yellow door on white house

How Much Debt is Too Much to Buy a House?

Perhaps you’ve found your dream home, or maybe you’re still in the exciting stages of looking for the house you want. In either case, you’re likely thinking about getting a mortgage loan—and you may be wondering if the amount of debt you currently have will become a stumbling block to qualifying for a mortgage.

To qualify for a mortgage, a lender needs to be confident that you can responsibly manage the amount of debt that you’re currently carrying along with a mortgage payment. The formula used to determine that is called a debt-to-income (DTI) ratio.

More specifically, a DTI ratio is the percentage of your qualifying monthly income, before taxes, that is needed to cover ongoing debts. This could include student loan payments, a car payment, credit card payments, and so forth. If the DTI ratio is too high, then a lender may see you as a higher risk.

This post will describe DTI in more detail, including how to calculate yours, what lenders typically like to see, and what might be too much debt to buy a house. We’ll also share strategies to manage your debt and lower your DTI ratio to help you qualify for the house of your dreams.

Understanding How Your DTI Ratio Can Affect Your Mortgage Options

The DTI formula is pretty simple. First, make a list of all your debts with recurring payments. Then, if you’re a W2 earner, take your pre-tax monthly income and divide your monthly expenses by this amount. That percentage is your DTI ratio .

Note that, with a mortgage, to calculate your DTI ratio, you’ll need to have a reasonable estimate of monthly property taxes on the home, insurance (homeowners, for sure, and PMI and flood insurance, if applicable), and HOA dues, if applicable. Even if you wouldn’t necessarily pay those bills on a monthly basis, you’ll need the bill broken down into a monthly amount for DTI calculation purposes. (And remember these are just examples. Your actual DTI, as calculated by a lending professional, may differ.)

If your debt-to-income ratio is too high, it can impact the type of mortgage you’ll qualify for. Each mortgage lender will have their own preferred DTI ratio, of course, and lenders can and do make exceptions based on your unique financial situation. Here’s an explainer on desirable debt-to-income ratios from the Consumer Financial Protection Bureau.

Preparing for When You Need a Mortgage

If you know you’ll want to buy a house within, say, the next year or two, it can be beneficial for you to understand how much home you can afford. This will give you time to manage your finances to make getting a mortgage approval easier. Perhaps you can’t pay off all your debt in that time frame, but there are strategic moves to make to position yourself better when mortgage time is upon you. In addition, consider reviewing our home buyers guide to get a better understanding of everything you need to prepare for your mortgage.

First, be careful. There are plenty of debt-related myths, but let’s address two debt-related realities:

1. Having a lot of debt in relation to your income and assets can work against you when applying for a mortgage.
2. If you are consistently late on debt payments, lenders may question your ability to pay your mortgage on time.

Here are a few tips that can help with some of the most common debt challenges:

Student Loan Debt

If you’re looking to take control of your student loan debt, consider refinancing your student loans into one new student loan with a potentially lower interest rate.

This can make paying back your loans easier, because there is just one monthly payment to make. Plus, with a (hopefully) lower interest rate, you can pay back less interest, overall. And, if you’re concerned about your monthly DTI ratio being too high when you go to apply for a mortgage, you may be able to refinance your student loan to a longer term for lower monthly payments, to reduce your current monthly DTI ratio. (Keep in mind, though, that extending your loan term may mean paying more interest over the life of your loan.)

When you refinance at SoFi, you can combine federal loans with private ones, something not many lenders permit. Request a quote online to see what you can save. Note that SoFi does not have any application fees or prepayment penalties, and there are no hidden fees.

Credit Card Debt

When you have a significant amount of credit card debt, the monthly payments can negatively impact your DTI ratio.

If you’re concerned about managing credit card debt payments while paying a mortgage, you could even consider focusing your efforts on getting out of credit card debt before you start the homebuying process.

To manage your credit card debt, and ultimately eliminate it, here are a few debt payoff methods to consider

•  The snowball method. List your credit cards from the one with the lowest balance to the one with the highest. Then, focus on paying off the one with the smallest balance first, while still making minimum payments on the rest. When that first card is paid off, focus on the next one on your list and so forth.

•  Tackling high-interest debt first. Using this method, you list your credit cards from the one with the most interest to the one with the least. Then, focus on paying off the credit card with the highest interest while making minimum payments on the rest. Then tackle the next one, and then the next one.

•  Consolidating credit card debt using a personal loan before you apply for a mortgage loan. When you do this, you’ll have just one loan, and personal loans typically have lower interest rates than credit cards (if you qualify). Ideally, keep credit cards open while only using them to the degree that you can pay off in full each billing cycle. And as with all debt payments, make all personal loan payments on time.

By reducing and managing your credit card debt, you can better position yourself for a mortgage loan on the house of your dreams.

Consolidating Your Credit Card Debt with a Personal Loan

Ready to consolidate credit card debt into a personal loan? SoFi makes it fast and easy, and it only takes minutes to apply. Plus, our personal loans have the following perks:

•  Low rates

•  No fees

•  Access to live customer support seven days a week

•  Community benefits; ask about how, if you lose your job, we can temporarily pause your personal loan payments and help you to find a new job

We look forward to helping you achieve your financial goals and dreams. Learn how a personal loan from SoFi can help.

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.
SoFi Mortgages are not available in all states. Products and terms may vary from those advertised on this site. See for details.
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 on credit.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Read more
wooden house on green background

Is Buying a House a Good Investment?

Owning your own home is a quintessential part of the American Dream. It’s a haven, a space that is completely your own, offering stability and comfort for you and your family. If you have been dreaming about homeownership, you may be trying to determine if buying a home is a good investment.

People often buy homes when the timing is right in their lives; they’re mostly out of debt, they’ve saved for a down payment, they’ve built up their credit score, and they have a solid career. If you have the means, buying a home can be a great decision. For others, it may make sense to rent for a few more years to save and learn how to buy a house.

While houses are often seen as investments, they are different from stocks or mutual funds. Sure, you buy your home with the hope that the value increases over time, but it’s also an asset you use every day. And owning a home requires regular maintenance and unexpected costs.

If you’re wondering “Is buying a house a good investment?” you’ll have to do some personal reflection and take a look at your finances and future plans. There are a lot of factors to consider and only you can determine when you’re ready to buy. Here are six questions to consider when deciding if it’s time to buy a house.

Are You Willing to Own a Home for Five Years or More?

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

If you don’t plan to own the house for at least three to five years, you may not break even when you sell the home. When you buy a home, you pay for more than just the house and those costs can add up.

You’re often paying for appraisals, mortgage application fees, inspections, movers, real estate agent fees, and that can add up to thousands of dollars. In order to offset all those fees, your home would generally have to appreciate by 15% to 20% prior to selling. It can be difficult to make those gains back in just three years. If you plan to live somewhere for less than five years, it could make the most sense to rent property.

Do You Have Sufficient Savings?

In order to buy a home, you’ll generally have to take out a mortgage to finance your purchase. Lenders will scrutinize your mortgage application, reviewing your credit report, employment history, and earnings to make sure you are able to make the monthly mortgage payments. Before you even get to that stage, you’ll have to save for a down payment and closing costs.

In addition to the initial cost of buying a home, there are continuing costs you’ll have to account for, such as home insurance, property taxes, general maintenance, and emergency home repairs. When you are renting, if the kitchen sink springs a leak, your landlord will take care of it.

But when you own a home, those repairs will be entirely your responsibility. Having an emergency fund saved up will help you deal with unexpected costs associated with homeownership.

One way to save for your down payment is to use a SoFi Invest account. At SoFi, you can begin investing with as little as $100 and you’ll gain access to a team of financial advisors who can work with you to establish your financial goals and create a plan to help you get there. If owning a home is your goal, investing with SoFi could help you get there.

Buy your next home with as little
as 10% down on loans up to $3 million.

Are You Confident in the Housing Market?

While the price of homes has continued to rise over the past 10 years, there has also been an increase in demand and a decrease in available housing . This can make it difficult for first-time homebuyers to find a suitable home that is in their price range. It’s important to be prepared as you start to look at homes. Understand your budget and make sure you have saved enough money to make a solid down payment on the property.

Are You Ready for the Responsibility?

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

Will you need to buy a lawn mower? If you live in an area with harsh winters, will you need to get a snow blower or hire someone to clear the driveway after each snow storm? If the roof starts to leak, you’ll have to fix it or hire someone to complete the repairs.

Make sure you are ready for the financial responsibility that comes with owning a home before you make the purchase. You’ll have to account for repairs, improvements, general upkeep, insurance, and taxes.

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

Part of the process of learning how to buy a house is educating yourself on how mortgages work and the different types available. Generally, there are two types: fixed rate and adjustable-rate mortgages.

A fixed-rate mortgage keeps your payment level over time, typically 15 or 30 years, because the interest rate remains stable. The interest rate on a flexible-rate mortgage fluctuates over time. They usually start out lower than a fixed-rate loan, but often rise in later years. To see what a mortgage could mean for you, take a look at SoFi’s mortgage calculator.

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

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

Ready to Buy? Consider a SoFi Mortgage

When you’re ready to take the next steps in your home-buying journey, consider taking out a SoFi mortgage loan. SoFi offers both adjustable-rate and fixed-rate mortgages, so you can choose the option that works best for you.

Applying for a loan with SoFi is easy—we offer pre-qualification online in under two minutes. Plus, there are no hidden fees.

Ready to buy your new home? Learn how a SoFi mortgage can help you buy the house of your dreams.

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.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see Equal Housing Lender.

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

SoFi Student Loan Refinance
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.


Read more
paintbrush with green paint

The Cost of Buying a Fixer-Upper

Buying a home is a monumental decision and one you’ve surely made with care. But today’s housing market can make it tricky to get exactly what you want right out of the gate.

According to Reuters , the shortage of affordable homes across the country will continue well into 2019 and possibly beyond.

Supply hasn’t been able to keep up with demand, the article says, and the average house price is far outpacing inflation. So, instead of going for a move-in ready home you may be tempted to buy a fixer-upper and save a little cash.

However, though the home’s initial price may seem enticing, the cost to renovate a house could deter you from remodeling your dream home.

Just how much does it cost to fix up a house? Let’s break down the most common costs associated with gutting a house and remodeling so you can make an informed buying decision.

Decide If This Is Your Home or a Flip

Many times, people looking to purchase a fixer-upper are in it for the short game of a flip. This means they are hoping to purchase a home well under market value, make a few renovations, and then quickly sell the home for a profit. And that’s all good—you just need to decide which camp you’re in.

This Old House explains that fixer-uppers that just need a little paint and cosmetic work are excellent for flippers as they are a relatively low-cost investment that could provide bigger returns. But, if you’re looking to build your dream home and just require good bones, then go ahead and look at properties that may need structural changes or something more than just a facelift.

This type of home is typically less expensive but could take years and lots of money to renovate. However, if you’re planning to make it your forever home, then it might be worth it to you.

Do Your Homework Before You Buy

It’s crucial to add up all the costs of potential renovations before you put a down payment on a home. And don’t let the dreamy idea of just wanting your own home get in the way. This isn’t the time to go easy on your potential property investment. Instead, it’s all about being brutal before you buy. And doing so may actually pay off in the long run. Otherwise, you may end up in your own version of “The Money Pit” movie.

“If people are unforgiving upfront about assessing the costs of renovation, the value of the property and the neighborhood, and how much money they have, they can come out ahead and buy more house than they otherwise could ever afford,” Bradley Inman, CEO of, told This Old House .

Like Inman says, assess the upfront cost and add up all potential material and labor needs—think both big and small, like plumbers, electricians, carpenters, all the way down to any new doorknobs you’ll buy along the way. Then, subtract that from the home’s renovated market value. Inman suggests subtracting a further 5% to 10% for unforeseen costs, and that number is what you should consider offering.

For example, if you’ve done the math and found that fully renovating a two-bedroom home in Denver, Colorado, will cost $50,000 for labor and materials, you might add in an extra $5,000 for extras. Then, subtract that from $424,200, which is the current median home value (as of January 2019) for a two-bedroom property in the city. That equates to $369,200, which would then be your maximum offer. Of course, you could always mitigate the renovation costs by doing some of the work yourself.

Preparing to Invest in Home Renovations

Though each home is unique and each renovation will be different, provides a general cost breakdown for different remodel hypotheticals.

Than Merrill, founder of, told that a person can expect to pay about $25,000 to $45,000 for smaller remodels that include painting both the inside and outside of a home, light refinishing of cabinets, and updating landscaping.

For a heavier lift, which includes all of the above plus a complete kitchen renovation and a small bathroom fixup, the cost could be between $46,000 and $75,000.

And a major upgrade (the cost of gutting a house and remodeling), which includes everything listed above plus fixing structural issues, like the foundation and roof, will likely cost $76,000 or more.

Here’s what the cost breakdown looks like for a few of the most common fixer-upper areas. (Note: These are national averages and may vary depending on where you are.)

Common Fixer Upper Project Costs

Kitchen Remodels

According to HomeAdvisor’s 2018 remodel estimates, the average cost of kitchen remodels currently sits at $20,474. And, as HomeAdvisor points out, the National Kitchen and Bath Association estimates the top expenses for an average kitchen remodel include cabinetry/hardware (29%), installation (17%), appliances (14%), countertops (10%), and flooring (7%).

You could always save by purchasing stock cabinets from a place like Ikea, which only run a few hundred dollars per cabinet, or go big and get custom cabinets, which could set you back approximately $1,500 for just one.

Bathroom Renovation

The average bathroom renovation ranges from $6,000 to $14,000, according to HomeAdvisor. The biggest cost in the room is, once again, the cabinets. Next is the bath itself which HomeAdvisor said could cost between $400 and $1,500 for a basic tub. If you’re looking to go high end, that tub could set you back a cool $8,000.

Roof Installation

A roof should typically last two to three decades on a home—or longer if you choose the right material. The average cost for replacing a roof, according to HomeAdvisor, is $6,838.

But, again, that cost can vary greatly depending on if you want to go low or high quality. For example, asphalt shingles, which are the most common roofing type, could cost as little as $1,700, but slate, which could last even longer without needing repair, may run up to $120,000.

How to Handle the Cost of a Fixer Upper

These numbers can seem overwhelming, but remember, you’re bringing out your home’s maximum potential for both you and any potential future sale. To help pay for these improvements, you could look into applying for a home improvement loan to finance your home addition project.

SoFi applicants have an average online approval-to-funding in just seven days. Furthermore, they are unsecured loans, meaning you’re not required to put up collateral against the loan. And with fixed monthly payments, you can better plan for the road ahead. Now, all you need is a hammer and you’re ready to go.

Thinking about renovating a fixer-upper? SoFi personal loans can help you turn your new purchase into a dream home.

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

Read more
living room windows

What to Know About Replacing Windows in Your Home

As a homeowner, home window repair is a fact of life. Sometimes, you don’t have a choice—perhaps because of storm damage. Other times, you might replace the windows as part of a remodel to change the aesthetics of a space, or to reduce energy costs.

Sometimes, you’ll need to decide between window repair and replacement. Then, you’ll need to select options in materials and glass. When talking to an expert about repairing or replacing windows, you may hear new lingo. The person will likely want to discuss the window frame, as well as the following:

•  Sill: That’s the strip running horizontally across the frame’s bottom.

•  Jamb: Those are the sides of the frame, running vertically.

•  Head: That’s the strip running horizontally across the frame’s bottom.

•  Sash: Some windows have one or more panels that move; the material that forms the frame that

•  holds these individual panes is the sash.

•  Stiles: These are sections of the sash that run vertically.

•  Rails: These are sections of the sash that run horizontally.

Here’s what you need to know about window replacements, cost considerations, and tips for financing the project.

Repairing vs Replacing Windows

If you’re having issues with your windows, you may be wondering whether or not you actually need to replace the window. Here are a few things to consider when trying to decide if you are going to fully replace windows or simply do a few small repairs to make sure they are still functional.

First, if you have one or more windows with cracked or otherwise broken glass, but frames are still solid—and you’re satisfied with how they look—it probably makes sense to just replace the glass with a quality product.

If you have double-pane windows, ones where two panes of glass are separated by a space (gas- or vacuum-sealed) to reduce heat transfer and increase efficiency, know that the seals can also break. You can tell if seals are broken with this simple test: If the window fogs up, you should be able to wipe the condensation off of the window, either from the inside or outside.

If you can’t, the seal is most likely compromised. If this happens, it’s highly unlikely you can simply replace the glass. But, if the frames are solid, you could still replace the panes, sashes, and seals. And be aware that if you have triple-paned windows, this seal breakage could happen in even more places.

Do you actually feel air coming in through a window? If so, you can caulk or weather-strip the trouble spots and see if this solves the problem. Are there small spots of wood that are rotting? If so, you can try scraping away rotted areas, then making putty repairs and repainting. Did you fix the problem? If repairs for either issue (air leaks or rotting wood) don’t solve the problem, that window will likely need replaced.

Here’s another issue to consider. Is the window stuck? There are a few different troubleshooting things to try, including looking for broken hardware pieces and replacing them; or scraping away paint, sanding down the area, opening up the window and cleaning the tracks. If one of these solves the problem, great. If not, then you’ll either need to replace them.

Finally, here is a benchmark to consider: Perhaps you fixed the problem, but the window is warped or otherwise damaged. This is a sign of issues to come and, as with most maintenance, being proactive about window replacement usually makes the most sense.

Benefits of Replacing Windows

If you decide that it is time to replace some or all of the windows in your house, you will likely cut your energy costs once the project is completed. According to ENERGY STAR® , windows granted the ENERGY STAR seal of approval can lead to the following annual savings for a typical home:

•  $126 to $465 when replacing single-pane windows

•  $27 to $111 when replacing double-pane windows that are clear glass

When you replace windows, you are also adding to the sales potential of your home, partly thanks to the energy savings. They also add to the curb appeal of the house, because windows are one of the most obvious features of a home as people walk or drive by. If the windows look old or poorly maintained, then potential buyers may conclude that the entire home needs maintenance, which may not be true at all.

And if you’re installing new windows as a way to invest in your home, consider larger ones that let in more natural light. Using daylight to brighten up your home has been found to be beneficial to people, enhancing productivity and improving mood. Natural light can help fine-tune circadian rhythms, which can add to a better sense of well-being.

Types of Window Materials

In general, you’ll need to choose what type of glass you want and what type of frame/sash materials. There are numerous materials you can choose from for your windows, ranging from vinyl to wood, fiberglass to aluminum and more. Vinyl choices are typically the most affordable and are usually low maintenance and durable. They can last a long time, since this material doesn’t peel or fade, chip, or rot.

For a traditional look, you can choose wood. They provide an elegant appearance, but typically come with more maintenance because wood can warp and rot, and paint will eventually chip and peel. Wood is almost always more expensive than vinyl.

Fiberglass is a little more expensive than vinyl, but can offer more durability and provide more energy efficiency. Scratches and nicks are harder to see, which is good; and, because the material doesn’t expand or contract to any significant degree, you seldom have to worry about air leaks.

Aluminum frames and sashes are long lasting and durable, and you can choose from numerous colors and finishes. This material creates a more modern look than wooden ones. And, although this material can be less efficient because the metal conducts heat, you can select ones with thermal breaks to minimize the issue.

You can also choose clad windows that are wooden inside your home, to provide a beautiful appearance, but vinyl, aluminum, or fiberglass on the outside where durability is more important. These windows are typically more expensive, but they do provide a versatile approach.

If you’ve got an historic home and you want to return your home to its original integrity, you may need to work with a company that can customize windows for you. The wrong style of window and use of anachronistic materials can significantly mar restoration efforts.

After you’ve selected material for the frame, you’ll have to decide on the type of glass. There are a few different types of glass, and they all have different functions—so do your research or work with a professional to find the best option for your home. Types of window glass include the following:

•  Insulated glass: These windows have at least two panes apiece, hermetically-sealed ones divided by spacers.

•  Heat-absorbing tinted glass: Because these windows can absorb heat from the sun, they can keep your home or business cooler. Plus, they reduce glare.

•  Reflective-coated glass: This can also reduce glare and heat in the home.

•  Gas-filled glass: These are insulated, gas-filled units that provide more insulation than just air. Gases used are usually krypton or argon.

•  Low-emissivity-coated glass: These windows can provide significant savings in energy costs in colder climates.

•  Spectrally-selective-coated glass: These allow in light while filtering out significant amounts of heat.

Window Replacement Cost

Home Advisor provides guidance into typical window replacement costs in 2018. Replacing windows can be an expensive project, but it could ultimately improve the value of your home. While prices vary based on a few factors, like where in the country you live and the size of the windows, these general estimates could give you an idea of what replacing windows might cost you.

•  Single-hung windows: $175 to $350 per window

•  Double-hung windows: $300 to $800 per window

•  Sliding windows: $325 to $1,200 per window

•  Casement windows: $275 to $750 per window

Using a Personal Loan When Installing New Windows

Once you’ve decided how many windows you will replace and what the window replacement cost will be, consider taking out a home improvement loan to fund the repairs. You can use the SoFi personal loan calculator to determine what a personal loan with SoFi could look like.

At SoFi, you can get a low-rate personal loan with no fees when you’re ready to repair or replace your windows. You can quickly and easily find your rate and complete an application online. Live customer support is available seven days a week, and if you lose your job through no fault of your own, you can apply for Unemployment Protection—we can even assist you in your job search.

Ready to upgrade your windows? See how a home improvement loan with SoFi can help.

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.
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.

Read more

The Pros and Cons of Different Types of Home Loans

Homeownership can be both rewarding and a great financial decision for your future. But as anyone who has dipped their toes into the home-buying process knows, the pressure to find and secure the “right” mortgage loan can feel overwhelming, especially if you’re a first-time home buyer.

During the early stages of the home-buying process—perhaps while you’re researching neighborhoods and schools, shopping around for properties, and nailing down the details of your budget—it would serve you well to do some research into the types of mortgages available. That way, you’ll feel prepared when the time comes to put down an offer on the perfect home.

As you’ve likely noticed, there are quite a few mortgage loan types available to borrowers. Brace yourself, because the process definitely requires you harness your best inner comparison shopper. You’ll need to consider the ins and outs of each option alongside your personal and financial needs. To help make the decision a bit easier, we’ve compared the advantages and disadvantages of each mortgage type below.

Fixed-Rate Versus Adjustable-Rate Home Loans

First, it’s helpful to know that most home loans come with a fixed or adjustable interest rate. A fixed-rate mortgage means that your interest rate will never change. In other words, your monthly mortgage payment is locked in. Fixed-rate mortgages generally come in 15 or 30-year loans.

A 30-year fixed-rate loan is the most common, though you can save a lot in interest if you opt for a 15-year loan. Monthly payments on a 15-year loan will be much higher than for a 30-year mortgage, so it’s best to commit only if you’re confident that it works in your budget—even in the event of a financial emergency.

An adjustable-rate mortgage, called an ARM, has a fixed, usually lower rate for an initial period and then increases to a more expensive, floating rate tied to the market interest rate index. ARMs are often expressed in two numbers (like 5/1 or 2/28), although those numbers don’t follow one particular formula (they could represent years, months, number of annual payments, etc.). For example, a 5/1 ARM has five years of fixed payments and one change to the interest rate in each year thereafter.

It’s easy to be drawn to the lower initial rate offered on an ARM, but it very well could end up costing more in interest than a fixed-rate loan over the lifespan of your mortgage. An ARM might work best for someone who plans to pay off their mortgage in five years or less, or is committed to refinancing prior to the ARM’s rate increase.

Rate increases in the future could be dramatic although there are limits to the annual and life-of-loan adjustments, often leaving adjustable-rate mortgage-holders with much higher monthly payments than if they had committed to a fixed-rate mortgage.

Types of Government Home Loans

The government does not actually lend money to home buyers. Instead, “government home loans” is a catchall for loans that are insured or guaranteed by various government agencies in the event the borrower defaults. This makes the loan less risky for lenders, and allows them to provide mortgages at reasonable rates.

Federal Housing Authority (FHA) Loans:

FHA loans are one of the most popular government loan types for first-time home buyers, because they have the more lenient credit score requirements and down payment requirements. With a 580 credit score, you might qualify with a 3.5% down payment. For more, check out the FHA’s lending limits in your state.

Pros: Because FHA loans are ubiquitous and have lower down payment and credit score requirements, they are one of the most accessible loans. FHA loans give potential homeowners a chance to buy without a big down payment. Additionally, FHA loans allow a non-occupant co-signer (as long as they’re a relative) to help borrowers qualify.

Cons: Historically, the requirements for FHA mortgage insurance have varied over the years. Currently, an FHA loan requires both an up-front mortgage insurance premium (which can be financed into your loan amount) and monthly mortgage insurance. The monthly mortgage insurance has to stay in place until your loan-to-value ratio reaches 78%.

USDA loans:

The U.S. Department of Agriculture provides home loans in rural areas to borrowers who meet certain income requirements. USDA loans offer 100% financing—so no down payment is necessary—and require lower monthly mortgage insurance (MI) payments than an FHA loan. This type of mortgage loan is offered to “rural residents who have a steady, low or moderate income, and yet are unable to obtain adequate housing through conventional financing.” To find out if you qualify, visit the USDA income and property eligibility site .

Pros: USDA loans come with low monthly MI, and they are accessible loans for low-moderate income borrowers in rural areas.

Cons: You need a credit score of at least 640 to qualify. These loans, like an FHA loan, also require an upfront fee which can be financed into your loan. If you are obtaining a loan with no down payment, this could result in a loan balance higher than your loan amount.

VA loans:

The U.S. Department of Veteran Affairs provides loan services to members and veterans of the U.S. military and their families. If you are eligible , you could qualify for a loan that requires no down payment or monthly mortgage insurance.

Pros: You don’t have to put any money down or deal with monthly MI payments, which could save borrowers thousands per year.

Cons: These loans are great to get people in homes, but are only available to veterans.

FHA 203k rehab loans:

FHA 203k loans are home renovation loans for “fixer upper” properties, helping homeowners finance both the purchase of a house and the cost of its rehabilitation through a single mortgage. Current homeowners can also qualify for an FHA 203k loan to finance the rehabilitation of their existing home.

Many of the rules that make an FHA loan relatively convenient for lower-income borrowers apply here. An FHA 203k loan does not require the space to be currently livable, but it does generally have stricter credit score requirements. Many types of renovations can be covered under an FHA 203k loan: structural repairs or alterations, modernization, elimination of health and safety hazards, replacing roofs and floors, and making energy conservation improvements, to name a few.

Pros: They can be used to buy a home and fund renovations on a property that wouldn’t qualify for a regular FHA loan. And they only require a 3.5% down payment.

Cons: These loans require you to qualify for the price of the home plus the costs of any planned renovations.

Conforming Home Loans

Conforming home loans are a type of mortgage offered by private lenders. They are not insured by the government, but meet standards set by Fannie Mae and Freddie Mac (government sponsored agencies). As of 2018, the conforming loan limit is $453,100 in most of the U.S. and goes up to $679,650 in certain higher-cost areas.

Conventional Home Loans:

Conventional loans are the single most popular type of mortgage used today. These are slightly more difficult to qualify for a conventional loan than a government-backed loan. However, borrowers can obtain conventional loans for a second home or investment property.

Conventional loans typically require a minimum of a 620 credit score and a down payment between 5% and 20%. Private Mortgage Insurance (PMI) ) if you put 20% down. If you put less than 20% down, PMI is required but you have options. PMI can be paid monthly or can be an upfront premium that can be paid by you or the lender. Monthly PMI needs to stay in place until your loan-to-value ratio reaches 78%.

Pros: Pretty much any property type you’re considering would qualify for a conventional mortgage. And you have greater flexibility with mortgage insurance if you are putting down less than 20%.

Cons: Conventional loans tend to have stricter requirements for qualification and require a higher down payment that government loans.

Conventional 97 Mortgage:

Fannie Mae and Freddie Mac’s conventional 97 loan was made to compete with FHA loans. It requires a 3% down payment or 97% loan-to-value ratio, besting the FHA’s 3.5% down payment requirement. A conventional 97 loan also requires that at least one borrower be a first-time homeowner, which they define as someone who hasn’t owned a property in the past three years. Participants in this program will need to have good credit scores and the standard 43% debt-to-income ratio.

Pros: You only need to put down 3%.

Cons: Only single-unit properties qualify, and one of the borrowers must be a “first-time buyer.”

Non-Conforming Loans

If you need a loan that exceeds the limits of both a conforming loan and a government-backed loan, you’ll need a non-conforming loan. A non-conforming loan exceeds the limits set forth by Fannie Mae and Freddie Mac.

Jumbo Loans:

Because of their size, jumbo loans tend to have even stricter requirements than regular, conforming loans. Most jumbo loans require a minimum credit score above 700 and a down payment of at least 15%.

Super Jumbo Loans:

For financing of $1 million or more, you are going to need to take out what is called a super jumbo loan. These loans require excellent credit and can provide up to $3 million in financing.

Those looking to fund an expensive property purchase will likely have little choice but to use a jumbo or super jumbo loan. If that’s you, it might require taking some time to get your credit score in good shape.

The process of finding and securing the right mortgage loan requires a little bit of investigation and a whole lot of patience. Happy hunting!

Ready to do some comparison shopping? SoFi offers mortgages with competitive rates, a fast & easy application, and no hidden fees.

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.
SoFi Mortgages not available in all states. Products and terms may vary from those advertised on this site. See for details.


Read more
TLS 1.2 Encrypted
Equal Housing Lender