Aug
11
2023

How Does Subleasing Work for an Apartment?

By | Home Ownership, mortgage | Comments Off on How Does Subleasing Work for an Apartment?

How does subleasing work? Whether you’re a current tenant thinking about subleasing your apartment or a prospective renter looking at a possible subtenant situation, you might be wondering if it makes sense to sublease an apartment.

Subleasing is like renting from another renter instead of the landlord. The rights of the original lease between the owner and the original tenant are transferred to the subtenant, yet the original tenant is still responsible to fulfill contractual obligations of the lease. If the subtenant doesn’t pay, for example, the original tenant will likely still need to pay the landlord rent. (Note that subleasing is different from subletting, in which you let a new tenant take over your current lease and have a direct relationship with your landlord.)

Subleasing may be considered when a tenant needs to move out before it expires. It’s also common when a tenant needs to leave for a short time and wants to return to the apartment later.

What Is Subleasing?

Subleasing is a legal way for a tenant to rent out their property to another tenant (also called a subtenant). The original tenant remains on the lease and is expected to fulfill the obligations of that lease. They may be responsible for damages and unpaid rents caused by the subtenant, for example.

There are a number of scenarios where subleasing might make sense, such as when a tenant wants to rent out extra rooms or when the original tenant needs to leave the area for a new employment opportunity. Breaking leases can be quite costly, so if the landlord allows for a unit to be subleased, finding a subtenant can ease the financial burden on the original tenant. Likewise, if a tenant is able to rent out extra rooms, they can factor that into the money they have available to spend on rent and may be able to afford the apartment better.

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

How Does a Sublease Work?

A sublease only works if it is allowed by the landlord. Basically, a sublease creates a new landlord-tenant relationship between the original tenant and the subtenant instead of between the landlord and the subtenant.

The new tenant pays the original tenant and the original tenant pays the landlord. The subtenant must fulfill contractual obligations to the original tenant (who acts as landlord) while the original tenant must abide by the lease agreement made with the landlord.

Recommended: How Much Rent Can I Afford on $60K a Year?

When to Consider Subleasing

When canceling/breaking your lease is incredibly expensive, you’re probably looking at what it takes to sublease your apartment or home. Certain situations may make more sense than others when it comes to subleasing.

•   You are temporarily moving to a different location for work and would like to return to your apartment.

•   You have an opportunity to study or work abroad for a semester.

•   You bought a home and have a home mortgage loan to pay for and may need a subtenant to finish your lease for you.

•   You’re moving for a job opportunity and need a subtenant to finish your lease for you.

•   Your family has increased in size and you need a bigger apartment.

•   A personal situation, such as a sudden need to care for an elderly or disabled family member, makes it necessary to move.

Keep in mind, landlords may not allow subleasing. It’s usually specified in the original rental agreement if subleasing isn’t allowed. If your contract does not forbid it, you’re likely able to sublease your apartment.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

Pros and Cons of Subleasing

Subleasing has some pros and cons to consider.

Pros of subleasing

•   The financial burden of a lease you can’t fulfill is eased.

•   You may be able to avoid expensive fees for breaking your lease.

•   You may be able to move to a more suitable housing situation for you if you find a subtenant.

•   You may earn income if your subtenant pays more than you pay to rent the property.

Cons of subleasing

•   You may have to act as landlord.

•   You could incur costs for damages caused to the property by the subtenant.

•   You may need to pay rent if the subtenant is unable to.

Recommended: First-Time Homebuyer Programs and Loans

Examples of Subleasing an Apartment

Here’s an example of how subleasing an apartment works: Let’s say you take a hard look at whether you should buy or rent, based on your budget, and you decide to buy or build a house. You find your dream home unexpectedly quickly. Paying for both rent and a mortgage is costly, so you want to find a subtenant to take your spot at the apartment.

You check your lease and there’s nothing in there that disallows it. You advertise, people call you, you meet, and eventually find someone you think would be good. You get them to fill out an application and check their income, credit, and background.

Once everything looks good, have them sign a sublease agreement with you. You move out of the apartment and into your new home. They move in, they pay you, and you pay the landlord. Once your lease is up, assuming you do not renew it, the subtenant will need to work out a new lease with the landlord if they want to stay in the rental.

How to Sublease Your Apartment

So, exactly how does subleasing an apartment work? When it comes to the nitty-gritty details, the process looks something like this:

  1. Find a subtenant. Since you’re assuming the role of landlord, you’ll want to advertise and vet the subtenant fully. A landlord will often complete a background check, credit check, and verify income on a tenant — you should do the same with your subtenant.
  2. Sign a sublease. Creating a sublease that protects you is key. You’re still responsible for the lease agreement you signed with the landlord, so you’ll need to be as specific as possible about what the situation and rights of the sublease entail.
  3. Collect rent from the subtenant. Now that you have a subtenant, you’ll need to collect rent from them and pay your landlord. You’re still responsible for filling the terms of your original lease, after all.
  4. Continue paying rent to the landlord as per the original lease agreement. As the primary tenant, you’re responsible for rent to the landlord. If your subtenant doesn’t pay it, you may need to figure out a way to pay the landlord so you’re not in breach of your contract.
  5. When your lease and contract ends, the subtenancy will end. The subtenant will no longer have any rights once your lease ends. In apartment complexes, it’s common for the subtenant to apply for a new lease with the landlord and become the tenant.

Recommended: How to Rent an Apartment with No Credit

Tips to Subleasing an Apartment Your First Time

Subleasing an apartment isn’t easy, but it may be the right move to allow you to move on. If it’s your first time, you’ll want to keep these things in mind:

•   Make sure subleasing is allowed in your lease agreement. The last thing you want is to breach your contract. That gives your landlord justification for keeping your deposit and pursuing legal action against you. While this sounds extreme, it’s also not outside the realm of possibility.

•   Screen your subtenant carefully. Since you’re acting as landlord, you’ll want to ensure the subtenant is able to pay and maintain the property. Consider running a background check and credit check, and verifying income. Don’t go off your gut — every rookie makes this mistake — but instead, verify the information the prospective tenant gives you. A good subtenant will make your life 100% easier.

•   Get a professional to create a sublease contract. The contract between you and your subtenant should be strong, or you open yourself up to legal and financial trouble. A professional can help. Some items that may need to be included in the sublease are:

◦   Name of the sublessor

◦   Name of the sublessee

◦   Location of the property

◦   Beginning and end dates of the sublease

◦   Rent and deposit amounts

◦   Due date of rent

◦   Terms and conditions of the original lease

◦   The document should be signed by both parties and possibly by the landlord if it is required



💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

The Takeaway

Subleasing can help you cover the cost of a lease you need to get out of, but it’s not easy and it’s not without risk. Even if you do a great job finding and screening the new tenant, there’s no guarantee they will pay and keep the property in tip top shape. But it’s also possible you’ll find a great subtenant and help you get to the next stage of your life, whether it’s moving in with your partner or buying your first home.

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


SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is the difference between a lease and sublease?

A lease is a legal contract that grants rental rights for a tenant directly with the landlord. A sublease is a contract between the initial tenant and a second tenant.

Is subleasing easier?

With subleasing, you take on the role of landlord with a new tenant while maintaining a contract with your landlord, so it’s not an easy path. You collect rent from the subtenant and pay the landlord. Along with this, you assume the risk of another tenant damaging the property or not paying.

How does subleasing work in California?

In California, you simply can’t sublease legally without your landlord’s written permission. First, you’ll want to check your lease agreement to make sure subleasing is permitted. Then, if it is allowed, you’ll still need to get written consent from your landlord before subleasing.

Photo credit: iStock/StockRocket

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.

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

SOHL0423009

Read more
Aug
11
2023

How Much Will a $250,000 Mortgage Cost per Month?

By | Home Ownership, mortgage | Comments Off on How Much Will a $250,000 Mortgage Cost per Month?

When buying a house, many of us get caught up in the down payment and other large upfront costs. It’s important to factor in the long-term costs associated with a $250,000 mortgage, which includes the monthly mortgage payment.

Just how much will that payment be each month? Read to learn the monthly cost of a $250K mortgage.

Total Cost of a $250K Mortgage

Homebuyers have some large expenses to deal with before making mortgage payments. Both upfront costs and long-term expenses should factor into figuring out how much house you can afford.

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

Upfront Costs

Upfront costs associated with buying a home are more than just the earnest money and down payment. A buyer can expect to pay closing costs, including some or all of the following:

•   Abstract and recording fees associated with the documentation of a property, which can cost from between $200 to $1,200 and $125, respectively.

•   Application fees for a mortgage from the lender, which can cost up to $500.

•   Appraisal fees to estimate the home’s value for the lender, which could cost between $300 to $400.

•   Home inspection fees if the buyer opts for an inspection of the property before buying, can run between $300 to $500 on average.

•   Title search and title insurance fees are required to ensure there are no liens or unexpected claims to the property being purchased. This usually costs between $75 to $200.

These fees before and during closing don’t include the down payment. The median down payment on a house is 13%, but to avoid things like private mortgage insurance, a buyer may have to put down as much as 20% of the home’s purchase price.

A buyer who takes out a $250K mortgage and makes a 20% down payment is likely putting in around $62,500. In addition to the down payment and closing costs, keep in mind expenses around moving and furnishing a new home.


💡 Quick Tip: You deserve a more zen mortgage. SoFi Mortgage Loan Officers are dedicated to closing your loan on time — backed by a $5,000 guarantee offer.‡

Long-Term Costs

You’ll pay down the principal plus interest on your loan over the long term, with a higher proportion of interest in your monthly payments early in the life of the loan. Near the end of your loan term, you’ll be paying almost entirely principal.

If you put down less than 20% on your home, you may also be paying private mortgage insurance (PMI) each month. Here are some other long-term costs:

•   Maintenance Homeowners should factor in the cost of maintenance and repairs in their long-term housing budget. Many owners default to the 1% rule, setting aside 1% of a home’s purchase price annually for ongoing repair costs.

•   Property taxes These vary based on your location but can be thousands of dollars a year.

•   Homeowners association (HOA), co-op, or condo fees These also vary, but you will know what they are before you close on the property.

•   Insurance Depending on where your home is located, you may need hazard insurance to cover you in the event of a natural disaster, in addition to standard homeowners insurance.

Recommended: First-Time Homebuyer Guide

Estimated Monthly Payments on a $250K Mortgage

The monthly cost of a $250K mortgage payment will vary based on several factors, including:

•   Down payment, or how much a buyer puts down when purchasing a home

•   Length of loan, or the timeline in which a buyer agrees to pay off their mortgage

•   APR, the annual percentage rate of the mortgage

Breaking things down further, the terms can also influence the monthly payments on a $250K mortgage. Buyers can choose between a:

•   Fixed-rate mortgage, where they pay the same APR over the life of the loan.

•   Adjustable-rate mortgage (ARM), where buyers typically pay a lower rate at the beginning of the loan, but the APR will change over the life of the loan.

How you choose from among the different types of home mortgage loans will depend on your financial goals and qualifications.

Monthly Payment Breakdown by APR and Term

What interest rate a buyer will get when applying for a mortgage depends on the market and their financial history. The length of the loan can also impact the estimated monthly mortgage payment. A 30-year loan will have lower monthly payments but you will pay significantly more interest over the life of the loan:

Interest rate

 15-year term

 30-year term
3.00% $1,726 $1,054
3.5% $1,787 $1,122
4% $1,849 $1,193
4.5% $1,912 $1,266
5% $1,976 $1,342
5.5% $2,043 $1,419
6% $2,110 $1,499
6.5% $2,178 $1,580
7% $2,247 $1,663

As a reminder, these estimates do not include additional costs that might be included in monthly payments, like insurance and property taxes. Consider using a mortgage calculator to figure out monthly payments based on personalized annual percentage rate (APR) and terms.

How Much Interest Is Accrued on a $250K Mortgage?

How much interest a homeowner will accrue on a $250K mortgage depends on the APR and terms of the loan. As a general rule of thumb:

•   The higher the APR, the more interest paid

•   The longer the loan, the more interest paid

In the beginning, monthly mortgage payments will primarily cover the interest on the mortgage, paying only a small portion of the principal. However, over the life of the loan, the homeowner begins to pay more toward the principal and less in interest.

For example, on a $250K mortgage with a 30-year loan term and 4% APR, a buyer can expect to pay $179,673.77 in interest over the life of the loan. For a $250K mortgage with a 15-year loan term and 4% APR, a buyer will pay $82,859.57 in interest.

While the owner will pay less in interest with a shorter loan term, they can expect higher monthly payments than a 30-year loan term.


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

$250K Mortgage Amortization Breakdown

Suppose a buyer secures a $250K mortgage on a home with a 7% rate and a 15-year term. Their monthly payment on the mortgage, including principal and interest, would be roughly $2,247.

Here’s how those payments would split between interest and principal balance over the life of the loan, otherwise known as an amortization breakdown:

Year

 Beginning balance

 Annual interest paid

 Annual principal paid

 Ending balance
1 $250,000 $17,190 $9,774 $240,226
2 $240,226 $16,484 $10,481 $229,744
3 $229,744 $15,726 $11,239 $218,506
4 $218,506 $14,914 $12,051 $206,454
5 $206,454 $14,042 $12,922 $193,532
6 $193,532 $13,108 $13,857 $179,675
7 $179,675 $12,107 $14,858 $164,817
8 $164,817 $11,032 $15,932 $148,885
9 $148,885 $9,881 $17,084 $131,801
10 $131,801 $8,646 $18,319 $113,482
11 $113,482 $7,321 $19,643 $93,838
12 $93,838 $5,901 $21,063 $72,775
13 $72,775 $4,379 $22,586 $50,189
14 $50,189 $2,746 $24,219 $25,970
15 $25,970 $995 $25,970 $0

Keep in mind that this table doesn’t include additional costs that may be rolled into mortgage payments, such as insurance or property taxes.

Amortization tables can be helpful tools for understanding payments across the life of a mortgage.

What Is Required to Get a $250K Mortgage?

The process of getting a $250K mortgage has several requirements, including:

•   You’ll need a credit score of at least 500 for some mortgages, but most lenders require a score of 620 or more

•   You’ll prequalify for a mortgage. You’ll provide a little information about yourself and the lender will perform a soft credit inquiry. This will give you a sense of what the lender might offer in terms of interest rate.

•   You’ll find the right lender. The right lender for a borrower will vary based on the rates they offer, in addition to other fees and features.

•   You’ll fill out a mortgage application and get preapproved for your mortgage. The application may require tax documents, W-2s, and bank account statements. If you’re preapproved, you’ll receive a letter from the lender providing conditional approval for the mortgage within a certain window, typically 60 to 90 days. SoFi’s Help Center can help you start your journey to homeownership today.

The Takeaway

Considering monthly payments on a $250,000 mortgage is an important step in understanding the budget behind buying a home. Multiple factors can impact the monthly cost, including interest rate and loan terms, making it essential to consider all options and make the choice that best suits your budget.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What’s the monthly payment on a $250K mortgage?

The size of your payment will depend primarily on the length of the loan’s term and its interest rate. A 15-year term at 7% would give you a monthly payment of about $2,247, while a 30-year term at 7% would yield a payment of $1,663. Note that although the 30-year term has a lower monthly payment, you’ll pay significantly more in interest over the lifetime of the loan.

How long will it take to pay off a $250K mortgage?

How long it takes to pay off a $250,000 mortgage will depend on the term of your loan and whether you refinance along the way. You might have a loan term of 30, 20, 15, or even 10 years. And remember, you can always pay off your loan sooner if you like, although in rare cases there can be a prepayment penalty.

How much do I need to earn to get a $250K mortgage?

You’d need to earn about $90,000 per year in order to afford a $250,000 mortgage, so that your monthly debt payments don’t cause undue financial stress.

Photo credit: iStock/Worawee Meepian

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

‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
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.

Read more

Aug
11
2023

Pros and Cons of Jumbo Loans

By | Home Ownership, mortgage | Comments Off on Pros and Cons of Jumbo Loans

After finding that big, beautiful house, you now have to find a big, beautiful mortgage. If the amount you need to borrow is over the Federal Housing Finance Agency (FHFA) conforming loan limit of $726,200 for most geographic areas, you’ll need to get a jumbo loan.

A jumbo loan is a little different than a conventional, conforming mortgage and has its own benefits and drawbacks. You can expect increased scrutiny from potential lenders, and possibly some increased costs.

Jumbo Loans: The Basics

Luxury homes, vacation homes, unique properties, and homes in high-cost-of-living areas may need a jumbo loan. A jumbo loan is different from a conventional loan in that it isn’t guaranteed by Fannie Mae or Freddie Mac. This means the lender takes on more risk to issue a mortgage to the borrower. With the additional risk exposure, lenders have higher qualifications. This may include:

•   A higher credit score

•   A larger down payment

•   Strong cash reserves — sometimes up to a year’s worth of mortgage payments

•   A higher income

•   A low debt-to-income ratio

•   More stringent loan-to-value requirements

While the qualifications and loan amounts may be different, they may offer an interest rate similar to what you would find for a conventional loan below the conforming loan limits.

Keep in mind the more stringent requirements shouldn’t dissuade you from looking into jumbo loans. On the contrary, let’s take a closer look at jumbo loan pros and cons to help you decide if you want to go this direction or not.

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

Recommended: Local Housing Market Trends

Benefits of Jumbo Loans

A jumbo loan may allow you to buy property you otherwise wouldn’t be able to. Some of the main benefits of a jumbo loan include:

•   Higher loan amount. A jumbo loan allows you to purchase property at a higher price point. If you’re looking for high-end property, a vacation property, or your dream home, a jumbo loan may be able to help you access the financing you need. Depending on where the property is located, the conforming loan limits are either $726,200 or up to $1,089,300.

•   Comparable Interest rates. You may be surprised to learn that interest rates on jumbo loans may be comparable to those of conforming conventional loans. Sometimes, they’re even lower!

•   Avoid PMI. There are some lenders that allow you to forgo private mortgage insurance with a jumbo loan, especially if you put down at least 10% on a property. This can save you money every month.



💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

Drawbacks of Jumbo Loans

While jumbo loans can afford you the loan you need for a higher-priced property, they do have some drawbacks you should be aware of.

•   More stringent qualifications. Jumbo loans are tougher to get. You need a higher income, a high credit score, and a big down payment. Lenders also want to see a debt-to-income (DTI) ratio lower than 43%, and the loan-to-value (LTV) ratio may max out at 80% of a property’s value.

•   Potentially higher rates. Jumbo loans are not guaranteed by Fannie Mae or Freddie Mac, so a jumbo loan can reduce a lender’s liquidity and expose them to more risk. In the past, jumbo loans have been offered at higher interest rates, though recently, many lenders are offering jumbo loans at a lower interest rate than a conventional mortgage.

•   Need to show cash reserves. For some of the best terms for jumbo loans, you may need to show anywhere from three to 24 months’ worth of cash reserves. Furthermore, jumbo loan lenders have different standards when it comes to what is considered a cash reserve. Some lenders may be able to count your 401(k) as part of your cash reserves, while others require money to be held in a more liquid account.

•   Fewer lenders offer jumbo loans. This doesn’t mean jumbo loans are uncommon by any means, but you do have to find a lender in your area that offers jumbo loans.

•   Higher costs. Because jumbo loans are so large, you have higher costs all around. Closing costs are based on a percentage of the transaction. With a higher loan amount, you’ll pay more for these services. You’ll also pay more for fixed-cost services, such as an appraisal or a home inspection, if your home is larger and has more to evaluate.

How Hard Is It to Qualify for a Jumbo Loan?

It’s true — fewer borrowers will be able to qualify for a jumbo loan. But if you know what lenders are looking for, your odds are good. Jumbo loan requirements may include:

•   Credit score of 700 or higher

•   Down payment of 20%, although some lenders allow as little as 10% down

•   LTV ratio around 80% or lower

•   DTI ratio of 43% or lower

•   Cash reserves equal to 6 to 12 months of the monthly mortgage payment

•   Higher income amount



💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

Jumbo Loan vs Conventional Loan

Technically, jumbo loans are conventional loans. A conventional loan is a mortgage that isn’t a government-backed mortgage. What’s different about a jumbo loan is that it is not a conforming conventional loan.

A conforming conventional loan is one where the loan amount is less than the conforming loan limit of $726,200 for most areas and $1,089,300 for high-cost areas. This distinction is important, but it’s also common to call a conforming conventional loan simply a conventional loan.

Aside from the loan amount, other major differences between a jumbo loan and a conventional conforming loan include the down payment amount, credit score requirement, LTV ratio, DTI ratio, income requirement, and cash reserve requirement. These key differences are outlined in the chart below:

Jumbo Loan

 Conventional Conforming Loan
Loan amount Loan higher than $726,200 in most areas or $1,089,300 in high-cost areas. Loan lower than $726,200 in most areas or $1,089,300 in high-cost areas.
Down payment Down payment as low as 10% Down payment as low as 3%
Credit score 700+ As low as 620
LTV Around 80% As high as 97%
DTI 43% or lower, 36% for some lenders Up to 50%
Income Higher Lower
Cash reserves As much as 12 months Not required

The Takeaway

If you have your eye on a property that exceeds the conforming home loan limits for your area, a jumbo loan can make it happen for you. Prepare yourself for the more stringent salary, credit score, and cash reserves requirements and you’ll be able to call that home yours.

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

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

FAQ

Who qualifies for a jumbo loan?

Borrowers with a high income, an excellent credit score, substantial funds on hand for a down payment (plus large cash reserves), and a low debt-to-income ratio may qualify for a jumbo loan. Check with lenders to learn their specific requirements.

How do you apply for a jumbo loan?

You can apply for a jumbo loan through any lender that offers a jumbo mortgage product.

Photo credit: iStock/FOTOGRAFIA INC.

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.

SOHL0423004

Read more
Aug
10
2023
How to Calculate Cap Rate

What Is Cap Rate and How Do You Calculate It?

By | Financial Independence, Home Ownership, invest | Comments Off on What Is Cap Rate and How Do You Calculate It?

What Is Cap Rate?

Capitalization rate, also called cap rate, is the rate of return that an investor can expect to earn on a real estate investment property. Commercial real estate investors use it to determine how long it will take to recoup their investment in a property. Many investors will roughly calculate this number mentally, before doing further diligence on a potential investment.

In its simplest form, investors determine the cap rate of a property by dividing the property’s annual net operating income by the value of the asset. The resulting number is a percentage, and it’s how investors understand the potential return on a property. Essentially, the cap rate represents the financial returns of a property over a single year.

What Does a Cap Rate Indicate?

The ranges of what constitutes a good or bad cap rate varies widely, depending on the investment property and its market. Investors use the cap rate as a quick guide to an investment’s value compared to other similar real estate investments.

But as an indicator, the cap rate leaves out important aspects of a real estate investment such as the leverage undertaken to purchase and develop a property, and the time it will take to realize cash flows from improvements.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Formula for Calculating Cap Rates

The most popular formula for calculating cap rates is this:

•   Capitalization Rate = Net Operating Income / Current Market Value

Here’s a breakdown of each of those components in this context:

Net Operating Income

Net operating income consists of the property’s gross annual income — all the rent and other revenues the property produces — minus all of the common home repair costs, taxes, insurance, and other expenses related to the property, excluding mortgage payments. Once those costs have been subtracted from the income, you have the net operating income.

Current Market Value

Current market value isn’t necessarily the price that an investor paid for the property. Rather, it’s the price that the property would sell for today. In the case of a prospective real estate investment, it’s the price that the investor would pay to buy a property.

Cap Rate

When an investor divides the Net Operating Income by the Current Market Value, they take the number that’s left and move the decimal point two digits to the right to arrive at the cap rate. That number represents the percentage return investors can expect from the property.

Recommended: Investment Opportunities in 2023

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

How to Calculate Cap Rate

Cap Rate Example

An investor who’s considering a real estate investment would start by finding out the annual rental income it produces. This is easier to do with an existing property that already has paying tenants because it has a track record and leases in place.

Assuming that an investor is interested in a property that already has tenants, an investor can ask for this information from the current owners. For instance, in this hypothetical investment, an investor finds out from the present owners that a property has tenants who pay $90,000 a year in rent.

But the building costs $9,000 per year to manage. It also costs $4,500 to maintain the property. Then there’s another $7,100 that the owner of the building will have to pay in property taxes. Finally, insuring the building will cost $6,500 per year.

To arrive at the net income of the property, the investor will have to subtract all of those annual expenses from the property’s gross annual income. In this example, the net income of the property, after factoring all of those costs, comes in at $62,900.

Once an investor knows the net income that the property produces, they divide that number by the current market value (if they already own the property), or the purchase price (if they’re thinking of buying it). In our example, if the current market value/purchase price is $400,000 and the net income is $62,900, the formula gives a result of 0.15725. And when the investor moves the decimal point two digits to the right, the result is 15.72. That number — 15.72 — tells the investor that they can expect the property to deliver an annual return of 15.72%.

Using a Property’s Cap Rate

While a property’s past income can serve as a guide, cap rates are based on projected estimates of its future expenses and future income. As the business climate and the condition of the property fluctuate from year to year, the property’s cap rate will also fluctuate.

But even though the cap rate changes over time, it is a valuable way to understand the real value of an investment, simply because it tells an investor how long it will take to recoup their investment in the property. For example, an investor purchasing a property with a cap rate of 10% will need roughly 10 years to earn back the initial investment.

After that 10-year investment, the investor will still own the property and be entitled to the net income. But before they reach that point, many unexpected risks related to property investing can rear up and derail the investor’s plans.


💡 Quick Tip: Are self directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

The Limitations of Cap Rate

The cap rate of a property is a projection, and nothing more. Investors purchasing a Treasury bond paying 3% have every reason to expect that if they hold it to maturity, they’ll receive 3% annually.

But property investing comes with a host of risks that can keep that rosy cap rate from ever becoming a reality. With commercial real estate, the most likely risk is that the tenants will move out.

To go back to our example, if a third of the tenants move out of the building, then its gross income will go down to $60,000. But the building’s many expenses will most likely remain steady, making its net income $32,900. Assuming that the building’s value hasn’t changed, suddenly its cap rate is $60,000/$400,000, or 8.2%.

There are also factors having to do with the property itself. Even when well maintained, buildings break down and wear out over time. That adds to the operating costs and diminishes the net income of the property. It also affects the value of the underlying asset that the investor owns.

Some risk factors that investors should consider include the age, location, and condition of the property. At the same time, investors should think about what type of property they’re buying — whether it’s a single or multifamily home, industrial, office, or retail property. They should also consider how the type of property could be affected by outside influences. For instance, retail and hotel owners saw their cap rates fall significantly when the coronavirus pandemic reduced business for their industry.

There are also unknowns, such as inflation, which could make some of the investor’s expenses higher but also potentially allow them to increase the rent. Digging deeper, investors buying an established property may want to do some homework on the current tenants’ financial status, as well as their history of paying rent on time.

Investors should also look at the terms of the current leases that they’ll be inheriting when they take over the property. At the same time, investors should take a larger view of the macroeconomic factors affecting the property, its location, and its tenants, and consider the potential opportunity costs associated with tying up a portion of their portfolio in an investment property.

Recommended: The Pros and Cons of Owning a Rental Property

The Takeaway

The cap rate formula provides investors with a valuable measure when evaluating the opportunity presented by a property investment. Cap rate can help them gauge how long it might take to recoup their investment.

But cap rate is just one measure investors should look at when considering a property. The age, location, and condition of the property are important, as is the current lease situation. Potential real estate investors should do thorough research.

That said, overall, real estate investment may be one way to diversify a portfolio, since real estate returns typically do not correlate to the returns of stocks and bonds.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.


Invest in alts to take your portfolio beyond stocks and bonds.

Photo credit: iStock/amirulsyaidi


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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.

SOIN0723051

Read more
Aug
09
2023

What Is Joint Tenancy With Right of Survivorship? Examples

By | Home Ownership, Real Estate | Comments Off on What Is Joint Tenancy With Right of Survivorship? Examples

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

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

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

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


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

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

Requirements for Joint Tenancy With Right of Survivorship


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

•  acquired the asset at the same time

•  obtained the same title document

•  an equal share of interest in the property

•  equally exercised their right to ownership of the property

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

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

Understanding Joint Tenancy With Right of Survivorship: Examples


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

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

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

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

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


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

Different Types of Joint Tenancy


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

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

Joint Tenancy with Right of Survivorship

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

What are the Tax Implications of JTWROS?


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

For example, if your joint tenant is not your spouse, and the value of your shared property is higher than the annual gift tax exclusion ($17,000 in 2023), the transferal of ownership at the time of their death could trigger the federal gift tax. You may also be subject to estate taxes if the value of your shared property exceeds the IRS’s threshold for that tax — $12,920,000 in 2023.

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

Advantages and Disadvantages of JTWROS


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

Benefits of JTWROS

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

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

Drawbacks of JTWROS

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

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

When Does Joint Tenancy With Right of Survivorship Make Sense?


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

How to Enter a JTWROS Agreement


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

The Takeaway


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

Ready to take the leap into homeownership for yourself? SoFi Mortgage Loans come with competitive rates and terms suited to every phase of life.

Checking out rates is a smart step toward homeownership — take a look today.

FAQ


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


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

Which tenancy is best for married couples?


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

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


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

Photo credit: iStock/PeopleImages

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.

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.

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

SOHL0523011

Read more

CATEGORIES

  • All
  • No categories
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

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

©2024 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender