Understanding Property Valuations

If you’re applying for a mortgage, you probably expect the lender to take a look at your income, debt, credit history, employment, and assets.

There’s another loan element the lender will consider that may be less familiar: an objective property valuation.

What Is a Property Valuation?

Sellers may use a property valuation to determine how much their house is worth and how much they can charge on the open market.

A mortgage lender’s property valuation is slightly different. It helps the lender determine the value of the property you’re hoping to buy based on factors like size, location, condition, and demand.

Why would lenders require this type of home appraisal? They want to know that the loans they offer are backed by a sufficiently valuable property so that if a borrower were to default on the loan, they can recoup their losses.

Consider this: Sellers can choose any listing price they want — whatever they think someone is willing to pay. But if the buyer needs financing, the selling price must be supported by market value (what comparable homes have recently sold for in the area) before a lender will pony up the cash for a loan.

If the home you want to buy is appraised for less than the sales price, the seller would need to lower the price to the appraised value, you would have to make up the difference, or you’d exit the deal.

Who Carries Out a Property Valuation?

A lender’s property valuation typically will be carried out by a professional appraiser assigned by a third party.

The lender, buyer, and seller are not to have any relationship with the appraiser so that the valuation is unbiased. Buyers can hire an independent appraiser, but the valuation would not be official.

The kind of valuation required by lenders depends on factors such as the type of home you’re looking to buy, the type of loan you’re applying for, your credit score, and whether you’re buying a single-family or multifamily home.

Home Appraisals, Explained

The most common kind of property valuation is an appraisal.

How Does a Home Appraisal Work?

An appraisal is an independent estimate of the home’s value by a licensed or certified real estate appraiser.

Appraisers weigh factors like location, the condition of the home, size and layout, the year it was built, and any renovations that have been done. They also consider “comps” — what similar homes in the neighborhood recently sold for — tax records, and zoning.

The appraisal will determine a market value that is either “as is” or “subject to” certain conditions, such as completion of repairs or upgrades.

Lenders rely on the appraiser’s market value to come up with the loan-to-value ratio of a property, which influences the amount they’re willing to lend and the terms of the loan.

When Does an Appraisal Happen and What Does It Cost?

The federal government no longer requires appraisals for homes that cost less than $400,000, allowing simpler evaluations to stand in their place. That said, most mortgage lenders probably will still require an appraisal.

The appraisal typically occurs once the seller has accepted an offer and is normally performed within the loan contingency date of the purchase contract, usually 21 days.

The buyer pays for the appraisal ordered through the lender. The cost depends on the type of property, city, size, and features, but for a single-family home it averages $348, according to a national survey from HomeAdvisor, an online platform for home services professionals.

A desktop appraisal may cost much less than that.

What If You Get a Low Appraisal?

If the appraised value is as much as the agreed-upon price or more, that encourages the lender to move forward with the home loan, assuming that the other aspects of the property and your application are in order.

If the appraisal comes in under the agreed-upon price, the lender may reduce the amount of the loan it’s willing to offer.

You or the sellers can dispute the appraisal with the lender or ask for a second appraisal. If the value is still too low, there are three routes:

•   You can agree to contribute the difference in cash.

•   You can try to get the seller to reduce the price.

•   You and the seller may agree to split the difference.

Buyers can back out of the deal if the contract includes an appraisal contingency. A clean offer, one with as few contingencies as possible, caught on in the recent hot market, but buyers take risks in dropping contingencies.

Alternatives to a Full Home Appraisal

In certain situations or stages of the homebuying process, you may not need to go through a full formal home appraisal. Here are some alternative methods lenders use for home valuations.

Automated Valuation Model

Algorithms take into account the size of the home, the number of bedrooms and bathrooms, comps, and other factors to estimate property value.

Some lenders of conventional mortgages using Fannie Mae or Freddie Mac’s automated underwriting systems may receive a waiver for a full appraisal, thanks to robust sales in the neighborhood to support the purchase price, the amount of the down payment, strength of the borrower, or the type of transaction.

Some lenders also use automated valuation models when deciding whether to extend or adjust a home equity line of credit.

Drive-by or Exterior-Only Appraisal

A drive-by appraisal (also known as a summary appraisal) refers to an inspection that only looks at the exterior of a home. The appraiser will photograph the front and sides of the home, as well as the street in both directions.

The appraiser takes notes on the neighborhood and the condition of the home and looks at comps when coming up with an estimated value.

Desktop Appraisal

Never having to leave the desk, an appraiser uses property tax records, comps, and other public record data in lieu of a physical property inspection.

The Federal Housing Finance Agency made desktop appraisals, implemented in March 2020 amid lockdowns and social distancing, permanent for purchase loans starting in early 2022.

That means both Fannie Mae and Freddie Mac will allow appraisals to be conducted remotely.

Broker Price Opinion

A broker price opinion is an estimate of a property’s value determined by a real estate agent or broker, rather than a licensed appraiser. A client may request this estimate to underpin a home’s listing price.

A lender may request a broker price opinion when a borrower is behind on payments, and will use the unofficial assessment to see whether the home value is below the amount of the loan, potentially making the borrower eligible to negotiate a short sale.

Broker price opinions can also be used to buy and sell mortgages on the secondary market. Lenders prefer them in these cases because a full appraisal isn’t required, and because the valuations are fast and generally less costly.

The Takeaway

An unbiased professional appraiser determines real estate valuation based on factors like home size, condition, location, and comparable sales. When big money is at stake, a lender needs to determine the true property valuation.

Before you get to the home valuation stage, the first steps to becoming a homeowner may be getting prequalified and preapproved for a mortgage loan.

SoFi offers home mortgages with as little as 5% down, competitive rates, and flexible terms.

It’s quick and easy to find your rate on a SoFi mortgage.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. 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.

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

Young people and professionals who are just starting out often opt to first buy a modest home at an affordable price. Sounds like a good move, but it helps to look at buying a starter house from all angles.

The decision to buy a starter home is about more than just money.

What Is a Starter Home?

A starter home is loosely defined as a smaller property that a first-time buyer expects to live in for just a few years.

The home could be a condo, townhouse, or single-family home. But generally, when you purchase a starter home, you anticipate outgrowing it — maybe when you get married or have a couple of kids, or because you want more amenities.

A starter house could be brand-new, a fixer-upper, or somewhere in between, but it’s usually priced right for a buyer with a relatively modest budget.

In July 2021, the median listing price for a “starter” home, one with up to two bedrooms, was $297,000, according to Realtor.com.

That still might sound a little scary, but remember, that’s the median price. Depending on where you live, there may be entry-level homes selling at manageable price points.

Even if you live in a larger city, the site found that buying a starter home was more affordable than renting in 24 of the 50 largest metro areas.

Recommended: How to Buy Your First Condo

How Long Should You Stay in a Starter Home?

Unless you’re a big fan of packing and moving — not to mention the often-stressful process of selling one home and then buying another, or buying and selling a house at the same time — you may want to stay in your starter home for at least two to five years.

There can be significant financial reasons to stick around for a while.

Home sellers are typically responsible for paying real estate agents’ commissions and many other costs. If you haven’t had some time to build equity in the home, you might only break even or even lose money on the sale.

And you will owe capital gains taxes if you’ve owned the home for less than two years and you sell it for more than you paid.

Of course, if there’s a major change in your personal or professional life — you’re asked to relocate for work, you grow your family, or you win the lottery (whoo-hoo!) — you may need or want to sell sooner.

What Is a Forever Home?

A forever home is one that you expect to tick all the boxes for many years — maybe even the rest of your life.

A forever home can come in any size or style and at any cost you can manage. It might be new, with all the bells and whistles, or it could be a 100-year-old wreck that you plan to renovate to fit your unique style and vision.

Your forever home might be in your preferred school district. It might be close to friends and family — or the golf club you want to join. It’s all about getting the items on your home-buying wish list that you’ve daydreamed about and worked hard for.

At What Age Should You Buy Your Forever Home?

There’s no predetermined age for finding and moving into a forever home. Some buyers plan to settle in for life when they’re 25 or 30, and some never really put down roots.

But according to data from the 2021 Home Buyers and Sellers Generational Trends Report from the National Association of Realtors® Research Group, buyers in the 56 to 74 age range said they expected to live in their newly purchased home longer than buyers from other age groups.

Younger buyers (ages 22 to 30) and older buyers (75 to 90) said they expected to stay put for 10 years.

The median expectation for buyers of all ages was 15 years.

Recommended: Learn more with the SoFi First Time Homebuyer’s Guide

Benefits of Buying a Starter Home

Becoming a homeowner can bring stability to life. A starter home comes with a feeling of “good enough for now” that, for some buyers, is just the right amount of commitment without feeling stuck in the long term.

It’s also a great way to try on aspects of homeownership that renters take for granted, like making your own repairs and mowing your own yard. The larger the house, the more work it usually brings. With a starter home, you can start small.

Buying a starter home is also an investment that could see good returns down the road. While you live in the home, you’ll be putting monthly payments toward your own investment instead of your landlord’s. Depending on market conditions, you could make some money when you decide to trade up, either through the equity you’ve gained when you sell or recurring income if you choose to turn it into a rental property.

Homeowners who itemize deductions on their taxes may take the mortgage interest deduction. Most people take the standard deduction, which for tax year 2021 is:

•   $25,100 for married couples filing jointly

•   $12,550 for single taxpayers and married individuals filing separately

•   $18,800 for heads of households

But some homeowners who itemize may be able to do better than the standard deduction.

Finally, in some states, a homestead exemption gives homeowners a fixed discount on property taxes. In Florida, for example, the exemption lowers the assessed value of a property by $50,000 for tax purposes.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.


Downsides of Starter Homes

While the idea of buying a home just big enough for one or two is a romantic one, the reality of finding a starter home that’s affordable has gotten tougher.

The outlook has been so bleak, especially in some larger cities, that some millennials are opting out of the starter-home market altogether, choosing instead to rent longer or live with their parents and save money.

Who can blame millennials for taking a different approach to homeownership than their parents? The older members of this generation came of age during the financial crisis of 2008-09, which included a bursting housing bubble that put many of their parents — and even some of them — underwater on a mortgage they may not have been able to afford in the first place.

Another con of buying a starter home is the prospect of having to go through the entire home-buying process again, possibly while trying to sell your starter home, too.

Keeping your house show-ready, paying closing costs, going through the underwriting process, packing, moving, and trying to time it all so you avoid living in temporary lodging is a big undertaking that, when compared with the relative ease of moving between apartments, can be seen as not worth the effort.

If you aren’t ready to jump into a starter home, an alternative could be a rent-to-own home.

Should You Buy a Starter Home?

If you’re tired of renting or living with your parents but don’t have the cash flow necessary for anything more than a humble abode, a starter home could be a great way to get into real estate without breaking the bank.

Before you buy any home — starter or otherwise — it’s important to sit down and crunch the numbers to see how much home you can realistically afford. Lenders look at your debt, but they aren’t privy to other regular monthly expenses, such as child care or kids’ activity fees.

You also may want to look at how much you can afford for a down payment. While a 20% down payment isn’t required to purchase a home, most nongovernment home loan programs do require some down payment.

In addition, putting down less than 20% means you may have to pay private mortgage insurance (PMI).

The decision to purchase a starter home is about more than just money, though. You may also want to consider your future plans and how quickly you might grow out of the house, whether you’re willing to live where the affordable houses are, and if you’ll be happy living without the amenities you’ll find in a larger house.

Other factors to consider are your current state of financial health and your mental readiness for a DIY lifestyle (which includes your willingness to fix your own leaky toilet or pay a plumber.)

If you’re ready to make the leap, there are plenty of home ownership resources available to help you get started on the path to buying your starter home. Your first step might be to check out a few open houses and to research mortgages online.

The Takeaway

Buying a starter home can be a good way to get your foot in the door of homeownership, but it’s important to consider your plans for the next two to five years or more before buying a starter house.

Are you house hunting and mortgage shopping? SoFi offers fixed-rate home loans with as little as 5% down and competitive rates.

Learn more about SoFi Home Loans and view your rate.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. 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.

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.
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.
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What to Know About FHA 203(k) Loans

If you have your heart set on buying a fixer-upper, an FHA 203(k) loan can help. Repair work requires energy and resources, and it can be difficult to secure a loan to cover both the value of the home and the cost of repairs — especially if the home is currently uninhabitable. With a 203(k) loan, the Federal Housing Administration (FHA) insures loans for the purchase and substantial rehab of homes. It is also possible to take out an FHA 203(k) loan for home repairs only, which could prove helpful with home renovation trends continuing.

Read on for more information about FHA 203(k) loans and the FHA 203(k) process, as well as your other home improvement loan options.

What Is an FHA 203(k) Home Loan?

Section 203(k) insurance lets buyers finance both the purchase of a house and its rehabilitation costs through a single long-term, fixed- or adjustable-rate loan. Before the availability of FHA 203(k) loans, borrowers often had to secure multiple loans to obtain a home mortgage and a home improvement loan.

The loans are provided through mortgage lenders approved by the U.S. Department of Housing and Urban Development (HUD) and insured by the FHA. The government is interested in rejuvenating neighborhoods and expanding homeownership opportunities.

Because 203(k) loans are backed by the federal government, you may be able to secure one even if you don’t have stellar credit. Rates are generally competitive but may not be the best, because a home with major flaws is a risk to the lender.

The FHA 203(k) process also requires more coordination, paperwork, and work on behalf of the lender, which can drive the interest rate up slightly. Lenders also may charge a supplemental origination fee, fees to cover the review of the rehabilitation plan, and a higher appraisal fee.

Additionally, the loan will require an upfront mortgage insurance payment of 1.75% of the total loan amount (it can be wrapped into the financing) and then a monthly mortgage insurance premium.

How an FHA 203(k) Loan Works

As mentioned above, you can take out a 15- or 30-year fixed-rate mortgage or an adjustable rate mortgage through an FHA-approved lender. The amount for which you’re approved will depend on how much your home is expected to be worth after all of the renovations are completed, plus the cost of the work.

Additionally, the amount you’re approved for will also depend on which type of FHA 203(k) loan you get — either the limited (also called streamline) or the standard. (Note that both of these options also have a 203(k) refinance option for current homeowners.)

Streamlined or Limited 203(k) Loan

The limited 203(k) loan allows you to finance up to $35,000 into your mortgage for any repairs or home improvements. There is no minimum repair amount. However, the streamlined 203(k) loan does not cover any major structural work.

Standard 203(k) Loan

If you’re buying a real fixer-upper and looking to tackle larger jobs or major structural repairs, you’ll likely want to go for the standard 203(k) loan. A minimum repair cost of $5,000 is required, and you must use a 203(k) consultant, which are HUD-certified professionals who will oversee the project and make sure FHA standards are met.

What Can FHA 203(k) Loans Be Used For?

Purchase and Repairs

For a standard 203(k) loan, other than the cost of acquiring a property, rehabilitation may range from minor repairs (though exceeding $5,000 in worth) to virtual reconstruction. If a home needs a new bathroom or new siding, for example, the loan will include the projected cost of those renovations in addition to the value of the existing home.

You could do either a remodel or a renovation with the funds, the former of which is making updates to an existing room or structure while the latter is more extensive and can include changing the function or partially the structure of a home. An FHA 203(k) loan, however, will not cover “luxury” upgrades like a pool, tennis court or gazebo.

If you’re buying a condo, 203(k) loans are generally only issued for interior improvements. However, you can use a 203(k) loan to convert a property into a two- to four-unit dwelling.

Project estimates done by the lender or the FHA will determine your loan amount. The loan process is paperwork-heavy. Working with contractors who are familiar with the way the program works and will not underbid will be important.

Contractors will also need to be efficient: The work must begin within 30 days of closing and be finished within six months.

Mortgage LoanMortgage Loan

Temporary Housing

If the home is indeed unlivable, the 203(k) loan can include a provision to provide you with up to six months of temporary housing costs or existing mortgage payments.

Pros and Cons of FHA 203k Loans

Who Is Eligible for an FHA 203(k) Loan?

Individuals and nonprofit organizations can use an FHA 203(k) loan, but investors cannot.

Most of the eligibility guidelines for regular FHA loans apply to 203(k) loans. They include a minimum credit score of 580 and at least a 3.5% down payment. Applicants with a score as low as 500 will typically need to put 10% down. Those with credit scores of less than 500 are not eligible for FHA-insured loans.

Your debt-to-income ratio typically can’t exceed 43%. Additionally, you must be able to qualify for the costs of the renovations and the purchase price.

Recommended: What Credit Score is Needed to Buy a House?

How to Apply for a 203(k) Loan

To apply for any FHA loan, you have to use an approved lender , a list of which you can find on HUD’s website. It’s a good idea to get multiple quotes.

Once you have a lender, they will assign you a 203(k) consultant who will help you to plan the work that needs to be done on the property you’ve selected and determine how much it will cost. To do so, the consultant will perform a home inspection to identify necessary repairs and improvements, including any health or safety issues.

After that, you will need to find a contractor to write out an estimate for the cost of the labor and materials. Once the lender approves that estimate, they will appraise your home. Your loan can then close and work on your home can begin.

Pros and Cons of 203(k) Rehab Loans

Before you move forward with 203(k) rehab loans, it’s important to understand the benefits as well as the downsides. Here are the major pros and cons to consider:

 

203(k) Rehab Loans: Pros and Cons

ProsCons

•   Combines purchase and renovations into one loan

•   Allows you to borrow more than your home is currently worth

•   Relatively low credit score and down payment requirements

•   Can cover temporary housing or mortgage payments if home is uninhabitable

•   Application process can be involved

•   May need to work with a HUD consultant

•   Cannot be used for investment properties

•   Requires upfront and monthly mortgage insurance premiums

 

203(k) Loans vs Conventional Home Rehab Loans

As you consider whether a FHA 203(k) loan may be a good option, you may be wondering how it compares to a conventional home rehab loan. Both can provide financing to cover the cost of renovating, but there are some key differences to keep in mind — namely the credit score and down payment requirements as well as what types of improvements can be financed.

 

203(k) Loans vs Conventional Home Rehab Loans: How They Compare

203(k) LoansConventional Home Rehab Loans

•   Lower credit score and down payment requirements

•   Requires an intensive application process and possibly a HUD consultant

•   Has limitations on what improvements can be done

•   May require a higher credit score and down payment

•   Can carry higher interest rates

•   Allows you to make luxury improvements

 

Alternatives to 203(k) Rehab Loans

The FHA 203(k) provides the most comprehensive solution for buyers who need a loan for both a home and substantial repairs. However, if you need a loan only for home improvements, there are other options to consider.

Depending on the improvements you have planned, your timeline and your personal financial situation, one of the following alternatives could be a better fit.

Recommended: Looking to upgrade your home this year? Check out our Home Improvement Cost Calculator to estimate your budget and ROI.

Other Government-Backed Loans

Limited FHA 203(k) Loan: In addition to the standard FHA 203(k) program, there is a limited FHA 203(k) loan of up to $35,000, which we mentioned above. Homebuyers and homeowners can use the funding to repair or upgrade a home.

FHA Title 1 Loans: There also are FHA Title 1 loans for improvements that “substantially protect or improve the basic livability or utility of the property.” The fixed-rate loans may be used in tandem with a 203(k) rehabilitation mortgage. The owner of a single-family home can apply to borrow up to $25,000 with a secured Title 1 loan.

Fannie Mae’s HomeStyle® Renovation Mortgage: With Fannie Mae’s HomeStyle® Renovation Mortgage, homebuyers and homeowners can combine their home purchase or refinance with renovation funding in a single mortgage. There’s also a Freddie Mac renovation mortgage, but standard credit score guidelines apply.

Cash-Out Refinance

If you have an existing mortgage and equity in the home, and want to take out a loan for home improvements, a cash-out refinance from a private lender may be worth looking into.

You usually must have at least 20% equity in your home to be eligible, meaning a maximum 80% loan-to-value (LTV) ratio of the home’s current value. (To calculate LTV, divide your mortgage balance by the home’s appraised value.)

A cash-out refi could also be an opportunity to improve your mortgage interest rate and change the length of the loan.

Recommended: How Does Cash-Out Refinancing Work?

PACE Loan

For green improvements to your home, such as installing solar panels or an energy-efficient heating system, you might be eligible for a PACE loan .

The nonprofit organization PACENation promotes property-assessed clean energy (or PACE) financing for homeowners and commercial property owners, to be repaid over a period of up to 30 years.

Home Improvement Loan

A home improvement loan is an unsecured personal loan — meaning the house isn’t used as collateral to secure the loan. Approval is based on personal financial factors that will vary from lender to lender.

Lenders offer a wide range of loan sizes, so you can invest in minor updates to major renovations.

Home Equity Line of Credit

If you need a loan only for repairs but don’t have great credit, a HELOC may provide a lower rate. Be aware that if you can’t make payments on the borrowed funding, which is secured by your home, the lender can seize your home.

Recommended: Guide to Buying, Selling and Updating Your Home

The Takeaway

If you have your eye on a fixer-upper that you just know can be polished into a jewel, an FHA 203(k) loan could be the ticket. However, other options may make more sense to other homebuyers and homeowners.

One alternative option that SoFi offers is cash-out refinancing, which allows you to turn your home equity into renovation money. A home improvement loan of $5,000 to $100,000 may be another option worth considering to turn your home into a haven.

Check your rate for a home improvement loan today.
 


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. 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.

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

What Is a Bridge Loan and How Does It Work?

A short-term bridge loan allows homeowners to use the equity in their existing home to help pay for the next place they’re ready to purchase.

But there are pros and cons to using this type of financing. A bridge loan can prove expensive. So can home equity loans. A personal loan might be a good fit.

What Is a Bridge Loan?

A bridge loan, also known as a swing loan or gap financing, is a temporary loan that can help when buying and selling a house at the same time.

Just like a mortgage, home equity loan, or home equity line of credit (HELOC), a bridge loan is secured by the borrower’s current home (meaning a lender could force the sale of the home if the borrower were to default).

But bridge loans are designed to have much shorter terms. Usually the loan is set up to be repaid in a year or less.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.


When to Use a Bridge Loan

Most homebuyers probably would prefer to quickly sell the home they’re in, pay off their current mortgage, and bank the down payment for their next purchase long before they reach their new home’s closing date.

Unfortunately, the buying and selling process doesn’t always go as planned, and it sometimes becomes necessary to obtain interim funding.

Common scenarios when homebuyers might consider a bridge loan include the following.

You’re Moving for a New Job, or Downsizing

You can’t always wait for your home to sell before you relocate for work. If the move has to go quickly, you might end up buying a new home before you tie up all the loose ends on the old home.

Or maybe you’ve fallen in love with a smaller home that just hit the market and you must act quickly.

Your Closing Dates Don’t Line Up as Hoped

Even if you’ve sold your current home, the new-home closing might be scheduled days, weeks, or even months afterward. To avoid losing the contract on the new home, you might decide to get interim funding.

You Need Money for a Down Payment

If you need the money you’ll get from selling your current home to make a down payment on your dream home, a bridge loan may make that possible.

You’re in a Competitive Market

If you’re trying to buy in a hot housing market, sellers may turn up their noses at offers that are contingent on the sale of a home. Being able to show that you have a bridge loan in place could help make your offer stronger.

How Bridge Lending Works

Typically, lenders only issue bridge loans to borrowers who will be using the same financial institution to finance the mortgage on their new home.

And even if you qualified for a new mortgage with that lender, you may not automatically get a bridge loan. You can expect your financial institution to scrutinize several factors — including your credit history and debt-to-income ratio — to determine if you’re a good risk to carry that additional debt.

You’ll also have to have enough equity (usually 20%) in your current home to qualify for this type of interim financing. In other words, eligible bridge loan borrowers generally can apply for up to 80% of their loan-to-value ratio.

Lenders typically issue bridge loans in one of these two ways:

•   One large loan: Borrowers get enough to pay off their current mortgage plus the money for a down payment for the new home. Then, when they sell their old home, they can pay off the amount they owe.

•   Second mortgage: Borrowers obtain a second mortgage to make the down payment on the new home. They keep the first mortgage on their old home in place until they sell it and can pay off both loans.

It’s important to have an exit strategy. Buyers usually use the money from the sale of their current home to pay off the loan. But if the old home doesn’t sell within the designated bridge loan term, they could end up having to make payments on multiple loans.

Bridge Loan Costs

A bridge loan may seem like a good option to homebuyers in a pinch, but the convenience can be costly.

Because these are short-term loans, lenders tend to charge more upfront to make bridge lending worth their while. You can expect to pay closing costs and a gaggle of fees, just as you would with a traditional mortgage. You also could pay an origination fee that’s as much as 3% of the loan value.

Interest rates for bridge loans are generally higher than conventional loan rates.

Bridge Loan Pros and Cons

As with any financial transaction, there are advantages and disadvantages to taking out a bridge loan. Here are some pros and cons borrowers might want to consider.

Potential Benefits

The main benefit of a bridge loan is the ability to buy a new home without having to wait until you sell your current home. This added flexibility could be a game-changer if you’re in a time crunch.

Another bonus for buyers in a hurry: The application and closing process for a bridge loan is usually faster than for some other types of loans.

Potential Drawbacks

Bridge loans aren’t always easy to get. The standards for qualifying tend to be high because the lender is taking on more risk.

Borrowers can expect to pay a higher interest rate, as well as several fees.

Borrowers who don’t have enough equity in their current home may not be eligible for a bridge loan.

The short-term financing aspect of a bridge loan could lead to financial stress. If you buy a new home and then are unable to sell your old home, you could end up having to make payments on more than one loan, including a bridge loan with a high interest rate.

Worst-case scenario, if you can’t make the payments, your lender might be able to foreclose on the home you used to secure the bridge loan.

Bridge Loan Alternatives

If the risks and other downsides of taking out a bridge loan make you uneasy, there are other options that might suit your needs.

Home Equity Loan

A home equity loan is another way to tap into your current home’s value to cover the down payment on your future home. Because home equity loans are typically long term (up to 20 years), the interest rates available, usually fixed, may be lower than they are for a bridge loan. And you’ll have a little more breathing room if it takes a while to sell the old home. Another plus: The approval process usually goes pretty quickly.

You can expect to pay some closing costs on a home equity loan, though, so you may want to factor that into your decision. You also may want to consider the extra costs involved if there’s a prepayment penalty.

Keep in mind, too, that you’ll be using your home as collateral to get this type of loan. And until you sell your original home, unless it’s owned free and clear, you’ll be carrying more than one loan.

HELOC

Rather than the lump sum of a home equity loan, a HELOC lets you borrow, as needed, up to an approved limit, from the equity you have in your house. The monthly payments are based on how much you actually withdraw. The interest rate is usually variable.

You can expect to pay a lower rate on a HELOC than a bridge loan, and you’ll have more time to pay it off. But there still will be closing costs and other fees. And there may be a prepayment fee, which could cut into your profits if your home sells quickly. (Because your old home will serve as collateral, you’ll be expected to pay off your HELOC when you sell that home.)

Many lenders won’t open a HELOC for a home that is on the market for sale, so it may require advance planning to use this strategy.

401(k) Loan or Withdrawal

If you’ve been stashing away money in a 401(k), it may be tempting to withdraw or borrow the money for a down payment. But most financial experts advise against it.

You may wish to discuss the rules regarding withdrawals and loans with your employer’s HR department or plan administrator. And if you’re working with a financial advisor, that could be another helpful conversation. Besides missing out on the potential investment growth, there can be other drawbacks to tapping those retirement funds.

Personal Loan

If you have a decent credit history and a solid income, you may be able to find a personal loan with a competitive fixed interest rate and other terms that are a good fit for your needs.

Other benefits:

•   You can sometimes find a personal loan without the origination fees and other costs of a bridge loan.

•   A personal loan might be suitable rather than a home equity loan or HELOC if you don’t have much equity built up in your home.

•   You may be able to avoid a prepayment penalty, so if your home sells quickly, you can pay off the loan without losing any of your profit.

•   Personal loans are usually unsecured, so you wouldn’t have to use your home as collateral.

The Takeaway

A bridge loan can help homebuyers purchase a new property when they haven’t yet sold their current home. But a bridge loan can be hard to get and expensive.

A personal loan is an alternative worth considering. SoFi offers fixed-rate personal loans of $5,000 to $100,000 with no fees and no prepayment penalty.

And when you need that next mortgage, check out the competitive rates and other advantages of a SoFi Home Loan.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. 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.

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

6 Simple Ways to Reduce a Mortgage Payment

It’s often said that your mortgage payment should be no more than 28% of your gross monthly pay. A really conservative take is that your payment should be no more than 25% of net monthly pay.

In any case, here are suggestions to make your payments more palatable. A lower mortgage payment could mean lower blood pressure, not to mention the ability to pay down other debt, build investments, and have a healthy emergency fund.

6 Ways to Lower Your Mortgage Payments

1. Give Your Mortgage a Bonus

If you get a bonus or a windfall, consider throwing some of that money at your mortgage. If you are in a position to make a major lump-sum payment on your home loan, you may benefit from mortgage recasting.

With recasting, your lender will reamortize the mortgage but retain the interest rate and term. The new, smaller balance equates to lower monthly payments. Many lenders charge a servicing fee and have equity requirements to recast a mortgage.

Simpler options:

•   Make a lump-sum payment toward the mortgage principal.

•   Make extra payments on a schedule or whenever you can.

It’s a good idea to tell your lender that you want to put the extra money toward the principal and not the interest.

Paying extra toward the principal provides two benefits: It will slowly reduce your monthly payment, and it will pare the total interest paid over the life of the loan.

Refinance your mortgage and save–
without the hassle.


2. Reap Rental Income at Home

There are at least two options here: “House hacking” and adding an accessory dwelling unit (ADU).

House hacking can mean buying a two- to four-unit multifamily building for little down and living in one of the units. Multifamily homes with up to four units are considered residential when it comes to financing. Owner-occupants can choose Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, or conventional financing.

Some people house-hack a single-family home, which just translates to having housemates or short-term rental guests.

An ADU, aka an in-law suite, granny flat, or carriage house, is a secondary dwelling unit on the same lot as a primary single-family home. It can be a detached cottage, a garage or basement conversion, or an attached unit.

With any addition or renovation, you might want to estimate return on investment — how much you’d charge and how long it would take to recoup the cash you put in before turning a profit.

3. Extend the Term of Your Mortgage

If your goal is to reduce your monthly payment — though not necessarily the overall cost of your mortgage — you may consider extending your mortgage term. For example, if you took out a 15-year mortgage, refinancing into a 30-year mortgage would amortize your payments over a longer term, thereby reducing your monthly payment.

This technique could lower your monthly payment but likely will cost you more in interest in the long run.

Just because you have a new 30-year mortgage doesn’t mean you have to take 30 years to pay it off. You’re often allowed to pay off your mortgage early without a prepayment penalty by paying more toward the principal.

4. Get Rid of Mortgage Insurance

Mortgage insurance can add a significant amount to your monthly mortgage payments. Luckily, there are ways to eliminate these payments, depending on which type of loan you have.

Getting Rid of the FHA Mortgage Insurance Premium

Consider your loan origination date.

•   July 1991 to December 2000: If your loan was originated between these dates, you can’t cancel your MIP.

•   January 2001 to June 3, 2013: Your MIP can be canceled once you have 22% equity in your home.

•   June 3, 2013, and later: If you made a down payment of at least 10% percent, MIP will be canceled after 11 years. Otherwise, MIP will last for the life of the loan.

Another way to shed MIP is to refinance to a conventional loan with a private lender. Many FHA homeowners of late have enough equity to refinance.

Getting Rid of Private Mortgage Insurance

If you took out a conventional mortgage with less than 20% down, you’re likely paying PMI. Ditching your PMI is an excellent way to reduce your monthly bill.

To request that your PMI be eliminated, you’ll want to have 20% equity in your home, whether through your own payments or through home appreciation.

Recommended: Thinking about starting a new home renovation project? Use this Home Improvement Cost Calculator to get an idea of what your project will cost.

Your lender must automatically terminate PMI on the date when your principal balance reaches 78% of the original value of your home.

Check with your lender or loan program to see when and if you can get rid of your PMI.

5. Appeal Your Property Taxes

Your property taxes are based on an assessment of your house and land conducted by your county’s tax assessor. The higher they value your property, the more taxes you’ll pay.

If you think you’re paying too much in taxes, you can appeal the assessment. If you do, be prepared with examples of comparable properties in your area valued at less than your home. Or you may also show a professional appraisal.

To challenge an assessment, you can call your local tax assessor and ask about the appeals process.

6. Refinance Your Mortgage

One of the best ways to reduce monthly mortgage payments is to refinance your mortgage. Refinancing (not to be confused with a reverse mortgage) means replacing your current mortgage with a new one, with terms that better suit your current needs.

There are a number of signs that a mortgage refinance makes sense, such as an improved financial situation, the ability to lower your rate, or the desire to secure a fixed rate.

Refinancing can result in a more favorable interest rate, a change in loan length, a reduced monthly payment, and a substantial reduction in the amount you owe over the life of your mortgage.

The Takeaway

How to lower your mortgage payment? There are several possible ways. And who wouldn’t love a thinner house payment?

If refinancing during this time of low rates could help, SoFi offers refinancing and cash-out refinancing.

And SoFi offers a range of fixed-rate loans for owner-occupied primary residences, second homes, and investment properties.

It takes just two minutes to find your rate.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. 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.

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