a tax break when selling a property for a profit. A tax provision known as the Section 121 Exclusion, or “home sale exclusion” allows homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence. Here are some basics that can help you determine if you qualify.

Ownership and Use Tests

To use the home sale exclusion, you typically must meet these requirements:

•   You must have owned and used the home as your primary residence for at least two of the five years leading up to the date of the sale. The two years don’t have to be consecutive.

•   The home must qualify as your primary residence. For example, it should be the address used on state and federal IDs, voter registration, filing taxes, and utility bills. And you can only claim this exclusion once every two years.

Calculating the Taxable Gain

Here’s an example of how the home sale exclusion might work. Let’s say, Joe, who is single, buys a house for $200,000 and sells it three years later for $500,000. His profit is $300,000; but after applying his $250,000 exclusion, Joe would pay capital gains tax on only $50,000 of the profit.

Depending on what Joe’s taxable income is in the year he makes the sale, he could pay a capital gains tax rate of 0%, 15%, or 20% on this reduced amount.

Other Strategies to Minimize Capital Gains Tax

The 1031 exchange and home sale exclusion are two popular methods for minimizing the tax on real estate capital gains. But there are other strategies you may also want to consider to reduce the tax blow to your bottom line.

Installment Sales

If you make a large profit on your property sale and want to spread out your capital gains tax liability over a period of several years, you may want to look at the benefits of receiving installment payments from the buyer instead of a lump sum. With this method, you would pay capital gains tax only on the portion of the gain you receive each year until the property is paid off.

Let’s say you’re an older couple hoping to sell your home and downsize to a less expensive home purchase or a rental in retirement. Or maybe you’re a young couple planning to sell your home in a high-priced city in order to move to a less expensive location so one of you can stop working and stay home with the kids. An installment sale would allow you to reduce your upfront tax burden and could provide a reliable income stream when you make this big life change.

Tax-Loss Harvesting

Tax-loss harvesting is another popular option for reducing long-term capital gains. Here’s an example of how it might work:

Let’s say you made a big profit on a real estate deal, but you also suffered a large loss on a long-term investment held in a taxable investment account. You may be able to use (or “harvest”) that loss to offset some of the gains from your successful property sale. Or, if you have long-term investments that aren’t doing as well as you’d like, you might choose to sell them for less than you paid and use the loss to help offset your taxable gain.

If it turns out your loss is more than your gains, you also may be able to reduce your ordinary income by up to $3,000 in that tax year. And you can carry forward any remaining loss — up to $3,000 per year — to future tax years.)

Charitable Donations of Real Estate

If your list of financial goals includes charitable giving, donating real estate directly to a qualifying charitable organization — instead of selling it, paying capital gains tax, and then donating the profits — could help you maximize the amount of your gift. You also may be able to claim a tax deduction equal to the fair market value of the property during the tax year when the gift was made, which could significantly reduce your tax burden. With this strategy, both you and your favorite charity could benefit.

Recommended: Real Estate Listing Terms Decoded

Planning for Capital Gains Tax in Real Estate Investing

Navigating capital gains tax in real estate can be complex, which means planning is a must. Here are a few things to keep in mind whether you’re hoping to sell a property (or properties) this year or in the future.

Record-Keeping and Cost Basis

One of the best ways to reduce your capital gains tax is to make the most of all the reductions the IRS allows. But you’ll have to back up any costs you claim. So holding on to financial documents you receive while you own the property is imperative — including the original closing documents from your purchase, receipts from any major improvements you made, the real estate purchase contract and the closing documents from the sale. As a general rule, it’s smart to track home-improvement costs for any materials and labor that increase the value of the property (in other words, not general upkeep expenses).

This information will help you determine your property’s cost basis (or adjusted cost basis if you made major improvements), which is the value that will be assigned to your home or real estate investment for tax purposes.

Seeking Professional Advice

Another way to make sure you’re getting every tax break you can when you sell your property is to work with a financial professional who’s experienced in real estate taxation. This could help you keep more of your money after the sale and avoid making a misstep that could lead to an expensive IRS penalty.

The Takeaway

Understanding how to avoid capital gains on real estate, and doing some proactive planning, could make a big difference to the bottom line of a successful property sale. And the more money you can keep in your own pocket, the more you’ll have to put toward your other financial goals — including buying your next home or investment property.

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.

FAQ>

What qualifies as a like-kind property for a 1031 exchange?

A “like-kind” exchange doesn’t mean the old and new properties have to be exactly the same size or in the same neighborhood. But the net market value and equity of the replacement property must be the same as, or greater than, the property that’s been sold — and it must be in the U.S. The properties also should have a similar purpose (selling one rental property and acquiring another, for example).

Are there any time limits for 1031 exchanges?

Yes, there are two main deadlines you’re required to meet to successfully complete a 1031 exchange. First, within 45 days of closing on the original property, you must designate at least one replacement property in writing to a qualified intermediary. Next, you must close on the replacement property within 180 days of selling on the original property. These two time periods run concurrently.

Can you use a 1031 exchange for a primary residence?

A primary residence typically doesn’t qualify for a 1031 exchange. The properties involved must be used as an investment or for business.

Photo credit: iStock/gorodenkoff

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 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.

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.

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-Q324-004

Living small can have big advantages — particularly when it comes to cost. With fewer square feet to build, maintain, and keep lit, cooled, and heated, a tiny house can be far cheaper than more traditional iterations of the American dream.

Still, not all tiny houses come with tiny price tags. While it’s possible to build an off-the-grid tiny house for $10,000, some luxury tiny homes cost $100,000 or more. On average, a tiny home costs just over $50,000 to build, not including the price of the land it’s sitting on, though purchasing a prebuilt tiny home could rack up a higher price tag.

What Is the Average Tiny House Cost?

While, as we’ve seen, the cost of a tiny house can range significantly, the average price is usually somewhere between $30,000 and $60,000, according to Porch.com. Compare that to the latest median sale price for a non-tiny home — $434,000, according to real estate giant Redfin. (That’s before accounting for peripheral expenses like closing costs.) Bear in mind, though, that tiny house prices generally don’t include the land where the house will be located or the cost of any water, sewer, or electrical service hookup.

That’s a pretty hefty difference, although of course the tight housing market has an effect on the cost of prebuilt tiny homes, too. It’s not uncommon to see tiny homes listed for close to (or even over) $100,000, especially in highly desirable areas.

Many tiny houses are so relatively low cost that they don’t meet the minimum threshold to qualify for a home loan, although there are different types of mortgage loans and you can shop around to find a lender that might finance your home.

Tiny House on Wheels vs. Foundation

As you may already know, tiny homes can be built on wheels (though they’re not usually as mobile as standard mobile homes) or built on a foundation just like a larger home. Along with giving their owners some flexibility when it comes to location, building a tiny house on wheels can also change the price tag.

According to data from The Spruce, a tiny house on wheels costs an average of $60,000 to $80,000, while those built into foundations start lower — at $35,000 — but can run substantially higher, to $180,000.

Many other factors also play into the overall tiny home cost, too, which we’ll take a closer look at next.

Recommended: How to Get a Mortgage

Factors Affecting Tiny Home Cost

What other factors affect your tiny home’s bottom line? Here are some of the most impactful.

Size and Square Footage

While “tiny” is a fairly open-ended description, according to builder United Tiny Homes, these structures are generally between 100 and 400 square feet. There is some wiggle room on either end, though, and 500-square-foot tiny houses aren’t unheard of.

As you might expect, the larger your tiny house is, the more materials it takes to build — and therefore, the higher its price is likely to be. Still, since even the largest tiny homes are so much less expensive than traditional homes, it may be worth it to have just a little bit more room to roam.

Building Materials

Another factor that’s true for tiny homes as well as their larger counterparts: The higher the quality of the building materials, the more expensive the tiny home is likely to be. (However, it may also be able to withstand the test of time better, lowering overall maintenance costs and actually saving you money over time.)

However, some tiny home builders save by using recycled or reclaimed materials, which can substantially lower the overall cost (though make the project more time- and effort-intensive).

Labor and Professional Services

Labor is, of course, another major factor. If you’ve got the skills to build your tiny home yourself — or the patience to learn them — you stand to save thousands of dollars on what you’d spend to have a professional builder do it for you. How much does it cost to build a tiny house when it comes to labor? Construction work usually starts around $20 per hour, depending on the specific project, and that’s not counting the cost of materials and any overhead a contractor would charge. Professionals such as a plumber or electrician can run into the hundreds of dollars per hour.

Of course, when it comes to tricky and even potentially dangerous aspects of building a tiny home, like running electricity, professional know-how might be worth the price if you’re an amateur.

Building vs. Buying a Tiny House

When you’re budgeting for buying a house, bear in mind that buying a premade tiny home could be a lot more expensive than building one yourself — but as we’ve seen, you can also rack up a large overall bill on building your own if you rely on professional labor to do so. Here are some other considerations to keep in mind as you decide which route is right for you.

Custom Build

Having the opportunity to literally dream up your perfect tiny home and bring it to life might be priceless to you — and, again, if you’re able to DIY the project from start to finish, it might cost you less than buying someone else’s already-built dream. However, working with a contractor and architect to draw the blueprint and build the entire home from scratch could be a lot pricier. The good news is, tiny homes are popular enough now that services specifically designed to build tiny homes are more readily available.

Prefab or Kit Homes

Looking for a good middle road between a custom-designed, DIY tiny home and buying one that’s ready to go? Tiny home kits are available for prices starting around $12,000 or so — although this figure of course doesn’t include the land the tiny home will need to sit on, or the labor it’ll take to get it from flat to 3-D.

Used Tiny Homes

Buying someone else’s used tiny home is an option that could save you money — or cost you more, if the house has been carefully flipped and staged and is well marketed. Used tiny homes on wheels may be less expensive than those on foundations, but lots of factors play in, including geographical location, materials used, and more.

Recommended: Mortgage Calculator

Cost-Saving Tips for Tiny House Living

Here are some best practices for minimizing tiny house cost:

DIY Construction

Once again, if you have (or can summon) the know-how to build your own tiny house from scratch, you can shave a substantial portion off the final price tag. Plus, you’ll be better prepared for inevitable maintenance projects down the line — which means the saving opportunities just keep going.

Repurposed and Recycled Materials

Using repurposed and recycled materials can lower the cost of the physical parts of your building. In some cases, recycled and repurposed materials are available for free — though you may “pay” in the time it takes to find them.

Off-Grid Living

Finally, setting your tiny house up for off-grid living saves you money on utilities and city services like trash and water. By utilizing solar panels and a composting toilet, you can make your tiny house ready for the great outdoors — and self-sustaining enough to forego the regular monthly bills.

The Takeaway

While the cost of a tiny home can vary significantly, it’s almost always substantially lower than the cost of traditional, larger American houses — which can give those who live tiny big gains in terms of financial freedom.

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.

FAQ

What is the cheapest way to build a tiny house?

If you have the know-how, building your own tiny house from scratch with recycled and repurposed materials can save you thousands of dollars. Many knowledgeable tiny home owners have completed the project for under $10,000.

How much does it cost to hire a tiny house builder?

While labor costs vary substantially depending on where you live (and other factors), the cost of materials for most tiny homes is already around $50,000, and labor usually costs about $20 per hour. Which is to say, the overall cost to hire a tiny house builder can quickly approach $100,000, particularly if you want a custom design.

Can you get a loan for a tiny house?

Tiny homes are still a relatively new phenomenon, and some mortgage lenders’ policies have not yet been updated to work for them. Given their relatively low cost, the amount you need to borrow may be under the mortgage lender’s minimum. Personal loans are another option for those who want to finance a tiny house, but beware: Unsecured personal loans usually come at higher interest rates than secured mortgages, and the interest may not be deductible on federal taxes as it would with a traditional mortgage.

Photo credit: iStock/RossHelen

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 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.

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-Q324-001

If you’re 62 years or older and are looking to move, a Home Equity Conversion Mortgage (HECM) for Purchase could help you pay for your new home. An HECM for Purchase is a government-insured reverse mortgage that you can put toward buying a house. With an HECM for Purchase, you won’t have to make mortgage payments as long as you keep up with property taxes and other obligations. However, this type of reverse mortgage can come with high closing costs and insurance premiums, so it may not be your most affordable option for financing a home. Read on for the full story of the HECM for Purchase program, along with its pros and cons.

What Is an HECM?

An HECM for Purchase is a type of HECM, which is in turn a type of reverse mortgage — specifically, the kind that is insured by the Federal Housing Administration (FHA). HECMs allow people 62 and older to convert the equity in their home into cash. (The chief HECM vs. reverse mortgage differentiator is the FHA’s involvement in HECMs.)

You’ll need to own your property outright or have a good amount of equity built up to qualify for an HECM. Eligible borrowers can turn that equity into cash and won’t have to pay back the home mortgage loan until they move, sell the home, or die. In those events, the HECM must be paid back in its entirety, along with any interest charges. An HECM has some of the same pros and cons of reverse mortgages.

What Is an HECM for Purchase?

An HECM for Purchase is a type of HECM that allows homeowners to borrow against their current residence and pay for a new one in one transaction with one set of closing costs. It’s designed for homeowners who are looking to move into a new primary residence. You can’t use an HECM for Purchase to finance a vacation home or an investment property.

Like other HECMs, an HECM for Purchase does not require repayment during the borrower’s lifetime while they (or their surviving spouse) are living in the house. However, borrowers can pay down the loan’s principal and interest if they choose. They also must meet other payment obligations, including property taxes, homeowners insurance, and maintenance costs.

The HECM for Purchase will become due if the borrower moves or dies. As a non-recourse loan, however, the HECM for Purchase will never charge more than the value of the home it was used to finance.

HECM for Purchase Requirements

There are several requirements you’ll need to meet to qualify for an HECM for Purchase. Here are the main ones.

Age Requirement (62+)

HECM for Purchase loans are exclusively offered to borrowers who are age 62 or older. By contrast, traditional mortgages don’t have an age restriction, apart from the age of majority in your state (typically at least 18).

Income and Credit Qualifications

You’ll also need to meet income and credit requirements to qualify for an HECM for Purchase. While there’s no stated minimum credit score, having debts in delinquency or default could be an obstacle to qualifying.

Lenders also consider your residual income, or the amount of income you have after subtracting certain expenses. You’ll need to show that you have sufficient residual income to keep up with living expenses.

Financial Assessment

A lender will also assess your overall finances to ensure you can meet the financial obligations of the HECM for Purchase loan, which include paying property taxes and homeowners insurance. Plus, you’ll need to make a sufficient down payment on the new property, typically around 50%.

How HECM for Purchase Works

An HECM for Purchase lets you draw on the equity of your current home to finance the purchase of your next home. It combines two transactions — a reverse mortgage and a new mortgage — into one to simplify the home purchase process.

You won’t have to make payments on your HECM for Purchase while you live in your house, but you will have to keep up with payments of property taxes, homeowners insurance, maintenance expenses, and any homeowners association fees.

HECM for Purchase loans are backed by the FHA, so you’ll need to work with a lender that specializes in these loans to get one.

Down Payment Amount

To use an HECM for Purchase, you’ll need to sell your original home and use the proceeds to make a sufficient down payment on your new home. Then you can finance the remaining amount with your HECM loan. The required down payment may range from 45% to 62% of the home’s purchase price, depending on the borrower’s and spouse’s age. If you have money left over after making the down payment, you can receive it as a lump sum or as fixed monthly payments.

Recommended: Getting a Mortgage in Retirement

Pros of HECM for Purchase

There are several benefits to taking out an HECM for Purchase loan.

•   No mortgage payments: With an HECM reverse mortgage for purchase loan, you won’t have to make principal and interest payments while you live in the house and cover essential charges, like taxes. A conventional mortgage, by contrast, requires monthly repayment.

•   More purchasing power: An HECM for Mortgage could increase your purchasing power and bring your goal of buying a new home within reach, especially if you’ve built up a good deal of equity in your current property.

•   Avoid dipping into savings: By using an HECM for Purchase to buy a home rather exhausting your savings, you can avoid draining your retirement funds or other accounts to buy a house.

•   Debt won’t exceed home value: As noted above, an HECM for Purchase is a non-recourse loan, so the debt you or your heirs owe will never exceed the home’s value, even if the property value dips in the future.

Cons of HECM for Purchase

At the same time, an HECM for Purchase loan has some downsides to consider before you borrow.

•   Charges interest, closing costs, and premiums: The HECM for Purchase can come with high closing costs, which include origination fees, title insurance, and appraisal fees. It also charges annual Mortgage Insurance Premiums and accrues interest based on the reverse mortgage interest rate you’re given at the outset of the loan.

•   Requires you to pay property taxes and other expenses: You’ll need to pay property taxes and homeowners insurance to keep the loan in deferred repayment, as well as maintain the property to acceptable standards.

•   Demands that you live in the new home full-time: Your home must be your new primary residence. If you move or sell, you’ll have to pay back the HECM for Purchase loan.

•   Calls for a large down payment: This loan program is reserved for borrowers who can make a large down payment, sometimes 50% or higher, for their new home.

Alternatives to Consider

Before applying for an HECM for Purchase, it’s worth considering alternative financing options, such as:

•   Traditional mortgage: A conventional mortgage typically requires a credit score of at least 620, a down payment (though not as high as 50%), and a debt-to-income ratio below 50% — and sometimes as low as 43%. You’ll also need to have sufficient income to qualify.

•   Home equity loan or home equity line of credit (HELOC): Homeowners can also tap into their equity with a home equity loan or HELOC. You could use this “second mortgage” to finance another home, but be cautious about over-borrowing. A lender can foreclose on your home if you miss payments.

•   Proceeds from home sale: Selling your home is another way to finance the purchase of a new one, especially if you’re downsizing to a more affordable place. In this case, you might have extra money left over to put into savings or invest.

Recommended: The Best Cities for Retirees

The Takeaway

The HECM for Purchase program can simplify the home-buying process for seniors who want to use a reverse mortgage to buy a new house. As long as you keep up with property taxes, homeowners insurance, and other required costs, you won’t have to make any mortgage payments on your HECM while you reside in your new home. At the same time, HECM for Purchase loans come with closing costs and premiums. Consider all your options to determine the best type of financing for your next home purchase.

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.

FAQ

What types of homes qualify for HECM for Purchase?

The following types of homes qualify for the HECM for Purchase program:

•   Single-family homes

•   2- to 4-unit homes where the borrower occupies one unit

•   HUD-approved condo projects

•   Individual condo units that meet FHA single-unit approved requirements

•   Manufactured homes that meet FHA requirements

The property must also meet all of the FHA’s property standards and flood requirements.

How long can I stay in the home with HECM for Purchase?

You can stay in the home you finance with an HECM for Purchase loan indefinitely. The loan will become due when the last borrower (or the borrower’s spouse) moves, sells the home, or passes away.

Are there limits on HECM for Purchase loan amounts?

An HECM for Purchase is limited to the appraised value of the home or the sales price of the new home, whichever is lower. It cannot exceed the HECM FHA mortgage limit, which is $1,149,825 for 2024.

Photo credit: iStock/FG Trade

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 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.

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.

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.

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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^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.

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An annual income of about $76,000 should put you in the position to afford a $250,000 mortgage, assuming you have relatively little other debt. But exactly what amount you’ll need to earn will depend on your interest rate, loan term, and debt level, among other factors. If you’re considering buying a new home, let’s take a closer look at how much you’ll need to earn to qualify for a $250,000 mortgage.

Income Needed for a $250,000 Mortgage

The exact income needed to afford a $250,000 mortgage loan can’t be nailed down without more information, but what we can get pretty close to is the P&I payment, which stands for principal and interest, and represents a majority of your monthly payment. However, even this calculation won’t give you an exact income number until you know your interest rate and desired loan term (15, 20, 30 years).

Other factors that will influence your monthly mortgage payment are:

•   Property taxes: Lenders often collect a portion of your property taxes each month and pay the local government on your behalf. And even if you don’t pay the taxes through your lender, you’ll need to include them in your budget.

•   Home insurance: Assuming you have a mortgage, your lender will require you purchase home insurance. Depending on the house and location, you may also be required to purchase earthquake insurance and flood insurance.

•   Loan specific fees: Different types of mortgage loans have unique fees that may increase the cost of your monthly mortgage payment. For example, the guarantee fee with a U.S. Department of Agriculture (USDA) loan, or mortgage insurance premium with a Federal Housing Administration (FHA) loan.

•   Homeowners association (HOA) fees: Since you’ll likely pay the HOA directly, these fees should not increase the cost of your mortgage payment, but they will increase your monthly expenses. Keep this in mind while house hunting.

Moving forward, let’s assume you choose a 30-year loan term and receive a 7.00% interest rate.

How Much Do You Need to Make to Get a $250K Mortgage?

Using a mortgage calculator, it’s easy to get some quick numbers for the P&I payment (principal and interest) on a $250,000 mortgage. If you’re willing to estimate, a mortgage calculator with taxes and insurance included will get you a little closer as to what to expect.

If we assume you take out a 30-year mortgage and have a 7.00% interest rate, the monthly P&I payment on a $250,000 mortgage would be $1,663. Assuming your lender wants you to have a maximum 28% housing-to-income ratio, then the minimum income you would need to make for your P&I payment would be $71,271 a year or $5,939 a month. Add in your property tax, home insurance, and private mortgage insurance (PMI, which a lender will require if your down payment is less than 20% of the home’s sales price) and you’re likely looking at a monthly payment of $2,234.

Another thing you may want to try is determine how much banks are likely to lend to you. If you know your exact gross income and monthly debts, try out a home affordability calculator. Another option is to move forward with a mortgage preapproval process so you know exactly how much you have to work with.

What Is a Good Debt-to-Income Ratio?

Ideally, lenders want borrowers to stick to a 36% debt-to-income (DTI) ratio, with a maximum of 28% going toward housing costs. However, depending on your income and credit score, some lenders may accept higher DTIs.

If we consider the cost of living by state, 28% may be too much when you account for daily expenses, such as food and gas, which can skew the income needed for a $250K mortgage. Therefore, if your job and lifestyle allow you to be flexible on where you live, you might consider checking out a ranking of the most affordable states.

What Determines How Much House You Can Afford?

Lenders look at a variety of factors when determining how much house a borrower can afford, but the big four are:

•   Income

•   DTI ratio

•   Credit score

•   Down payment amount

What Mortgage Lenders Look For

If you’re a first-time homebuyer, lenders look at the following variables for each borrower:

•   Employment history

•   Income

•   DTI ratio

•   Credit score

$250,000 Mortgage Breakdown Examples

How much income is needed for a $250,000 mortgage is significantly influenced by your rate and term. Let’s take a look at the various P&I payments you can expect with different rates and different terms:

Pros and Cons of a $250,000 Mortgage

Buying a house comes with both benefits and drawbacks. Here are some things you should consider:

Pros of a $250,000 Mortgage:

•   Each monthly payment builds equity

•   Home can be used as collateral for low rate loans

•   More freedom to make changes to home

•   Homeownership provides a hedge against inflation

Cons of a $250,000 Mortgage:

•   Homeowners are responsible for all repairs and maintenance

•   Must save up for both down payment and closing costs

•   Must purchase home insurance

•   Must pay property taxes

How Much Will You Need for a Down Payment?

If $250,000 is the purchase price, the lowest down payment a first-time borrower could make with a conventional loan is $7,500. If you choose an FHA loan, the lowest down payment you can make is $8,750. VA loans (from the U.S. Department of Veterans Affairs) and USDA loans don’t require down payments. It’s worth noting that even if you have owned a home before, you might qualify as a first-time homebuyer from a lender’s perspective if it has been at least three years since you had ownership in a principal residence.

Can You Buy a $250K Home With No Money Down?

Yes, both USDA loans and VA loans don’t require a down payment. VA loans are for qualified active and retired military and surviving spouses, while USDA loans are for homes bought in certain rural areas the USDA has deemed to be in need of economic development.

Can You Buy a $250K Home With a Small Down Payment?

If you use a conventional loan, the lowest down payment a first-time homebuyer can make is typically 3%. The lowest down payment with an FHA loan is 3.5%. USDA and VA loans don’t require a down payment, but they do have eligibility requirements.

Is a $250K Mortgage with No Down Payment a Good Idea?

Whether skipping the down payment on a home is a good idea depends on your long-term goals and what you hope to do. If you want to save money over the life of the loan, making a down payment will save you money in interest. If you need the money now for other endeavors, there’s nothing wrong with choosing a loan that doesn’t require a down payment.

Can’t Afford a $250K Mortgage With No Down Payment?

If you can’t afford a $250,000 mortgage, there are some things you can do to make homeownership a little easier.

Pay Off Debt

Paying off your debt will lower your DTI, improve your credit score, and give you more cash to work with each month. Because there are so many benefits, it may be worth your time to pay down as much debt as possible before applying for a mortgage.

Look into First-Time Homebuyer Programs

There are many first-time homebuyer programs across the United States. Assistance can come in various forms. It may be a low-rate loan, a forgivable loan, or a grant. It often comes as a forgivable loan, which doesn’t require any form of repayment as long as certain conditions are met. Assistance is often first come first served, so apply early if you’re interested.

Build Up Credit

The lower your score, the higher your interest rate. Strengthen your credit score, and you could qualify for a better interest rate that would lower your monthly payment and save you money in interest over the life of the loan.

Start Budgeting

Take steps to eliminate unnecessary spending so you can put as much as you can toward your savings. Monthly subscriptions and dining out, for example, may need to be put on the back burner as you work toward your savings goals.

Also, any lump payments you receive throughout the year could be put toward savings. For example, an end-of-the-year bonus or tax refund should be tucked away as soon as it’s received. Currently, the average federal tax refund is $2,869. That’s 33% of an $8,750 down payment.

If you’re new to the world of mortgages and financing, check out our home loan help center where we go in-depth on everything you need to know about buying your first home or moving forward with a mortgage refinance.

Alternatives to Conventional Mortgage Loans

It depends on the seller, but some sellers are open to lease-to-own or seller financing. Another option may be to pursue a portfolio loan with a local bank or credit union.

Mortgage Tips

Here are some tips to qualify for a mortgage:

•   Pay down your debts

•   Pay close attention to your credit score

•   Save up for a down payment

•   Stick with your current employer

•   Gather all supporting paperwork needed for your mortgage application

The Takeaway

For a 30-year loan on a $250,000 mortgage with a 7.00% interest rate, you’ll need a gross income of around $76,000 a year. But exactly how much income you would need to have depends on several factors that are specific to you, including your existing debts, your credit score, and what loan term you choose and what interest rate you qualify for.

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.

FAQ

How much income do you need to qualify for a $250,000 mortgage?

To cover the monthly mortgage payment on a $250,000 mortgage, you’ll need an income of around $76,000 a year. For the most accurate estimate, you will need to know your exact interest rate, property taxes, home insurance, and home loan term.

Can I afford a $250K house on a $50K salary?

It would be difficult to afford a $250,000 house on a $50,000 annual salary unless you are able to make a large down payment, which would reduce your monthly mortgage costs to a manageable level. If you earn $50,000 a year and have minimal debts, you could probably qualify for a mortgage loan of around $150,000.

What is the monthly payment on a $250K mortgage?

The monthly principal and interest payment on a $250,000 home mortgage loan ranges from around $1,500 to $2,250, depending on the loan term (15 vs. 30 years) and interest rate (6.00% to 7.00%, although a higher or lower rate might be possible). The shorter the term and the higher the interest rate, the greater your monthly payment will be.

Photo credit: iStock/yavorskiy

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 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.

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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†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.

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