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An escrow analysis is a review of funds collected and disbursed in your escrow account throughout the year. Your escrow account is typically used to collect and then pay property taxes and/or insurance payments. The analysis is a simple addition and subtraction calculation conducted by the mortgage servicer to determine if your monthly escrow payments made in the previous year were sufficient to cover expenses.

Deposits from your monthly payment are additions to your escrow account. Subtractions from your escrow account are for charges like your tax bill or homeowners insurance premium.

After the escrow analysis is conducted, the servicer will provide the borrower with an annual escrow account statement reviewing the deposits and disbursements made over the length of the escrow year. It is normal for taxes and insurance to change and your monthly mortgage payment will be adjusted each year. The escrow analysis conducted each year ensures you’re contributing the right amount.

Here’s more information on escrow analysis, including:

•   Why you need escrow analysis

•   How escrow analysis works

•   How to read your escrow account statement that comes after an escrow analysis

Why Do I Need an Escrow Analysis

An escrow account analysis is required under consumer protection laws for the length of escrow. Regulation X of the Real Estate Settlement Procedures Act (RESPA) has mortgage servicers conduct an escrow analysis at the end of each computational year and provide consumers with an escrow account statement. The analysis shows the money coming in from your monthly mortgage payment as well as money going out to pay bills for your taxes and insurance.

The escrow account analysis is necessary to:

•   Find shortages or excess funds

•   Aim to maintain a balance high enough to pay escrow bills

•   Compute a new monthly payment each year from adjusted amounts to escrow bills

If the amount of money exceeded the disbursements, you may see a refund and a lower monthly mortgage payment over the next year. If the amount of money was less than the disbursements, you may have a negative escrow balance and need to make up the difference either in a lump sum or increased monthly payments over the next year.

This analysis also helps keep any excessive escrow monies in your pocket rather than retained with a mortgage servicer.

Recommended: How to Avoid Private Mortgage Insurance

How the Analysis Works

When you apply for a mortgage, your lender will conduct an initial escrow analysis before your mortgage servicer sets up your escrow account. This analysis will total up the costs of all the taxes and insurance premiums you will need to pay throughout the year. Then, that amount is divided by 12 to get the monthly amount that you pay into the escrow account each month.

Here’s a quick example with escrowed items:

After adding up all the yearly expenses paid through your escrow account, divide it by 12 to get your monthly escrow payment.

$4,200/12 = $350 monthly escrow payment

The amount of your escrow payment will be included with your monthly mortgage payment. Your mortgage servicer will handle the amount that needs to go to your escrow account. When the bill for your taxes or insurance comes, the mortgage lender or servicer will pay it from the escrow account for you.

Recommended: What Is an Escrow Holdback?

Every year, mortgage servicers are required to conduct an escrow analysis on your account and send you an annual escrow account statement. This statement includes how much you contributed to the escrow account each month and how much was distributed to taxing entities and insurance companies.

If, throughout the year, your tax and insurance bills totaled more than your monthly escrow deposits, you will see a negative escrow balance. If your monthly escrow deposits were significantly more than your escrowed bills, you may see a refund.

How to Read Your Escrow Analysis Statement

The primary objective of the escrow account disclosure statement is to document where your escrow account stands. It will detail specific contributions and distributions by month and let you know how your monthly escrow payment will change. It is similar to reading a mortgage statement, but there are several elements that are different.

New monthly payment

The annual escrow account disclosure will show you how your payment is going to change. You’ll see:

•   Current payment: This is how much your total monthly payment currently is. It includes both your mortgage principal and interest payment, as well your escrow payment.

•   New payment: Your statement will show your new escrow amount, which, when added to the principal and interest amount, will change your total monthly payment.

•   Shortage/surplus: If your account had a negative escrow balance in the past year due to an increased tax or insurance bill, you’ll see the amount you owe added to your monthly payment. If you have a surplus, you’ll see that here, too.

•   Difference: The statement will include a calculation of the difference between what you were paying in the past year and what you will need to pay in the upcoming year.

•   New payment effective date: You will need to change the amount you pay to your mortgage servicer by the date listed on the disclosure statement.

Escrowed items

Your escrow account disclosure statement will help explain why there was an increase or decrease in your escrow account. These include changes to insurance premiums and property taxes included in your mortgage payment. You may see a comparison summary of your escrowed items, including:

•   County tax

•   Homeowners insurance

•   Private mortgage insurance, or PMI

Your mortgage servicer will compare how much they expected to pay versus how much was actually paid for the escrowed item.

Repayment of Escrow Shortage or Surplus

If there’s a shortage in your escrow account, your mortgage servicer may provide you with the option to make up the shortage in a single payment. You may see an “escrow shortage coupon” at the bottom of the form that you can mail in with your payment.

It should include your:

•   Loan number

•   Name

•   Shortage amount

Because your mortgage servicer is allowed to collect the deficient amount throughout the year, you may not see a due date for a single payment. Keep in mind, however, that this is not the same for a new adjusted payment amount, which must be changed by the payment due date.

If there is a surplus, which is defined as $50 or more, you’ll likely receive a check in the mail.

Escrow Account Projections and Activity History

It’s common to see a table of payments and disbursements by month on an escrow analysis. You’ll see how much you paid each month and when escrowed items were paid. You’ll also see a running account balance, which is important in ensuring there’s enough money to pay for escrowed items throughout the year.

The Takeaway

Escrow analysis occurs at the end of each computational year to ensure there’s enough in your escrow account to cover the costs of insurance and taxes. Excess amounts can be refunded to you, while deficient amounts (or shortfalls) can be added to your monthly payment in the next year.

When thinking about mortgages, whether a new loan or a refinance, SoFi may be able to help you with your homeownership goals. With flexible mortgage loan options, competitive interest rates, and personalized attention from loan professionals, you’ll have the information you need to make important financial decisions, quickly and conveniently.

Photo credit: iStock/Morsa Images

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.

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-criteria for more information.

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

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A home title policy — also called title insurance — protects homeowners and lenders from claims and litigation stemming from title defects. Title insurance, according to the American Bar Association, allows for a secure transfer of ownership from one party to another.

To address top questions surrounding home title policies, we’ve compiled this guide. You’ll learn:

•   What is title insurance for a home?

•   How does it work?

•   What are common title issues?

•   What does the home title policy cover?

•   What are the different types of home title policies?

By the end, you still won’t be thrilled to pay this additional cost at closing, but you may understand better what it protects.

What Is a Home Title Policy?

A title policy on a home is an insurance policy that protects against title defects. Title issues aren’t common, but when they occur, the amount of money involved can be massive. Home title policies are required by lenders to protect their investment in your property. That’s right, just like mortgage insurance, it’s not really for you. In fact, these policies are also called lender’s title insurance policies.

Confusingly, you can also buy a home title policy that provides the exact same protection for you: This is called an owner’s title insurance policy. If you want to be completely protected as a homebuyer, you need to purchase both. (Ugh!)

What could go wrong that necessitates this layer of insurance? If, for example, the seller didn’t have the full right to sell the property because there was another property owner and the title company missed this in their title report, the title company is responsible for the error. The title company could pay for litigation costs or payouts for property owners.

Title issues that could potentially arise include:

•   Existing mortgages

•   Undisclosed heirs that have claims on the property

•   Tax or construction liens

•   Property line disputes

•   Judgments involving the property, such as in the case of a divorce

•   Deeds, wills, or trusts with errors

•   Easements or encroachments that may restrict access and/or devalue the property

•   Notary mistakes

•   Errors in public records

•   Fraud and forgeries

💡 Quick Tip: Thinking of using a mortgage broker? That person will try to help you save money by finding the best loan offers you are eligible for. But if you deal directly with an online mortgage lender, you won’t have to pay a mortgage broker’s commission, which is usually based on the mortgage amount.

How Does a Home Title Policy Work?

There are two parts to a home title policy: a title search and a policy issuance. After real estate purchase contracts are written and the property is in escrow, homeowners select a title company to conduct a title search.

In the title search, the title company looks through public records for defects (or problems, like those listed previously). If the search turns up a mortgage lien issue, judgment, or other issue, it will need to be addressed before ownership can be transferred.

If the title search hasn’t revealed any issues, the title company will issue the policy when the transfer of ownership is recorded. The borrower pays a one-time fee for the home title policy in their closing costs.

Recommended: What Is Escrow?

What Does the Home Title Policy Cover?

The title search helps eliminate risk, but it’s still a possibility that title problems can arise. That’s where the title policy for a home comes in. After the policy has been issued, should any additional items come up, the title company will litigate those issues for the benefit of the lender — but only up to the amount of the loan. As the loan balance decreases, so does the amount of home title insurance coverage.

One important thing to note is the home title policy that you get is usually a lender’s title insurance policy. What this means is the lender is protected against legal claims against the home. The borrower’s claim to the home — their equity — is not protected unless the borrower also purchases an owner’s title policy.

💡 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.

Home Title Policy Requirements

Home title policies aren’t required by a governing body like a city or state — they’re required by the lender. When a borrower seeks funds for a home mortgage loan, the lender has certain requirements that the borrower must meet in order for them to issue that mortgage. One of these is a home title insurance policy. Borrowers must pay for a home title policy in order to close the loan. Lenders want to make sure the property the borrower selected is free to be bought and sold and their investment is protected.

Recommended: First-Time Homebuyer Programs

Pros and Cons of a Home Title Policy

It’s worth summing up the benefits and drawbacks of a home title policy.

When buying a home, you’ll encounter lots of different types of insurance. It’s worth taking a few minutes to familiarize yourself with the definitions.

Types of Home Title Policies

As noted above, home title policies come in two types: lender’s title insurance and owner’s title insurance.

Lender’s home title policies protect the lender from losses that come from title issues or defects. If title issues arise, the title company will cover losses or litigate for the lender up to the amount of the mortgage.

Owner’s home title policies protect the amount of equity an owner has in the home. If someone has a claim or brings suit against the title of the home, it is possible homeowners could lose the amount of equity they have in their home.

Fees for these policies vary widely by state. But for a typical home valued at around $400,000, you can expect to pay about $2,000 to purchase both types of title insurance and to pay for the title search. Fortunately, this is a one-time cost — unlike other types of homeowners insurance you might buy, you won’t have to renew your title insurance every year.

The Takeaway

It’s not exciting to pay for a home title policy, but the expense is more palatable once you understand what it protects. If you purchase both lender’s and owner’s home title policies, you’ll be well protected in the event of an unexpected claim or ownership dispute on your new 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.

FAQ

Is it worth shopping around for title insurance?

Title insurance can be costly so it is worth it to shop around. The insurer your lender typically uses might be an affiliate. So there could be a financial benefit to your lender if you use their partner company, but that doesn’t mean there will be a financial benefit to you. Comparison shopping could save you money.

What is the disadvantage of title insurance?

The chief disadvantage of title insurance is its cost, and the fact that it is usually required by a lender. Beyond that, keep in mind that lender’s title insurance only covers the lender in the event of a title problem — it doesn’t protect the equity that you have in the home. For that, you would need a second owner’s title insurance policy.

What is the difference between title and mortgage insurance?

Lender’s title insurance, which is paid for by the borrower, protects the lender in the event that a title dispute arises on the property. Mortgage insurance protects the lender in the event that the borrower defaults on the loan.

Photo credit: iStock/Wasan Tita

*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 Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria 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.

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What’s your number? That’s not a pickup line; it’s the digits a mortgage lender will want to know. Credit scores range from 300 to 850, and for most types of mortgage loans, it takes a score of at least 620 to open the door to homeownership. The lowest interest rates usually go to borrowers with scores of 740 and above whose finances are in good order, while a score as low as 500 may qualify some buyers for a home loan, but this is less common.

Why Does a Credit Score Matter?

Just as you need a résumé listing your work history to interview for a job, lenders want to see your borrowing history, through credit reports, and a snapshot of it, expressed as a score on the credit rating scale, to help predict your ability to repay a debt.

A great credit score vs. a bad credit score can translate to money in your pocket: Even a small reduction in interest rate can save a borrower thousands of dollars over time.

Do I Have One Credit Score?

You have many different credit scores based on information collected by Experian, Transunion, and Equifax, the three main credit bureaus, and calculated using scoring models usually designed by FICO® or a competitor, VantageScore®.

To complicate things, there are often multiple versions of each scoring model available from its developer at any given time, but most credit scores fall within the 300 to 850 range.

Mortgage lenders predominantly consider FICO scores. Here are the categories:

•   Exceptional: 800-850

•   Very good: 740-799

•   Good: 670-739

•   Fair: 580-669

•   Poor: 300-579

Here’s how FICO weighs the information:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   New credit: 10%

•   Credit mix: 10%

Mortgage lenders will pull an applicant’s credit score from all three credit bureaus. If the scores differ, they will use the middle number when making a decision.

If you’re buying a home with a non-spouse or a marriage partner, each borrower’s credit scores will be pulled. The lender will home in on the middle score for both and use the lower of the final two scores (except for a Fannie Mae loan, when a lender will average the middle credit scores of the applicants).

Recommended: 8 Reasons Why Good Credit Is So Important

A Look at the Numbers

What credit score do you need to buy a house? If you are trying to acquire a conventional mortgage loan (a loan not insured by a government agency) you’ll likely need a credit score of at least 620.

With an FHA loan (backed by the Federal Housing Administration), 580 is the minimum credit score to qualify for the 3.5% down payment advantage. Applicants with a score as low as 500 will have to put down 10%.

Lenders like to see a minimum credit score of 620 for a VA loan.

A score of at least 640 is usually required for a USDA loan.

A first-time homebuyer with good credit will likely qualify for an FHA loan, but a conventional mortgage will probably save them money over time. One reason is that an FHA loan requires upfront and ongoing mortgage insurance that lasts for the life of the loan if the down payment is less than 10%.

Credit Scores Are Just Part of the Pie

Credit scores aren’t the only factor that lenders consider when reviewing a mortgage application. They will also require information on your employment, income, and bank accounts.

A lender facing someone with a lower credit score may increase expectations in other areas like down payment size or income requirements.

Other typical conventional loan requirements a lender will consider include:

Your down payment. Putting 20% down is desirable since it often means you can avoid paying PMI, private mortgage insurance that covers the lender in case of loan default.

Debt-to-income ratio. Your debt-to-income ratio is a percentage that compares your ongoing monthly debts to your monthly gross income.

Most lenders require a DTI of 43% or lower to qualify for a conforming loan. Jumbo Loans may have more strict requirements.

How to Care for Your Credit Scores Before Buying a House

Working to build credit over time before applying for a home loan could save a borrower a lot of money in interest. A lower rate will keep monthly payments lower or even provide the ability to pay back the loan faster.

Working on your credit scores may take weeks or longer, but it can be done. Here are some ideas to try:

1. Pay all of your bills on time. If you haven’t been doing so, it could take up to six months of on-time payments to see a significant change.

2. Check your credit reports. Be sure that your credit history doesn’t show a missed payment in error or include a debt that’s not yours. You can get free credit reports from the three main reporting agencies.

To dispute a credit report, start by contacting the credit bureau whose report shows the error. The bureau has 30 days to investigate and respond.

3. Pay down debt. Installment loans (student loans and auto loans, for instance) affect your DTI ratio, and revolving debt (think: credit cards and lines of credit) plays a starring role in your credit utilization ratio. Credit utilization falls under FICO’s heavily weighted “amounts owed” category. A general rule of thumb is to keep your credit utilization below 30%.

4. Ask to increase the credit limit on one or all of your credit cards. This may improve your credit utilization ratio by showing that you have lots of available credit that you don’t use.

5. Don’t close credit cards once you’ve paid them off. You might want to keep them open by charging a few items to the cards every month (and paying the balance). If you have two credit cards, each has a credit limit of $5,000, and you have a $2,000 balance on each, you currently have a 40% credit utilization ratio. If you were to pay one of the two cards off and keep it open, your credit utilization would drop to 20%.

6. Add to your credit mix. An additional account may help your credit, especially if it is a kind of credit you don’t currently have. If you have only credit cards, you might consider applying for a personal loan.

Recommended: 31 Ways to Save for a House

The Takeaway

What credit score is needed to buy a house? The number depends on the lender and type of loan, but most homebuyers will want to aim for a score of 620 or better. An awesome credit score is not always necessary to buy a house, but it helps in securing a lower interest rate.

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 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-criteria for more information.

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

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 .

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

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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If you’re in the market for a mortgage, you may be overwhelmed by all the different options — conventional vs. government-backed, fixed vs. adjustable rate, 15-year vs 30-year. Which one is best?

The answer will depend on how much you have to put down on a home, the price of the home you want to buy, your income and credit history, and how long you plan to live in the home. Below, we break down some of the most common types of home mortgages, including how each one works and their pros and cons.

Fixed-Rate vs. Adjustable-Rate Loans

When choosing the best type of mortgage for your needs, it helps to understand the difference between adjustable-rate mortgages and fixed-rate mortgages. Each option has advantages and disadvantages. Here’s a closer look.

Fixed-Rate Mortgage

With a fixed-rate mortgage loan, the interest is exactly that — fixed. No matter what happens to benchmark interest rates or the overall economy, the interest rate will remain the same for the life of the loan. Fixed loans typically come in terms of 15 years or 30 years, though some lenders allow more options.

This type of mortgage can be a good choice if you think rates are going to go up, or if you plan on staying in your home for at least five to seven years and want to avoid any potential for changes to your monthly payments.

Pro: The monthly payment is fixed, and therefore predictable.

Con: If interest rates drop after you take out your loan, you won’t get the lower rate unless you’re able to refinance.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate home loan is the most common type of mortgage and the longest term length available for mortgages.

Monthly payments are generally lower than shorter-term mortgages because the loan is stretched out over a longer term. However, the overall amount of interest you’ll pay is typically higher, since you’re paying interest for a longer period of time. Also, interest rates tend to be higher for 30-year home loans than shorter-term mortgages, since the longer term poses more risk to the lender.

15-Year Fixed-Rate Mortgage

A 15-year loan allows you to build equity more quickly and pay less total interest. Loans with shorter terms also tend to come with lower interest rates, since they pose less risk to the lender.

On the flipside, the shorter term means monthly payments may be much higher than a 30-year mortgage. This type of loan can be a good choice for borrowers who can handle an aggressive repayment schedule and want to save on interest.

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) has an interest rate that fluctuates according to market conditions.

Many ARMs have a fixed-rate period to start and are expressed in two numbers, such as 7/1, 5/1, or 7/6. A 7/1 ARM loan has a fixed rate for seven years; after that, the fixed rate converts to a variable rate. It stays variable for the remaining life of the loan, adjusting every year in line with an index rate. A 7/6 ARM, on the other hand, means that your rate will remain the same for the first seven years and will adjust every six months after that initial period. A 5/1 ARM has a rate that’s fixed for five years and then adjusts every year.

Many ARMs have rate caps, meaning the rate will never exceed a certain number over the life of the loan. If you consider an ARM, you’ll want to be sure you understand exactly how much your rate can increase and how much you could wind up paying after the introductory period expires.

Pro: The initial interest rate of an ARM is usually lower than the rate on a fixed-rate loan. This can make it a good deal for borrowers who expect to sell the property before the rate adjusts.

Con: Even if the loan starts out with a low rate, subsequent rate increases could make this loan more expensive than a fixed-rate loan.

Recommended: First-Time Home Buyer’s Guide

Conventional vs. Government-Insured Loans

Mortgages can also be broken down into two other categories: conventional loans, which are offered by banks or other private lenders, and government-backed loans, which are guaranteed by a government agency. Here’s a breakdown of conventional vs. government-insured loans, including how each works, and their pros and cons.

Conventional Loan

This is the most common type of home loan. Conventional mortgages must meet standards that allow lenders to resell them to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. This is advantageous to lenders (who can make money by selling their loans to GSEs) but means stiffer qualifications for borrowers.

Pro: Down payments can be as low as 3%, though borrowers with down payments under 20% have to pay for private mortgage insurance (PMI).

Con: Conventional loans tend to have stricter requirements for qualification than government-backed loans. You typically need a credit score of at least 620 and a debt-to-income ratio under 36%.

Government-Insured Loan

If you have trouble qualifying for a conventional loan, you may want to look into a government-insured loan. This type of mortgage is insured by a government agency, such as the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA).

FHA Loan

FHA loans are not directly issued from the government but, rather, insured by the FHA. This protects mortgage lenders, since if the borrower becomes unable to repay the loan, the agency has to handle the default. Having that guarantee significantly lowers risk for the lender.

As a result, qualifying for an FHA loan is often less difficult than qualifying for a conventional mortgage. This makes an FHA mortgage a good choice if you have less-than-stellar credit scores or a high debt-to-income (DTI) ratio.

Pro: With a FICO® credit score of 500 to 579, you may be able to put just 10% down on a home; with a score of 580 or higher, you may qualify to put just 3.5% payment.

Con: FHA mortgages require you to purchase FHA mortgage insurance, which is called a mortgage insurance premium (MIP). Depending on the size of your down payment, the insurance lasts for 11 years or the life of the loan.

💡 Quick Tip: Check out our Mortgage Calculator to get a basic estimate of your monthly payment.

VA Loan

The U.S. Department of Veterans Affairs backs home loans for members and veterans of the U.S. military and eligible surviving spouses. Similar to FHA loans, the government doesn’t directly issue these loans; instead, they are processed by private lenders and guaranteed by the VA.

Most VA loans require no down payment. However, you’ll need to pay a VA funding fee unless you are exempt. Although there’s no minimum credit score requirement on the VA side, private lenders may have a minimum in the low to mid 600s.

Pro: You don’t have to put any money down or purchase mortgage insurance.

Con: Only available to veterans, current service members, and eligible spouses.

FHA 203(k)

Got your eye on a fixer-upper? An FHA 203(k) loan allows you to roll the cost of the home as well as the rehab into one loan. Current homeowners can also qualify for an FHA 203(k) loan to refinance their property and fund the costs of an upcoming renovation through a single mortgage.

The generous credit score and down payment rules that make FHA loans appealing for borrowers often apply here, too, though some lenders might require a minimum credit score of 500.

With a standard 203(k), typically used for renovations exceeding $35,000, a U.S. Department of Housing and Urban Development (HUD) consultant must be hired to oversee the project. A streamlined 203(k) loan, on the other hand, allows you to fund a less costly renovation with anyone overseeing the project.

Pro: If you have a credit score of 580 or above, you only need to put down 3.5% on an FHA 203(k) loan.

Con: These loans require you to qualify for the value of the property, plus the costs of planned renovations.

USDA Loan

A USDA loan is a type of mortgage designed to help borrowers who meet certain income limits buy homes in rural areas. The loans are issued through the USDA loan program by the United States Department of Agriculture as part of its rural development program.

Pro: There’s no down payment required, and interest rates tend to be low due to the USDA guarantee.

Con: These loans are limited to areas designated as rural, and borrowers who meet certain income requirements.

Conforming vs. Nonconforming Loans

Conventional loans, which are not backed by the federal government, come in two forms: conforming and non-conforming.

Conforming Loans

Mortgages that conform to the guidelines set by government-backed agencies (such as Fannie Mae and Freddie Mac) are called conforming loans. There are a number of criteria that borrowers must meet to qualify for a conforming loan, including the loan amount.

For 2023, the ceiling for a single-family, conforming home loan is $726,200 in most parts of the U.S. However, there is a higher limit — $1,089,300 — for areas that are considered “high-cost,” a designation based on an area’s median home values.

Typically, conforming loans also require a minimum credit score of 630­ to 650, a DTI ratio no higher than 41%, and a minimum down payment of 3%.

Pro: Conforming loans tend to have lower interest rates and fees than nonconforming loans.

Con: You must meet the qualification criteria, and borrowing amounts may not be sufficient in high-priced areas.

Nonconforming Loans

Nonconforming mortgage loans are loans that don’t meet the requirements for a conforming loan. For example, jumbo loans are nonconforming loans that exceed the maximum loan limit for a conforming loan.

Nonconforming loans aren’t as standardized as conforming loans, so there is more variety of loan types and features to choose from. They also tend to have a faster, more streamlined application process.

Pro: Nonconforming loans are available in higher amounts and can widen your housing options by allowing you to buy in a more expensive area, or a type of home that isn’t eligible for a conforming loan.

Con: These loans tend to have higher interest rates than nonconforming loans.

Reverse Mortgage

A reverse mortgage allows homeowners 62 or older (typically those who have paid off their mortgage) to borrow part of their home equity as income. Unlike a regular mortgage, the homeowner doesn’t make payments to the lender — the lender makes payments to the homeowner. Homeowners who take out a reverse mortgage can still live in their homes. However, the loan must be repaid when the borrower dies, moves out, or sells the home.

Pro: A reverse mortgage can provide additional income during your retirement years and/or help cover the cost of medical expenses or improvements.

Con: If the loan balance exceeds the home’s value at the time of your death or departure from the home, your heirs may need to hand ownership of the home back to the lender.

Jumbo Mortgage

A jumbo loan is a mortgage used to finance a property that is too expensive for a conventional conforming loan. If you need a loan that exceeds the conforming loan limit (typically $726,200), you’ll likely need a jumbo loan.

Jumbo loans are considered riskier for lenders because of their larger amounts and the fact that these loans aren’t guaranteed by any government agency. As a result, qualification criteria tends to be stricter than other types of mortgages. Also, in some cases, rates may be higher.

You can typically find jumbo loans with either a fixed or adjustable rate and with a range of terms.

Pro: Jumbo loans make it possible for buyers to purchase a more expensive property.

Con: You generally need excellent credit to qualify for a jumbo loan.

💡 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.

Interest-Only Mortgage

With an interest-only mortgage, you only make interest payments for a set period, which may be five or seven years. Your principal stays the same during this time. After that initial period ends, you can end the loan by selling or refinancing, or begin to make monthly payments that cover principal and interest.

Pro: The initial monthly payments are usually lower than other mortgages, which may allow you to afford a pricier home.

Con: You won’t build equity as quickly with this loan, since you’re initially only paying back interest.

Recommended: What’s Mortgage Amortization and How Do You Calculate It?

The Takeaway

There are many different types of mortgages, including fixed-rate, variable rate, conforming, nonconforming, conventional, government-backed, jumbo, and reverse mortgages. It’s a good idea to research and compare different loan programs, consult with lenders, and, if needed, seek advice from a mortgage professional to determine the best type of home loan for your specific circumstances.

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

FAQ

What are the different types of mortgages?

There are several types of mortgages available to homebuyers, each with its own characteristics and requirements. Some of the most common types include:

•  Conventional mortgage This type of mortgage is not insured or guaranteed by a government agency.

•  FHA loan Insured by the Federal Housing Administration (FHA), FHA loans are popular among first-time homebuyers. They offer more lenient credit requirements and allow for a lower down payment (as low as 3.5%).

•  VA loan These loans are available to eligible veterans, active-duty service members, and eligible surviving spouses, and come with favorable rates and terms.

•  USDA Loan Issued by the U.S. Department of Agriculture, these loans are designed for low- and moderate-income homebuyers in rural areas. They offer low interest rates and may require no down payment.

•  Jumbo mortgage A jumbo mortgage is a loan that exceeds the loan limits set by Fannie Mae and Freddie Mac.

•  Fixed-rate mortgage The rate stays the same for the entire life of the mortgage.

•  Adjustable-rate mortgage (ARM) The interest rate is initially fixed for a specific period, then typically adjusts annually based on market conditions.

What are the 4 types of qualified mortgages?

Qualified mortgages are mortgages that meet certain criteria set by the Consumer Financial Protection Bureau (CFPB) to ensure borrowers can afford the loans they obtain. The four main types of qualified mortgages are:

•  General qualified mortgages These mortgages adhere to basic criteria set by the CFPB.

•  Small creditor qualified mortgages These loans have more flexible requirements for small lenders.

•  Balloon payment qualified mortgages These mortgages allow for a balloon payment at the end of the term.

•  Temporary qualified mortgages This type of qualified mortgage provides a transition period for loans that were eligible for purchase or guarantee by Fannie Mae or Freddie Mac but no longer meet those standards.

Which type of home loan is best?

The best type of home loan depends on your financial situation, goals, and preferences.

If you have a significant down payment and strong credit, you might consider a conventional mortgage. If, on the other hand, you have limited funds for a down payment and lower credit scores, you might consider a Federal Housing Administration (FHA) home loan.

VA loans benefit eligible veterans and service members, while USDA loans are for homebuyers in rural areas.

Whether to choose a fixed-rate or adjustable-rate mortgage will depend on your long-term plans and tolerance for risk.

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

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

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

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Real estate agents — both on the seller’s side and the buyer’s side — typically get paid at closing from the seller’s proceeds. The majority of real estate agents are paid via a commission vs. a set fee, which means the higher the sales price, the more money the agent gets paid.

Commissions are split evenly between the buyer’s and seller’s agents. The brokerage each real estate agent or Realtor® works for snags a portion of the commission as well. (Realtors are real estate agents who belong to the National Association of Realtors, requiring them to adhere to a certain code of ethics; we’ll use the terms interchangeably here.) Here’s an example of how a Realtor gets paid.

Real Estate Commission: An Example

Let’s say a home sells for $500,000 with a typical commission of 6%:

Total commission fee: $500,000 X 6% = $30,000

The commission is split evenly between the two sides:

•   Listing agent side = $15,000

•   Buyer’s agent side = $15,000

Real estate agents share their commissions with the brokers representing them. (A broker is an agent who also has an additional license to supervise other agents.) Let’s assume that the broker fee is 1% of the sales price (the broker’s split can go up to 50%, but we’ll use an easy 1% split here).

•   $500,000 sale price X 1% broker’s fee = $5,000

Subtract the broker fee from the total commission and the agent ends up with the rest.

•   $15,000 total commission – $5,000 broker’s fee = $10,000 agent commission

Typically, four people get paid from the seller-paid real estate commission. It may look something like this:

•   Listing agent = $10,000 (2% of sales price)

•   Listing agent broker = $5,000 (1% of sales price)

•   Buyer agent = $10,000 (2% of sales price)

•   Buyer agent broker = $5,000 (1% of sales price)

A Real Estate Agent’s Responsibilities

To earn their commission, real estate agents often have a lot of responsibilities. Their duties include:

•   Providing market data and helping to set a listing price

•   Placing ads and putting up yard signs

•   Photographing the property

•   Listing the property in the MLS, a listings database

•   Scheduling showings

•   Placing lock boxes

•   Guiding first-time home buyers

•   Smoothing over difficult relationships

•   Navigating offers and counter offers

•   Negotiating home contracts

Making a living through commissions can be challenging for real estate agents, but it can also be very rewarding.

Recommended: How to Find a Real Estate Agent

Who Pays the Realtor Commission?

It is expected that the seller pays the real estate agent commission fee for both the buyer’s and seller’s agents. At settlement (also called the “closing”), the money for the commission comes out of the seller’s proceeds. If the sales price of a home is $500,000 and the sellers owe $250,000 on their mortgage, then the commission and other fees would be subtracted from the $250,000 that remains after the sellers pay off their mortgage.

How Much Are Realtor Fees?

It is common to see real estate agent commission fees between 5% and 6%. This includes both the seller’s and the buyer’s real estate agents’ fees. The money is usually split evenly between the two sides. If the commission is 6%, for example, 3% would go to each side.

Can You Negotiate Who Pays the Real Estate Agent?

The Realtor fee is negotiable, though it is extremely rare for a buyer to pay it. Some ideas to help reduce your fee if you are selling your home:

•   Barter. Do you have a photographer friend who can take photos of your home? Offer up skills in exchange for a lower commission.

•   Hire a newer agent. A newer agent may accept a lower commission to gain experience.

•   Pay attention to market conditions. If homes aren’t moving in your market, you may be able to negotiate a lower commission.

Take time to interview potential Realtors using these suggested questions. When you’re buying a home, look for an agent with a strong network. (These agents may be the first to hear about so-called “whisper listings.”) Be sure the commission outlined in the listing agreement you sign matches what you agreed on.

How Is an Agent’s Commission Determined?

An agent’s commission is determined by the compensation agreement they have with their brokerage. As noted above, after the commission is split between the buyer’s and the seller’s agents, it’s then split again between the agent and the broker.

When Do Agents Receive Their Commission?

Agents usually receive their commission after the home mortgage loan has been funded and the sale closes. Their brokerage receives a wire with the funds and the agent’s portion of the commission is released to them shortly thereafter.

How Do the Agents Share Their Commission?

It is customary for agents to share the commission 50/50. If the listing has a 6% commission on it, 3% would go to the buyer’s agent and 3% would go to the seller’s agent.

What Is Dual Agency?

Dual agency is when a real estate agent represents both the seller and the buyer in a transaction. It must be disclosed to both parties because real estate agents are bound by a fiduciary duty to serve their clients. An agent who represents both seller and buyer will earn more commission.

Is Paying a Real Estate Commission Worth It for the Seller?

For many sellers, it’s painful to look at the closing documents and see how much of the sales price goes to different agents, title insurance companies, concessions, and so forth. But a lot of sellers like having someone to guide them through the complexities of real estate law, and sensitive issues that the sale of a home creates.

Recommended: How to Buy a House Without a Realtor

Alternatives to a Percentage-based Commission

There are real estate brokerages that advertise services for a flat fee. Usually, the flat fee is very low and may only include a listing on the MLS with photos. They usually don’t offer to schedule showings or manage the listing in any other way.

The Takeaway

Working with a real estate agent who earns a commission isn’t painful when you’re a buyer because the fee is almost always covered by the seller, and you will have an agent on your side to help you negotiate.

Another way to be money-smart when you’re buying is to get a good rate on a home loan. SoFi Mortgages offer competitive interest rates, low down payment options, and a guaranteed on-time close* (which you and your Realtor will love).

See your home loan rate in minutes.

FAQ

Do sellers pay realtor fees?

Yes, sellers pay realtor fees for both the buyer and the seller.

Do buyers pay Realtor fees in Texas?

No, the seller pays the realtor fees in Texas, with very few exceptions.

Do buyers pay Realtor fees in Washington state?

No, the seller usually pays realtor fees in Washington state, but it is negotiable.

How much does a new Realtor make in Illinois?

According to ZipRecruiter.com, the average pay for a first-year real estate agent in Illinois is $82,481. The range for first-year salaries is between $18,866 and $153,998.

Photo credit: iStock/RyanJLane
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria 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.

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.

*^‡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.