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A jumbo loan is a home mortgage loan that exceeds maximum dollar limits set by the Federal Housing Finance Agency (FHFA). Loans that fall within the limit are called conforming loans. Loans that exceed them are jumbo loans.

Jumbo mortgages may be needed by buyers in areas where housing is expensive, and they’re also popular among lovers of high-end homes, investors, and vacation home seekers.

What Is a Jumbo Loan?

To understand jumbo home loans, it first helps to understand the function of Freddie Mac and Fannie Mae. Neither government-sponsored enterprise actually creates mortgages; they purchase them from lenders and repackage them into mortgage-backed securities for investors, giving lenders needed liquidity.

Each year the FHFA sets a maximum value for loans that Freddie and Fannie will buy from lenders — the so-called conforming loans.

Jumbo Loans vs Conforming Loans

Because jumbo home loans don’t meet Freddie and Fannie’s criteria for acquisition, they are referred to as nonconforming loans. Nonconforming, or jumbo, loans usually have stricter requirements because they carry a higher risk for the lender.

Jumbo Loan Limits

So how large does a loan have to be to be considered jumbo? In most counties, the conforming loan limits for 2023 are:

•  $726,200 for a single-family home

•  $929,850 for a two-unit property

•  $1,123,900 for a three-unit property

•  $1,396,800 for a four-unit property

The limit is higher in pricey areas. For 2023, the conforming loan limits in those areas are:

•  $1,089,300 for one unit

•  $1,394,775 for two units

•  $1,685,850 for three units

•  $2,095,200 for four units

Given rising home values in many cities, a jumbo loan may be necessary to buy a home. Teton County, Wyoming, for instance, has an average home value of $1,624,087 and a conforming loan limit of $1,089,300.

Recommended: The Cost of Living By State

Qualifying for a Jumbo Loan

Approval for a jumbo mortgage loan depends on factors such as your income, debt, savings, credit history, employment status, and the property you intend to buy. The standards can be tougher for jumbo loans than conforming loans.

The lender may be underwriting the loan manually, meaning it’s likely to require much more detailed financial documentation — especially since standards grew more stringent after the 2007 housing market implosion and during the pandemic.

Lenders generally set their own terms for a jumbo mortgage, and the landscape for loan requirements is always changing, but here are a few examples of potential heightened requirements for jumbo loans.

•  Your debt-to-income (DTI) ratio. This ratio compares your total monthly debt payments and your gross monthly income. The figure helps lenders understand how much disposable income you have and whether they can feel confident you’ll be able to afford adding a new loan to the mix.

To qualify for most mortgages, you need a DTI ratio no higher than 43%. In certain loan scenarios, lenders sometimes want to see an even lower DTI ratio for a jumbo loan, or they may counter with less favorable loan terms for a higher DTI.

•  Your credit score. This number, which ranges from 300 to 850, helps lenders get a snapshot of your credit history. The score is based on your payment history, the percentage of available credit you’re using, how often you open and close accounts such as credit cards, and the average age of your accounts.

To qualify for a jumbo loan, some lenders require a minimum score of 700 to 740 for a primary home, or up to 760 for other property types. Keep in mind that a lower score doesn’t mean you won’t be able to get a jumbo loan. The decision depends on the lender and other factors, such as the loan program requirements, your debt, down payment amount, and reserves.

•  Down payment. Conforming mortgages generally require a 20% down payment if you want to avoid paying private mortgage insurance (PMI), which helps protect the lender from the risk of default.

Historically, some lenders required even higher down payments for jumbo mortgages, but that’s not necessarily the case anymore. Typically, you’ll need to put at least 20% down, although there are exceptions.

A VA loan can be used for jumbo loans. The Department of Veterans Affairs will insure the part of the loan that falls under conforming loan limits. The down payment requirement is based on the portion of the jumbo loan that’s above the conforming loan limit. The loan is available from some lenders with nothing down and no PMI. VA loans have a one-time “funding fee,” though, a percentage of the amount being borrowed.

•  Your savings. Jumbo loan programs often require mortgage reserves, housing costs borrowers can cover with their savings. The number of months of PITI house payments (principal, interest, taxes, insurance), plus any PMI or homeowner association fees, needed in reserves after loan closing depends on many factors. For a jumbo loan, some lenders may require reserves of three to 24 months of housing payments.

You don’t necessarily need to have all the money in cash. Part of mortgage reserves can take the form of a 401(k), stock portfolios, mutual funds, money market accounts, and simplified employee pension accounts.

Also, depending on the loan program, a lender may be comfortable with lower cash reserves if you have a high credit score, low DTI ratio, a high down payment, or some combination of these things.

•  Documentation. Lenders want a complete financial picture for any potential borrower, and jumbo loan seekers are no exception. Most lenders operate under the “ability to repay” rule, which means they must make a reasonable, good-faith determination of the consumer’s ability to repay the loan according to their terms. Applicants should expect lenders to vet their creditworthiness, income, and assets.

Jumbo Loan Rates

You might assume that interest rates for jumbo loans are higher than for conforming loans since the lender is putting more money on the line.

But jumbo mortgage rates fluctuate with market conditions. Jumbo mortgage rates can be similar to those of other mortgages, but sometimes they are lower.

Because the absolute dollar figure of the loan is higher than a conforming loan, it is reasonable to expect closing costs to be higher. Some closing costs are fixed, such as a loan processing fee, but others, such as title insurance, are tiered based on the purchase price or loan amount.

Pros and Cons of Jumbo Loans

Benefits

Because a jumbo loan is for an amount greater than a conforming loan, it gives you more options for ownership of homes that are otherwise cost-prohibitive. You can use a jumbo loan to purchase all kinds of residences, from your main home to a vacation getaway to an investment property.

Drawbacks

Due to their more stringent requirements, jumbo loans may be more accessible for borrowers with higher incomes, strong credit scores, modest DTI ratios, and plentiful reserves.

However, don’t assume that jumbo loans are just for the rich. Lenders offer these loans to borrowers with a wide variety of income levels and credit scores.

Lender requirements vary, so if you’re seeking a jumbo loan, you may want to shop around to see what terms and interest rates are available.

The most important factor, as with any loan, is that you are confident in your ability to make the mortgage payments in full and on time in the long term.

How to Qualify for a Jumbo Loan

To qualify for a jumbo loan, borrowers need to meet certain jumbo loan requirements. You’ll likely need to show a prospective lender two years of tax returns, pay stubs, and statements for bank and possibly investment accounts. The lender may require an appraisal of the property to ensure they are only lending what the home is worth.

Is a Jumbo Loan Right for You?

You’ll need to come up with a large down payment on a property that merits a jumbo loan, and some of your closing costs will be higher than for a conventional loan. But depending on where you wish to buy, the cost of the property, and the amount you wish to borrow, a jumbo loan may be your only choice for a home mortgage loan. It’s a particularly attractive option if you have good credit, a low DTI, and a robust savings account. And sometimes jumbo home loans actually have lower interest rates than other loans.

What About Refinancing a Jumbo Loan?

After you’ve gone through the mortgage and homebuying process, it could be helpful to have information about refinancing. Some borrowers choose to refinance in order to secure a lower interest rate or more preferable loan terms.

This could be worth considering if your personal situation or mortgage interest rates have improved.

Refinancing a jumbo mortgage to a lower rate could result in substantial savings. Since the initial sum is so large, even a change of just 1 percentage point could be impactful.

Refinancing could also result in improved loan terms. For example, if you have an adjustable-rate mortgage and worry about fluctuating rates, you could refinance the loan to a fixed-rate home loan.

Recommended: Guide to Buying, Selling, and Updating Your Home

Jumbo Loan Limits by State

The conforming loan limits set by the Federal Housing Finance Agency can vary based on the county where you are buying a home.

In most areas of the country, the conforming loan limit for a one-unit property increased to $726,200 in 2023 (the amount rises for multiunit properties). The chart below shows exceptions to the $726,200 limit by state and county.

Source: Federal Housing Finance Agency

The Takeaway

What’s the skinny on jumbo loans? They’re essential for buyers of more costly properties because they exceed government limits for conforming loans. Luxury-home buyers and house hunters in expensive counties may turn to these loans, but they’ll have to clear the higher hurdles involved.

If you’re interested in refinancing a jumbo mortgage at competitive rates, consider SoFi. You can prequalify online and put as little as 10% down.

With SoFi, you can see your new rate in just minutes.

FAQ

What are jumbo loan requirements?

Jumbo loans typically require a credit score of at least 700, a low DTI, and a down payment of at least 20%, although there are always exceptions.

What is the difference between a jumbo loan and a regular loan?

A jumbo loan is a home mortgage loan that exceeds maximum dollar limits set by the Federal Housing Finance Agency. Jumbo loans are typically used by buyers in regions with higher-priced housing but are also popular among luxury homebuyers and investors.

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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.

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.

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Buying a house is a major rite of passage. While it’s fun to imagine what kind of home you’ll buy (farmhouse? Mid-century modern?), how you’ll renovate it, and what it will be like to have your own space, buying a home also requires considerable planning and financial discipline.

After all, buying a home is often the largest financial transaction you will ever make, and it can be the biggest investment of your lifetime, too; a key source of growing your personal wealth. Here is the advice you need on:

•  How to prepare for buying a home

•  How to save money for a house, including the down payment

•  How to budget for owning a house.

What You Need to Know Before Saving for a House

Here are some important first steps toward homeownership.

Understand Your Finances

Many people have debt these days, whether student loans, a personal loan, credit card debt, a car loan, or a combination of some (or all) of these. A lot of debt could hinder your ability to save for a home and qualify for a home loan.

A number of factors come into play when applying for a mortgage, including your debt-to-income ratio (DTI). Your DTI looks at how your debt relates to the money you have coming in; what percentage of your income must go to paying what you owe. Lenders use this number to assess your risk as a customer, whether you have too much debt to be able to afford your monthly mortgage payments.

Qualifying DTIs can vary depending upon elements such as credit, type of property and others. Typically, lenders look for a DTI of 43% or lower. It is typically preferred that your DTI be closer to 36% or perhaps even lower. For this reason, as you focus on becoming a homeowner, you may want to try lowering or even eliminating your debt.

•  The snowball method involves listing all your debts, then putting extra money toward your lowest balance first while paying the minimum on the others. Once that debt is paid off, you can apply that entire payment to your next debt on top of the minimum, rinse and repeat.

•  The avalanche method is similar, however it focuses on the highest-interest balance first. By eliminating that high-interest debt first, the theory goes, you’ll pay less debt over time as the money starts to roll downhill into your other payments.

•  The snowflake method is a bit different in that the objective is to put any and all extra money (not already budgeted) toward debt as often as possible. Called micropayments, these can be anything from credit-card cash back to the money you pocket by eating at home instead of a restaurant. That holiday money from Grandma? Goes toward debt. Same with any work bonuses.

Debt consolidation loans or refinancing are two other ways that could potentially allow you to get out from under high interest payments. While they won’t eliminate your debt, with better terms, they could help reduce the number of monthly payments you’re responsible for.

Determine Your Budget

Understanding how much house you can afford is a vital step when you are contemplating buying a house. There are several factors to consider, including the home’s price, meaning how much of a down payment you can make and how much the home mortgage loan for the remaining amount will cost you. (There are other costs to consider, too; more on those below.)

You will likely find this information by doing some research online, trying out home mortgage calculators, and talking to friends and family who are homeowners.

Research Potential Mortgages

As mentioned above, understanding your potential down payment and monthly mortgage payments is an important step.

It’s also wise to acquaint yourself with the different kinds of mortgages. You may think it’s just a matter of snagging the lowest interest rate out there, but there’s more to the equation:

•  Options for low- and no-money-down loans. These are available via various programs, such as VA loans for those who are active members of the military or veterans.

•  Fixed- vs. variable-rate mortgages. One may be a better option than the other, depending on your financial needs and how long you plan to live in the home.

•  The different terms possible for mortgages are another factor. While many people may think of a mortgage as a 30-year commitment, there are also loans ranging from 10 to 40 years in length. Depending on your financial resources and cash flow, you may want something other than a 30-year mortgage.

Establish a Solid Budget

As you look for the best way to save for a house, it’s wise to have a solid budget to help you track your money and make sure it goes where you want. That might mean funneling money toward your down payment fund as well as toward paying off debt. There are different budgeting methods you might use.

One popular one is the 50/30/20 rule. In this budget, you allocate 50% of your after-tax dollars to needs, 30% to wants, and 20% to savings.

There are many tools that can help you with budgeting, including apps. You may find that your financial institution’s app includes ways to track your spending and automate your savings.

Automating your savings can be an excellent way to help save a down payment (you’ll learn more about this in a moment). This means that money is seamlessly transferred from your checking to your designated savings account. You don’t have to expend any effort; nor do you see that money bound for savings sitting in checking where you might spend it.

Save for a Down Payment

While there are (as mentioned above) a variety of ways to save for a down payment, consider the fact that it’s a myth that you must put 20% down on a house. The reality, though, is that the median down payment on a conventional loan was around 13% last year, according to data from the National Association of Realtors.

To come to your real-life goal for a down payment, you can start by calculating how much house you can afford.

One option you can look into for your mortgage loan is government programs that offer low or no-down-payment mortgage options:

•  Federal Housing Administration (FHA) loans are government-backed loans. For those that qualify, they may require only a 3.5% down payment with a credit score of 580 or higher. Loan limits apply by property location.

•  United States Department of Agriculture (USDA) loans offer up to 100% financing in rural areas for eligible properties and borrowers.

•  Veterans Administration (VA) loans , as noted above, are available for military service and eligible family members with up to 100% financing.

Even though 20% down isn’t a given these days, it might still be a good idea for a number of reasons if you can swing it. First, you avoid paying private mortgage insurance (PMI), which is used to insure the lender against loss on a loan with less than 20% down. Putting 20% down could potentially mean lower monthly payments, less interest overall, and a quicker path to home equity.

Then, you can find ways to save up for a house, which can range from setting up recurring transfers into a high-yield savings account to investing in the market (more on that below). You might also consider selling stuff you no longer need or want or starting a side hustle to bring in more cash.

Consider Additional Costs

Saving money for a house is about more than you might think. It might start with a down payment, but it can also include several other important (and not insignificant) expenses. Consider the following:

Closing Costs

In addition to your down payment, you’ll likely need to come to the table with your portion of the closing costs.

These include fees that go along with the home buying and loan approval process, such as lender fees, payments to the home inspector, appraiser and surveyor, escrow payments, attorney and title fees. It’s a long list, and these closing costs are typically 3% to 6% of the loan amount.

Moving Costs

Moving costs aren’t insignificant: A basic local move may cost you $800 to $2,500, and a long-distance move can ring in at $2,200 to $5,700. It can be wise to get a couple of quotes from well-reviewed moving companies as you go into house-hunting mode so you can budget appropriately.

One easy way to cut down on moving costs is to DIY the entire process, from finding free moving boxes from friends, family, and grocery stores to loading and driving your stuff across town in a friend’s truck. It’s safe to say that even the most frugal moving strategy, however, will likely incur some costs.

Repairs and Decor

It may be difficult to estimate these costs before you have an accepted offer on a home, but it is good to keep in mind how much renovations, repairs, and decorating could cost.

If you’re moving to a larger space, will you need an extra bedroom set? Are you thinking the backyard is perfect for a fire pit, or even a pool? If you are considering a fixer-upper, repairs or upgrades could be tens of thousands of dollars or more.

One bit of good news here is that you may not have to fork over the cash in order to pay for renovations. The FHA offers 203k rehab loans to homebuyers. Eligible improvements include structural repairs, elimination of health or safety hazards, modernization, adding or replacing roofing and you can also add loan fees and mortgage payments during renovation up to the maximum loan amount.

In addition, considering a fixer-upper could be a more affordable way into the housing market. The property might be available for less than market value due to needed work, and any sweat equity you put into the house could equal larger returns down the road.

That said, keep in mind that not all properties are eligible for financing due to structural or other issues and the costs of home repairs can add up quickly, so it’s essential to do your research in advance.

Additional Costs

In addition, you need to account for such other costs as:

•  Property taxes

•  Private mortgage insurance (PMI)

•  Any HOA fees

•  Home maintenance costs (lawn care, HVAC checkups, pest control, and the like)

•  Utilities (heating a house can be pricier than a small apartment).

Invest in Your Future

As you take steps forward to afford a home, you can choose to invest your money in ways that can help you either get to closing day sooner or save even more than you need.

One way to think of investing for a down payment is to compare it to a retirement plan, where a common approach is to save aggressively when you’re younger, then start to transfer your investments into more stable options as you get close to retirement.

Here are some ways you could apply this philosophy to saving for a down payment:

•  If your timeline is under 3 years, consider a conservative portfolio, or maybe a high-yield savings account.

•  If you are looking at 3 to 5 years, consider a conservative or moderately conservative portfolio that could grow your money faster than a cash-based account.

•  If your closing day is 5 to 10 years in the future or more, consider a moderate or moderately aggressive investment portfolio that could yield higher returns in the long run.

While creating a plan can be a smart first step, that doesn’t mean it will go off without a hitch, especially if it’s long-term. You or your partner might change jobs, unexpected medical expenses might pop up, the heating bill could go way up due to a cold winter — life happens.

That’s why it’s important to check in on your budget periodically, see how you’re doing, rebalance your portfolio if needed, and make adjustments to your plan if you’ve gotten off-track from your goal.

The Takeaway

Saving for a house is a big commitment and involves some focus. You’ll need to budget, consider your down payment and other upcoming costs, and also find ways to help your money grow quickly but safely.

When you are ready to buy, see what a SoFi Home Mortgage offers. With low down payments for first-time and other buyers, flexible terms, and a streamlined process, it may be just what you’re looking for.

SoFi: The smart, simple path to your home mortgage.

FAQ

How much money should you save before buying a house?

When buying a house, most people focus on the down payment. Currently, most buyers put down 13%, but mortgages are available with as little as 3% or 0% down, depending on qualifications. In addition, it’s wise to budget for closing costs, home renovation and furnishing costs, as well as having an emergency fund in place.

What is the fastest way to save money for a house?

There are a variety of ways to quickly save money for a house including tracking and reducing your spending, minimizing debt, automating your savings, considering opening a high-yield savings account or investing in the market (depending on your timeline), and bringing in more income via a side hustle.

How do you realistically save for a house?

To afford a home, it can be wise to pay off or lower your debt, minimize your spending, increase your savings, sell stuff you no longer want or need, and bring in extra income through additional work.

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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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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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A 12% increase in the conforming loan limits for 2023 raised the baseline loan limit for a single unit to $726,200 in most counties in the United States.

The adjustment is a result of a change in the average price of a home nationwide from the third quarter of 2021 to the third quarter of 2022. Home prices increased an average of 12.21%, and the baseline conforming loan limit kept pace.

Conforming loans may be cheaper than nonconforming loans like jumbo mortgages, but jumbo loans have their place.

Conforming Loan Limits for 2023

The conforming loan limits set by the Federal Housing Finance Agency can vary based on area and the number of units in the property.

In most counties, that number increased to $726,200 in 2023 for a one-unit property. In high-cost areas, the limit is $1,089,300 for a one-unit property.

In general, here’s how the baseline conforming loan limits break down for 2023.

Maximum baseline loan limit for 2023

Units	Many counties in the contiguous states, District of Columbia, and Puerto Rico	Alaska, Hawaii, Guam, and the U.S. Virgin Islands
1	$726,200	$1,089,300
2	$929,850	$1,394,775
3	$1,123,900	$1,685,850
4	$1,396,800	$2,095,200

Recommended: The Cost of Living by State

Why Care About Conforming Loan Limits?

Staying under a conforming loan limit means you’ll most likely obtain a lower-cost mortgage. Mortgages that “conform” to the limits can be acquired by Fannie Mae and Freddie Mac, government-sponsored enterprises.

Because these mortgages can be bought by the agencies and then sold to investors on the secondary mortgage market, they represent a lower risk to the lender and a lower cost to the consumer.

If you need to finance more than the conforming limit, you’ll need to look at jumbo mortgage loans.

Getting a jumbo loan involves clearing more hurdles than a conforming loan. The rate will usually be similar to conforming loan rates, but sometimes it can be lower. How jumbo can a loan be for a primary residence, second home, or investment property? It’s up to each lender.

Government-backed mortgages are also nonconforming loans, and although they serve certain homebuyers, they also may be more expensive than conforming conventional loans because they usually come with additional fees.

Recommended: How to Get a Mortgage Loan

Notable Counties Above the Standard Loan Limits

Loan limits are higher in counties where the average home price is above 115% of the local median home value. The loan ceiling is 150% of the baseline value.

For 2023, the high-cost-area loan limit increased from $970,800 to $1,089,300 on a one-unit property. Alaska, Hawaii, Guam, and the U.S. Virgin Islands also have a baseline loan limit of $1,089,300.

The following is a chart of counties in high-cost areas with an increased baseline loan limit. The increased amount for high-cost areas is either maxed out at $1,089,300 or the average percentage of increase for the price of a home in the area.

Will Conforming Loan Limits Rise or Fall?

The baseline conforming loan limit is adjusted each year to reflect the change in the average home value in the United States.

The conforming loan limit has increased in six of the past 10 years and has never declined. From 2006 to 2016, for example, the conforming loan limit remained at $417,000, despite declining home values across the country. If home values continue to rise, the conforming loan limit will also rise.

Conforming Loan Limits Over the Past 10 Years

The 12% increase in loan limits for 2023 is lower than the 18% increase of 2022, which was the largest jump in the past 40 years. But it still represents an increase of $79,000 over the past year alone.

Conforming loan limit

Year	Amount
2023	$726,200
2022	$647,200
2021	$548,250
2020	$510,400
2019	$484,350
2018	$453,100
2017	$424,100
2016	$417,000
2015	$417,000
2014	$417,000

The Takeaway

Conforming loan limits are intended to keep costs low for homebuyers. This means competitive pricing on mortgages, no matter what the housing market looks like each year.

If you’re looking to apply for a home mortgage loan, check out how SoFi can help. SoFi offers fixed-rate mortgages, and qualifying first-time buyers can put as little as 3% down.

If a supersized loan is needed, SoFi offers jumbo loans with as little as 10% down and no private mortgage insurance.

Check out the full range of SoFi Mortgages today.

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Photo credit: iStock/marchmeena29

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.

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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USDA loans are available for certain properties with no down payment required and possibly a lower interest rate than conventional loans. However, eligibility for USDA loans largely depends on borrower income and home location.

While those four letters, namely USDA, may conjure up images of prime beef or grain crops, this particular usage refers to a program that can encourage homeownership for those with lower incomes in rural and some suburban areas. These mortgages may also help people buy and repair homes in need of updating.

Here, you’ll learn more about what these loans offer, how they work, and who qualifies for them.

What Is a USDA Loan?

USDA loans offer a loan option with no down payment for certain qualifying buyers who plan to purchase property in rural or some suburban areas. These mortgages are guaranteed by a division of the USDA known as the USDA Rural Development Guaranteed Housing Loan Program.

While partner lenders typically issue the loans themselves, the fact that the government is taking on some of the risk of lending funds has a big benefit. It allows these loans to often offer a considerably lower rate than you’d find at a commercial lender.

To qualify for a USDA loan, you may have to earn below a specific income limit and buy in certain areas. You may also purchase a property in need of repair.

If you are eligible, another perk of these mortgages is that private mortgage insurance (PMI) is not required, which is another way they present an affordable option for some buyers.

How USDA Loan Programs Work

USDA Rural Development’s housing programs give individuals and families the opportunity to buy or build a rural single-family home with no money down, repair their existing home, or refinance their mortgage under certain circumstances.

The USDA promotes homeownership for low-income households and economic development in rural areas.

USDA loans are available to eligible first-time homebuyers and repeat buyers for primary residences.

USDA Loan Requirements

Here are more details on who qualifies for a USDA loan.

Single Family Housing Guaranteed Loan Program

This program is the one that most people think of when they hear about USDA loans.

The USDA guarantees 30-year fixed-rate loans originated by approved lenders so that people in households with low to moderate incomes can buy homes in eligible rural areas. (You’ll need to search with an exact address.)

The income threshold is defined as no more than 115% of area median household income. In other words, your household income can’t exceed the area median income by more than 15%.

Buyers can finance 100% of a home purchase, get access to better-than-average mortgage rates, and pay a lower mortgage insurance rate.

That means no down payment, but borrowers still might want to look into down-payment assistance programs that also may help with closing costs.

A USDA loan can be used to purchase, renovate, or build a primary single-family home (no duplexes).

Single Family Housing Direct Home Loans

These subsidized loans, issued directly by the USDA, are available for homes in certain rural areas and for applicants with low and very low incomes.

The amount of the subsidy depends on the adjusted income of the family, and it reduces the family’s mortgage payment for a certain amount of time.

Adjusted income must be at or below what’s required for the geographical area where the house is located, and applicants must currently be without housing that’s considered safe, sanitary, and decent.

In addition, they must be unable to qualify for loans elsewhere; meet citizenship requirements (or eligible noncitizen ones); legally be allowed to take on a loan; and not be suspended from participating in federal programs.

The home itself must meet certain requirements for USDA loan eligibility. It must:

•   Typically have no more than 2,000 square feet

•   Not have an in-ground swimming pool

•   Not have a market value that exceeds the loan limit for the area

•   Not be used to earn income from the home.

Typically no down payment is required, although borrowers who have more assets than are allowed may need to use part of them toward the purchase. The rate is fixed and, when taking payment assistance into account, could be as low as 1%. The repayment term can be up to 33 years, or 38 years for applicants with very low income.

Funds can be used to purchase, build, repair, or renovate a single-family home. Once the title is out of the borrowers’ names or they no longer live in the house, they must repay part or all of the subsidies received.

Apply directly with your state Rural Development office .

This online eligibility tool can help potential borrowers see if they might qualify.

Single Family Housing Repair Loans and Grants

This program, also called the Section 504 Home Repair Program, is for homeowners with very low incomes who need a loan to improve, repair, or modernize their homes.

The program also offers grants if the applicants are 62 or older with very low incomes, and the money will be used to remove hazards to health and safety. The borrower must own the home and live in it. Prospective homeowners must not be able to find affordable credit through other venues.

Current limits on both the loans and the grants are as follows:

•   Maximum loan amount: $40,000

•   Maximum grant amount: $10,000

•   Maximum per person: $50,000, if they qualify for both the loan and grant.

Loan terms can be up to 20 years, with a fixed 1% interest rate.

For details about how to apply, applicants may contact their state Rural Development office.

Homeowners of higher income levels who need to finance home repairs may want to look into home improvement loans.

What Is the Minimum Credit Score for a USDA Loan?

The USDA does not set a firm credit score requirement. However, you are most likely to be approved if your score is in the 640 and higher range.

Even with a lower score, however, you may qualify for a loan.

Recommended: Learn the Cost of Living by State

Pros and Cons of USDA Loans

This section will focus on the USDA guaranteed loan program.

USDA Loans Pros

•   Typically no down payment is required.

•   Lower rates than FHA and conventional loans on average.

•   There isn’t a minimum FICO® score to qualify, so a less-than-ideal credit history may not prevent the loan from going through, though lenders like to see a credit score of at least 640.

•   Lenders may also require a debt-to-income ratio (DTI) of 41% or under. Depending on other factors, a slightly higher DTI might be possible.

•   No private mortgage insurance (PMI).

USDA Loans Cons

•   Homes must be in eligible rural areas.

•   Applicants must meet income limits.

•   Only certain lenders offer the program.

•   USDA loans require a 1% upfront guarantee fee and a 0.35% annual guarantee fee, based on the remaining principal balance each year.

Other Types of Mortgage Loans

In general, if your household income is more than 115% of the area median income, you can’t qualify for a USDA loan. The income of the entire household is considered, even if someone isn’t going to be on the mortgage note. That’s just one reason you might need to seek another type of mortgage.

Three broad types are:

Conventional loans: These are provided by banks and other private lenders and are not government-backed loans. This is the most common type of mortgage today. Borrowers typically need to have a down payment of 3% to 20%, and the lender will look at the debt-to-income ratio and credit scores when deciding whether to grant the mortgage loan.

FHA loans: Lenders that issue these loans are insured by the Federal Housing Administration, and it can be easier to qualify for this type of loan than a conventional mortgage. Lending standards can be more flexible and, with a credit score of 580 or higher, the borrower might qualify for a down payment of 3.5%. Note that mortgage insurance for an FHA loan can be high.

VA loans: Veterans, active military members, and some surviving spouses may receive VA loans provided by banks and other lenders but guaranteed by the VA. Eligible borrowers can benefit from a loan with no down payment and no monthly mortgage insurance. Most borrowers will pay a one-time funding fee, though.

Different types of mortgage loans have benefits and disadvantages. As a homebuyer, it is beneficial to understand what is applicable to your situation.

First-Time Homebuyer Programs

Borrowers who qualify as first-time homebuyers can receive benefits. Loan programs include:

•   Freddie Mac’s Home Possible® program and Fannie Mae’s 97% LTV. The programs offer down payments as low as 3% for buyers who have low to moderate incomes.

•   The Fannie Mae HomeReady® mortgage program. Borrowers who undergo educational counseling can get help with closing costs.

•   Mortgages for qualifying first-time buyers, who can put as little as 3% down.

It can make sense for low- and moderate-income borrowers to contact their state housing agency to see what programs are available for first-time homebuyers.

Recommended: Find First Time Home Buyer Programs in Your State

The Takeaway

USDA loans support rural homebuyers and homeowners who meet income limits and whose properties qualify. Others shopping for a mortgage will need to research home loans and find a choice that suits them.

If you’re in that group of mortgage shoppers who aren’t seeking a USDA loan, consider this option: A SoFi Home Mortgage Loan might be just right for you. Our flexible, competitive loans are available via a quick and simple process.

Start your home-buying journey with SoFi.

FAQ

What are the basics of how a USDA loan works?

USDA loans are available with no down payment and potentially a lower interest rate to borrowers who are buying certain properties in qualifying rural areas and who meet income limits.

What’s the difference between an FHA loan and a USDA loan?

These loans address different types of properties and have different qualifying requirements. With a USDA loan, there is no down payment requirement, there is no PMI, but borrowers must meet income guidelines and be purchasing properties in a rural or suburban area. With an FHA loan, there is a 3.5% down payment and a DTI requirement, but there is not the regional guideline for the property. However, PMI is assessed.

Is FHA better than USDA?

When comparing FHA vs. USDA loans, it’s not really a matter of one being better than another but of which one suits your needs and which one you qualify for. An example: If you are buying in a rural area, you might get a USDA loan requiring no down payment. If you are buying in a metropolitan area, you might instead qualify for an FHA loan with 3.5% down.

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

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

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

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

Third-Party 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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Modular homes are increasingly capturing interest as a fast and affordable housing option. The global market for modular homes is forecast to grow from $82 billion in 2022 to $139 billion in 2029. These houses are built from factory-made components and are then constructed on a permanent foundation on a building site. They must meet the Department of Housing and Urban Development standards, as well as local guidelines.

Not to be confused with manufactured homes (previously called mobile homes), which can be moved from location to location, a modular home can be a good option to what are known as stick-built or traditionally constructed homes.

Could one be right for you? Here are the pros and cons of these structures, to help you decide if this might be your next home sweet home.

What Are Modular Homes?

Modular homes are constructed in a way that differs from a traditionally built home. Many of the components are made in a factory and then shipped to the property, where they are assembled on a permanent foundation.

The process is typically less expensive and faster than a stick-built home (meaning ones that are assembled piece by piece at the site).

As briefly noted above, modular homes are permanent structures and are subject to local and federal standards.

Recommended: Mobile vs. Modular vs. Manufactured Homes

How Are Modular Homes Constructed?

One of the biggest differences from a traditional home is the way modular homes are constructed. The house’s components are assembled in a factory and delivered to the homesite in one or more trips. The modules may be akin to three-dimensional boxes that are connected to one another and the foundation at the job site.

The benefit of constructing modular home components in a factory is the controlled environment. Because the parts are assembled under ideal conditions (perfect temperature, humidity, etc.), buyers can usually expect a consistent, high-quality build.

In addition, the actual build can move more quickly. Estimates of the time to build a modular home range from 16 to 32 weeks, depending on how customized the plans are and other variables.


💡 Quick Tip: Don’t overpay for your mortgage. Get your dream home or investment property and a great rate with SoFi Mortgage Loans.

The Pros and Cons of Modular Homes

As with most things in life, there are pluses and minuses to modular homes. Consider these points to decide if one could be right for you. First, the upsides:

•  Modular homes are typically 10% to 20% less expensive than traditionally built homes.

•  They can be built up to 30% to 60% faster than stick-built homes.

•  Depending on the builder, they may be customized to suit your needs, both in terms of layout/square footage and finishes. You can get a very basic home or a truly luxe, mansion-like one.

•  They can be more energy-efficient than traditionally built houses, and the materials and building process may be more environmentally friendly as well.

•  They are considered better able to withstand environmental threats (flooding, hurricanes) than traditionally built homes.

That said, there are some disadvantages to modular homes to consider:

•  You need to add in some costs to your home-buying budget: the cost of the land, the foundation, and other related expenses. Yes, you are paying for those things when you buy a stick-built house, but it’s already rolled into the price.

•  You will need to investigate how to finance your home. If it’s an already built home, then a home loan will work. But if you are building from the ground up? Rather than getting a mortgage (since you aren’t buying an existing home from a seller), you may want to look into construction loans. Some modular home companies offer their own financing and lending programs.

•  Depending on the modular home company, you may not be able to get every last detail you want. Shopping around can help you find the top features you want in your home.

Modular Home Risks

There are a couple of considerations prospective modular homeowners should be aware of:

•  Finding land can be difficult in some areas. If you love modular homes but want to live in a suburb that has a hot housing market, you may be hard pressed to find a lot that works for you.
(You also may need a land loan to purchase your property if you do find a lot you love.)

•  It may be difficult to make changes once construction has started because so much of the home is pre-built.

•  Bias exists. Some people confuse modular homes with manufactured or mobile homes, which don’t have a foundation, and may therefore avoid them. This could mean a real estate agent might not show buyers a modular home that’s for sale, for example, due to this misperception.

How to Find Modular Homes for Sale

You can shop for pre-existing modular homes on major real estate websites like Realtor.com and also on specialized sites that list this type of home.

To construct a modular home, you can look at such sites as modularhome.org and modularhomeowners.com. Also, with the growing popularity of modular homes, you may well be able to get a word-of-mouth referral from someone in your circle.

How to Choose a Modular Home

When considering a modular home builder, much will depend on the following factors:

•  Do you like the style of the houses they build? The floorplans?

•  Are their prices lining up with your budget? Do they offer financing, if you need it?

•  Where are they located? If their factory is somewhat close to you, which can help reduce transportation expenses?

•  Are you impressed with the quality of their work? Their customer service?

•  Which brands do they partner with? Many manufacturers work with certain vendors for windows, doors, appliances, etc.

💡 Quick Tip: A home equity line of credit brokered by SoFi gives you the flexibility to spend what you need when you need it — you only pay interest on the amount that you spend. And the interest rate is lower than most credit cards.²

How to Finance a Modular Home

Financing a modular home will take different paths depending on whether the house is already constructed or you’re building it.

•  For already built homes, you may look into conventional mortgage loans, FHA, USDA, and VA loans, just as you would for any other property you are interested in.

•  If you are building your own modular home, then you will probably need to apply for a construction loan to have the funds to get your house over the finish line.

•  Some modular home companies offer financing options.

•  You might also see if a personal loan could help you afford a modular home. Some lenders will allow you to buy a property with the funds; check with your lender, and understand the interest rate you will be charged.

Are Modular Homes Worth It?

Whether a modular home is worth it is a very personal decision.

For some people, there may be no greater satisfaction than working with a modular builder to specify their dream home and seeing their home come together, usually more quickly and less expensively than other building methods. They can collaborate with their builder and find a house plan that checks off all (or most) of the items on their home wish list.

Many people are thrilled with the eco-friendly aspects of these homes as well.

However, there are also people who find a vintage home more appealing or who would rather walk through an already built home and know exactly what they are buying.

Recommended: How Much Does It Cost to Build a House?

Modular Home Tips

If you’re set on buying a modular home, here are things to consider:

•  Style of home. Modular homes come in various styles, from contemporary to log cabins. It can be wise for buyers to shop around and work with a modular home manufacturer that suits their taste.

•  Manufacturer location. The cost of transporting a modular home can be high. It may be essential for the budget-conscious modular homebuyer to work with a manufacturer close to the home’s final destination.

•  Custom builds. Some modular home manufacturers may offer more customizable options, from floor plans and finishes. Do your research, and find a builder who can check off most of the priorities on your wish list.

•  Timeline. Some modular homes go up relatively quickly, while other manufacturers could be dealing with back orders. If time is of the essence, choose your builder carefully.

The Takeaway

Modular homes are growing in popularity. Components (modules) are factory-built and then assembled on a foundation; this process can be faster and more affordable than buying a traditionally built home. They also often have environmental benefits.

However, they aren’t for everyone: Building your own home is very different than hitting the open houses, and financing a modular home likely takes you on a path that involves a construction loan. If, however, you fall in love with an already built modular home, then you can usually apply for a mortgage from a number of lenders.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is a modular home a good investment?

A modular home can be a good investment. They often offer energy efficiency which is a selling point. However, a modular home’s value will be dependent on the housing market in your area, just as it would be with any other kind of home.

Are modular homes dangerous?

The dangers of modular homes are minimal. As long as the assembly of the modular home complies with local building codes, modular homes are as safe as a traditionally built home.

Is the value of modular homes decreasing?

Modular homes appreciate and depreciate in a way that’s similar to traditional builds.

Where can you get financing for modular homes?

Among the possibilities from various lenders are a construction loan, financing from your builder, or a personal loan.

How long will a modular home last?

With proper maintenance and high-quality materials, a modular home should last as long as, or longer than, any traditionally built home. Some of the first modular homes, built in the early 1900s, are still standing today.

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Photo credit: iStock/turk_stock_photographer

*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.

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To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).

All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.

You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, 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 loan amount. Minimum loan amount is $75,000. 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.

SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.

In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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.

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

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

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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