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Looking to get into a home but can’t qualify for a traditional mortgage? You may want to look at owner financing.

Owner-financed homes aren’t very common, but they have some benefits for unique buyer and seller situations. Owner financing bypasses a traditional mortgage when the seller takes on the role of lender, but seller financing comes with some risks.

Read on to discover how owner financing works and when it could make sense.

What Is Owner Financing?

Owner financing, also known as seller financing, is a transaction in which the property owner takes on the role of lender by financing the sale to the buyer. Like the trading of homes, this type of transaction bypasses traditional mortgages (unless the purchase of the home is only partially owner-financed).

The payments for buyers are typically amortized over 30 years for a smaller monthly payment, but there’s often a large balloon payment at the end of a shorter period of time (usually 5-10 years). Owner-financed transactions operate on the belief that the buyer’s finances may improve over time or the property will appreciate to a point where the buyer can get a home loan from a traditional lender.

Note: SoFi does not offer owner financing at this time. However, SoFi does offer conventional mortgage loan options.

How Does Owner Financing Work?

Owner-financed homes work much like traditionally financed homes, but with the seller acting as the lender. The seller may (or may not) require a credit check, a loan application, a down payment, an appraisal of the home, or the right to foreclose should the buyer default. Buyers and sellers will need to agree on an interest rate and the length of the loan.

The buyer and seller sign a promissory note, which contains the loan terms. They also record a mortgage (or deed of trust), and the buyer pays the seller. The buyer should also pay for homeowners insurance, taxes, title insurance, and other loan costs. It’s typical to hire real estate professionals or lawyers to get more into the details of how to use a home contract in owner financing.

Pros and Cons of Owner Financing

For Sellers

Owner financing isn’t nearly as beneficial for sellers as it is for buyers, but there are still some upsides to consider along with the increased debt load and assumed risk.

For Buyers

There are advantages to buying a house for sale by owner, namely that a buyer can obtain housing sooner under owner financing. A buyer may also be able to lower the down payment needed and pay lower closing costs. But it’s also riskier than borrowing from a traditional mortgage lender. If, for example, buyers are unable to finance the balloon payment, they risk losing all the money they’ve spent during the loan term.

To reduce risk exposure in an owner-financed transaction, buyers may want to hire an attorney.

Example of Owner Financing

Bob and Vila want to purchase a large, forever home for their family. The purchase price of the home is $965,000, but Bob and Vila can only qualify for $815,000. Part of Bob’s income is from recent self-employment, which is not accounted for by the lender but will help the couple be able to afford the house.

For the remaining $150,000, the seller offers owner financing as a junior mortgage. The buyers will pay both a traditional mortgage lender and the seller in this type of owner financing.

Recommended: How Much Home Can I Afford?

Types of Owner Financing

Land contracts, mortgages, and lease-purchase agreements are a few ways to look at owner financing. Here’s how they work and how they’re different from a traditional mortgage.

Land Contracts

Because the title can’t pass to the buyer in owner financing, a land contract creates a shared title for the buyer and seller until the buyer makes the final payment to the seller. The seller maintains the legal title, but the buyer gains an interest in the property.

Mortgages

These are the different ways to structure a mortgage with owner financing:

•   All-inclusive mortgage: The seller carries the promissory note and the balance for the home purchase.

•   Junior mortgage: When a buyer is unable to finance the entire purchase with a lender on one mortgage, the seller carries a junior mortgage (or second mortgage) for the buyer. The seller is put in second position if the buyer defaults, so there’s risk to the seller by doing a second mortgage.

•   Assumable mortgage: Some FHA, VA, and conventional adjustable-rate mortgages are assumable, meaning the buyer is able to take the seller’s place on the mortgage.

A mortgage calculator can help you get an idea of what purchase price you may be able to afford.

Lease Purchase

In a lease-purchase arrangement, both parties agree on a purchase price. The potential buyer leases from the owner for an amount of time, usually 1-3 years, until a set date, when the renter has the option to purchase the property. In addition to paying rent, the tenant pays an additional fee, known as the rent premium.

It’s typical to see options that credit a percentage of the purchase price (often between 1% and 5%), rents, and rent premiums toward the purchase price. If the option to buy isn’t used, the buyer will lose the option fee and rent premiums.

These are also known as rent-to-own, lease-to-own, or lease with an option to purchase. They can be used when an aspiring buyer has a lower credit score and needs some time to qualify for traditional financing.

Steps to Structuring a Seller Financing Deal

If you’re thinking about finding a property with owner financing, consider taking these steps to help get you through the process:

1.    Hire a professional. Because owner financing bypasses traditional lending institutions, there’s a lot more risk involved. Hiring a real estate professional and an attorney can help you structure the deal to protect your interests.

2.    Find a property where the owner offers financing. An owner must be willing and able to offer seller financing to make this type of transaction happen. It’s difficult, which is why owner financing is more common between parties that know each other very well. It’s usually required that the property is owned free and clear of any mortgage. Here are a few other ways to look for seller-financed properties:

◦   Asking your current landlord if they’re open to selling their property to you

◦   Looking for real estate listings with phrases such as “seller financing available”

◦   Contacting the real estate agent about a home you’re interested in, if the home has been on the market a while and the conditions are right

◦   Finding a personal connection who is able to offer owner financing

3.    Agree to terms: Because seller financing terms are so flexible, there are a lot of details that buyers and sellers need to work out, including:

◦   Sales price

◦   Amount of down payment

◦   Length of the loan

◦   Balloon payment amount

◦   Interest rate

◦   Structure of the contract (land contract, mortgage, or lease purchase, as described above)

◦   Any late fees, prepayment penalties, and other costs the buyer is responsible for

4.    Complete due diligence: Buyers and sellers would be wise to do their due diligence as if it were a regular purchase. Sellers may want to examine a buyer’s credit, complete a background check, and confirm that the buyer has obtained homeowners insurance and title insurance to move forward with the transaction. On the buyer’s end, a home inspection and appraisal may be warranted.

5.    Sign and file paperwork: Much like a real estate transaction, the contracts involved in owner financing arrangements can be pretty involved. Depending on how your financing is structured, you may have a promissory note, an owner financing contract and addenda, and title paperwork. You’ll also want to be sure your promissory note and deed of trust are filed with the county recorder’s office. An attorney, if you hired one, should be able to complete this process for you.

Alternatives to Owner Financing

Traditional mortgage financing may work better for your individual situation:

•   FHA loans: FHA loans have a low down payment requirement and low closing costs and may be approved for homebuyers with lower credit scores. They are underwritten by the Federal Housing Administration. Even if you’ve had a bankruptcy, you may be able to get an FHA loan.

•   USDA loans: USDA loans are backed by the U.S. Department of Agriculture. Income must meet certain guidelines (as determined by geographic region), and the home purchased must be in an eligible rural area.

•   VA loans: Loans guaranteed by the Department of Veteran Affairs are geared toward eligible military members, veterans, National Guard and Reserve members, and spouses. The favorable terms include a low down payment (or no down payment), lower closing costs, a low interest rate, and the ability to use the VA for a home loan multiple times.

•   Conventional loans: A conventional loan simply means the financing isn’t insured by the federal government, as it is with FHA, VA, or USDA loans. Fannie Mae and Freddie Mac provide the backing for conforming loans: those that have maximum loan amounts that are set by the government.

It’s advisable to avoid taking interest rates at face value and to compare the annual percentage rates (APRs) instead. The APR represents the interest rate and loan fees, so if an FHA loan looks better than a conventional mortgage based on just the rates, an APR comparison may tell a different story.

For more information, a help center for mortgages can be a great resource for learning more about the mortgage and home-buying process.

Recommended: 18 Mortgage Questions for Your Lender

The Takeaway

With owner financing, the seller is the lender. Both buyers and sellers face upsides and downsides when the transaction involves owner-financed homes.

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

Why would an owner offer financing?

Owner financing broadens the pool of potential homebuyers, which might appeal to some homeowners. They may also appreciate having the opportunity to earn interest paid by the homebuyer.

What risks does owner financing have for the buyer?

There are fewer consumer protections available to buyers who get owner financing, which is why it’s recommended that buyers seek a lawyer’s help in reviewing any agreement. Buyers also risk paying a higher-than-usual interest rate.

What risks does owner financing have for the seller?

Sellers take on the risk that the buyer may miss payments or default on the loan. They also remain tied to the property until the loan is fully repaid, which could limit their flexibility if they need access to the cash from the sale sooner.

Photo credit: iStock/KTStock

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.

SOHL-Q126-237

A short squeeze is a market event that drives up shares of a stock that’s being shorted. In this highly risky maneuver, short sellers are essentially forced to try to exit their bearish position quickly in order to minimize losses amidst the dramatic surge in the share price.

One of the most well-known short squeezes in recent history was the GameStop trading frenzy that occurred in 2021, and again on a smaller scale in 2024. Both were inspired by viral social media posts, and the so-called “meme stock” phenomenon influenced price surges in other stocks, as well, including those of AMC, Koss Corp., and BlackBerry in 2021. Earlier in 2008, Volkswagen briefly became the most valuable stock globally as a result of a short squeeze.

Learn more about short squeezes and how they may influence a stock’s price and volatility.

What Is a Short Squeeze?

As mentioned, a short squeeze is an event in the market that involves short sellers having to quickly close out their positions. Because these investors have to actually buy back shares they’ve lent out, this may drive dramatic gains in the share price.

There are many investors, both retail and institutional, who use short selling to speculate that a given stock will go down over a fixed period of time. But short selling is incredibly risky, as stock prices have historically tended to drift upward. And timing a bearish position can also be tricky. Even if an investor has good reason to believe that a company’s shares will fall, it could be some time before they actually do.

What Causes Short Squeezes?

To understand how short squeezes occur, you first have to understand how shorting a stock works. An investor may short a stock when they believe its price will decline. To sell a stock short, an investor first borrows shares from a broker, and sells them in the open market. At a later time, the investor buys back the shares in order to return them to the original lender.

If the stock goes down between the time they borrow the stock and return it to the broker, the investor may make money. That’s because they can pocket the difference between the higher selling price and the lower purchase price, minus interest owed and transaction costs.

And if those short investors borrow a stock that goes up instead of down, they lose money.

Example of Short Selling

Let’s look at a hypothetical case of a short sale. Let’s say an investor borrows a stock that’s trading at $10 with an agreement to pay back the shares in 90 days.

The investor then sells the stock for $10. Then 90 days later, if the stock is trading at $5, they can buy back the number of shares they borrowed and return them to the lender, capturing the $5 per share profit (minus interest and fees).

Example of Short Squeeze

Now, let’s use this example to look at a short squeeze. Let’s say the investor borrows the stock, again, that’s trading at $10, with an agreement to pay back the shares in 90 days.

This time, however, the share price shoots up to $15. The investor still has to buy the shares they borrowed and return them to the lender. But other investors are also trying to cover their shorts, so there’s a shortage of shares in the market to buy back.

The shortage causes the stock’s price to jump even higher to $20, which in turn triggers other short sellers to close their positions, leading to a buying frenzy and a short squeeze.

Theoretically, there’s no limit to how much money short sellers can lose. When an investor is short a stock and wrong in their assumption, the share prices can go infinitely higher.

Recommended: How Low Can a Stock Go?

Famous Short Squeezes

One famous example of a short squeeze was that of GameStop, which first occurred in 2021, when electronics retailer GameStop saw its shares jump more than 1,000% in a few weeks as a wide range of investors looked to take advantage of the high number of short sellers in the stock.

This was perhaps one of the most well-known of the meme stock phenomena that overtook the market that year, but it wasn’t the only one. Shares of AMC, Bed Bath & Beyond, Koss Corp., and other companies’ stocks spiked upward during the meme-stock frenzy that year.

Another example occurred in 2008, when automaker Volkswagen briefly became the world’s most valuable stock by market cap when it became known that Porsche was increasing its stake in its fellow German carmaker.

What’s a Long Squeeze?

By contrast, a long squeeze is when short sellers drive down the price of a stock or asset until the bullish investors begin to sell their positions in response, driving the price lower still. It can be helpful to review short positions vs long positions to get a deeper understanding of a long squeeze.

What Was the MOASS?

The “MOASS” is an acronym for mother of all short squeezes. And it’s more or less exactly what it sounds like: a monstrous short squeeze event in the market.

The short squeeze involving GameStop shares in 2021 is perhaps the best and most recent example of a MOASS, though companies such as AMC and Koss Corp., mentioned above, experienced similar phenomena at the time.

Many institutional investors had shorted GameStop stock, anticipating that its value would fall, but social coordination of day traders drove up demand for the stock and its value. This “squeezed” the short sellers and caused many big firms to lose significant amounts of money on their positions.

How to Identify a Short Squeeze

Given the high risk of significant loss for short sellers in a short squeeze, learning how to identify signs of a potential short squeeze may help to reduce risk. On the other side of the equation, some investors may buy into a short squeeze to attempt to benefit from a quickly rising stock price, though this also comes with substantial risk. Buyers can quickly lose interest in stocks of companies that lack the fundamentals to support their market price.

While short squeezes are not entirely common and can be difficult to predict, metrics such as short interest and days to cover may help signal that a short squeeze could be imminent.

Short Interest

To identify the potential for a short squeeze, traders may start by surveying the markets for stocks that have garnered substantial interest from short sellers. This factor is often called short interest, and as a metric, it represents the number of a company’s shares that have been sold short but not yet returned to the lender.

Traders know that unless the short sellers of those shares can wait, hedge, or manage risk, they’ll have to buy back shares — at virtually any price — to return them to the lender.

There are two ways to understand short interest:

•   One is the short interest percentage, which shows how many of a company’s overall shares are currently shorted. A higher number means that more short sellers will be bidding up the stock to buy it back if the stock rises.

•   The second metric is the short interest ratio, also called the days-to-cover ratio, which shows how much short sellers are responsible for a stock’s daily trading volume. A higher ratio can indicate that it may take more time for short sellers to buy back their shares, making it more likely for a rapid price surge to occur.

Stocks with a high short interest and high days-to-cover ratio are potentially vulnerable to a short squeeze. If opportunistic traders identify stocks that seem like short-squeeze candidates, they may buy the stocks outright and watch those key metrics, along with the news, to decide when to sell. Again, this strategy can be highly risky given the chaotic price swings that may occur. Short squeezes can make a stock shoot up, but those returns often evaporate quickly.

Short Squeezes vs Naked Shorts

A short squeeze is a rapid price increase in a heavily shorted stock. It’s essentially a chain reaction that results from numerous short sellers buying the shorted stock to cut their losses, pushing the price increasingly upward. The result can be substantial losses, as mentioned above.

A naked short is a type of illegal trade that involves an investor selling shares they don’t actually own, borrow, or otherwise have possession of. This leaves the trader vulnerable, or “naked,” in the event that a trade goes south, and is highly risky. It’s also considered unethical since it can create volatility and distort prices.

Risks of a Short Squeeze

While short-squeeze investments can produce eye-popping returns in the short term, they come with real risks for individual investors and institutions.

Risks for Investors

For investors, perhaps the biggest risk of a short squeeze is that they’ll get caught on the wrong side of one and lose some money. Obviously, that’s a risk for institutions as well, but individual investors likely don’t have as many resources on hand to try and recover.

Similarly, investors may misread the room — that is, not quite understand what’s happening in the market and misjudge their position. They’ll also need to be vigilant in watching their positions to make sure they change those positions at the right time.

Risks for Institutions

Most of the risks involved with short squeezes for individual investors hold true for institutions, too.

For instance, the risks involved with stocks themselves include the fact that stocks with a high short interest number may be undervalued or misunderstood, or they may simply be failing businesses. And if there’s no good news or market interest, they may continue to sink.

At the same time, the price increases caused by short squeezes are short-lived. Once the short sellers have paid back their lenders, the market runs out of buyers who will pay any price for that stock. And the share prices often fall as quickly as they rose. The danger to traders in a short squeeze is that they may be forced to buy back shares at peak prices, exposing them to potentially unlimited losses.

The Takeaway

A short squeeze is a market phenomenon in which investors inadvertently bid up the price of a heavily shorted stock, while trying to get out of their bearish positions. In order to buy the stocks that investors borrow to sell short, those investors must buy the stock at ever-increasing values.

Short selling is an advanced trading strategy that investors may use to speculate on the direction of an asset’s price, but it also comes with high risk, including the potential of being involved in a short squeeze.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

Are short squeezes legal?

Short squeezes are a natural occurrence in the stock market, but market manipulation is illegal. As the SEC says, “abusive short sale practices are illegal,” and that may play into short squeezes. As such, it’s a gray area.

What is the biggest short squeeze of all time?

While the Volkswagen short squeeze in 2008 was one of the largest of all time, the 2021 short squeezes of GameStop along with AMC, Koss, and others, were some of the most dramatic and notable short squeezes in history. These events highlighted how coordinated buying and market dynamics can drive rapid price increases.

How high can a short squeeze go?

Theoretically, there’s no limit on how high a stock can go, and accordingly, how high a short squeeze can go. However, such price surges are often driven by short-term dynamics and may not be sustained.

Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC. For a full listing of the fees associated with Sofi Invest, see our fee schedule.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

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

SOIN-Q126-065

Signing on with a knowledgeable mortgage lender is one of the first steps you’ll take on your journey to homeownership. A good lender could help you make a sound decision about a major commitment.

If you want to know what questions to ask a mortgage lender, this list can help you feel more confident when choosing a lender to navigate the complex home-buying process with you.

1. How Much Can You Borrow?

How much you can borrow is the question most buyers have on their minds when they start dreaming about real estate listings online. You may have come across a mortgage calculator tool that estimates how much a mortgage is going to cost.

But that’s just a starting point. A mortgage lender will evaluate the entire spectrum of a homebuyer’s financial situation and find the true amount they’ll be able to borrow. The lender may also make recommendations for programs or loans for each buyer’s unique situation.

When you get a loan, you’ll receive a mortgage note, a legal contract between the lender and you that provides all the details about the loan, including the amount you were approved to borrow.

2. How Much of a Down Payment Do You Need?

Another key question your lender can help answer for you is how much are down payments? You’ve probably heard about the ideal 20% down, but a lender may be able to help homebuyers get into a home with a much lower down payment, such as 3% or 5%. The lowest down payment option is often available only to first-time homebuyers. But anyone who hasn’t owned a primary residence in the last three years is often considered a first-timer.

A 20% down payment will enable you to forgo mortgage insurance on a conventional loan (one not insured by the federal government). But lower down payment amounts can help homebuyers obtain housing sooner. There are plenty of options to explore with your lender.

3. What Is the Interest Rate and APR?

Your mortgage lender may explain the difference between the interest rate and the annual percentage rate:

•   Interest rate: The interest rate is the cost to borrow money each year. It doesn’t include any fees or mortgage insurance premiums.

•   APR: The APR is a more comprehensive reflection of what you’ll pay for the mortgage, which will include the interest rate, points paid, mortgage lender fees, and other fees needed to acquire the mortgage. It’s usually higher than the interest rate.

The interest rate and APR must be disclosed to you in your Loan Estimate with the other terms and conditions the lender is offering. Pay particular attention to how the APR changes from loan to loan. When you’re looking at APR vs. interest rates for an FHA loan and a conventional mortgage, for instance, you’ll notice that the numbers are very different. Here’s a snapshot of the difference between interest rates and APR for FHA and conventional mortgages in March 2026.

In this case, both the interest rate and the APR on a 30-year FHA loan are lower than on a conventional loan. However, when accounting for an upfront mortgage premium for the FHA loan and other fees, the APR can sometimes be higher on the FHA loan than on the conventional loan.

4. What Are the Differences Between Fixed- and Adjustable-Rate Mortgages?

The main difference between a fixed-rate mortgage and an ARM is whether or not the monthly payment will change over the life of the loan:

•   Fixed-rate mortgages start with a little higher monthly payment than an ARM, but the rate is secure for the term.

•   An adjustable-rate mortgage will start with a lower interest rate that may increase as the index of interest rates increases. This type of loan may be more appropriate for buyers who know they won’t be keeping the mortgage for long.

The key to an ARM is to know how it adjusts. How frequently will your rate adjust? How much could your interest and monthly payments increase with each adjustment? Is there a cap on how high your interest rate could go? A good mortgage lender will help you consider all these variables when selecting a fixed-rate or ARM.

5. How Many Points Does the Rate Include?

What are points on a mortgage? Mortgage points are fees paid to a lender for a lower interest rate. Asking your lender how many points are included in the rate can help you compare loan products accurately.

6. When Can the Interest Rate Be Locked In?

Rate lock policies differ from lender to lender. Check at the top of the first page of your Loan Estimate to see if your rate is locked, and for how long.

You’ll want to ensure that any rate lock agreement gives you enough time to close on your loan. Many lenders have fees for extending a rate lock.

7. How Much Are Estimated Closing Costs?

One of the most important documents you’ll receive from your lender is the Loan Estimate. The Loan Estimate gives a detailed breakdown of the interest rate, monthly payment, fees, and closing costs on the loan you’re applying for. When you ask about closing costs, your lender can provide this document to you.

Common closing costs include:

•   Appraisal fee

•   Loan origination fee

•   Title insurance

•   Prepaid expenses, such as homeowners insurance, property taxes, and interest until your first payment is due

Expect to see 2%-5% of the purchase price in closing costs.

8. Are There Any Other Fees?

Lenders are required to disclose all costs in the Loan Estimate. They’re also required to use the same standard form so you can compare costs and fees among different lenders accurately. Be sure to ask lenders about other fees and watch for them on your Loan Estimate.

9. When Will the Closing Happen?

The time to close on a house will depend on your individual circumstances, but the national average was 42 days as of June 2025.

An experienced lender with a digitized process may be able to close a loan more quickly. The time it takes a lender to approve and process the loan is also a factor to consider.

10. What Could Delay the Closing?

The March 2026 National Association of Realtors Confidence Index survey showed that within a three-month period, 13% of real estate transactions had a delayed settlement. Reasons for a delay may include appraisal issues, financing issues, home inspection or environmental issues, deed or title issues, or contingencies stated in the contract.
An experienced lender may know how to bring a home to the closing table despite the challenges with financing and appraisals. Be sure to ask upfront how these challenges would be addressed.

11. What Will Fees and Payments Be?

The neat part about obtaining a mortgage since 2015 is that the information must be included in the Loan Estimate. The form is used by all lenders and allows borrowers the opportunity to compare costs among lenders quickly and accurately. All fees and payments are required to be clearly outlined in this form.

Recommended: Guide to Mortgage Statements

12. How Good Does Your Credit Need to Be?

You’ll typically need a FICO® credit score of at least 620 to get a conventional mortgage, but lenders consider a credit score to be just one slice of the qualification pie.

With a lower credit score, a lender may steer you in the direction of an FHA loan, which requires a score of 580 or higher to qualify for a 3.5% down payment. Credit scores lower than 580 require a 10% down payment for an FHA loan.

Borrowers with credit scores above 740 may qualify for the best rates and terms a lender can offer.

13. Do You Need an Escrow Account?

Your lender can set up an escrow account to pay for expenses related to the property you’re purchasing. These may include homeowners insurance and taxes. An escrow account can take monthly deposits from the borrower, hold them, and then disburse them to the proper entities when yearly payments are due. In some locations and with certain lenders, escrow accounts are required.

14. Do You Offer Preapproval or Prequalification?

Lenders have different processes for qualifying mortgage applicants, so it’s important to understand prequalification vs. preapproval. Preapproval is a much more in-depth analysis of a buyer’s finances than prequalification.

A preapproval letter provided by the lender specifies how much financing the lender is willing to extend to you and helps to show sellers you’re a qualified buyer. Getting preapproved early in the home-buying process can also help you spot and remedy any potential problems in your credit report.

15. Is There a Prepayment Penalty?

A prepayment penalty is a fee for paying off all or part of your mortgage early. Avoiding prepayment penalties is easy if you choose a mortgage that doesn’t have any. Ask lenders if your desired loan carries a prepayment penalty. It will also be noted in the Loan Estimate.

16. When Is the First Payment Due?

A lender will be able to help you get your first payment in, which is typically on the first day of the month 30 days after you close. For example, if you closed on August 15, the first mortgage payment would be due on the first of the next month following a 30-day period (October 1).

Each mortgage statement sent every billing cycle includes current information about the loan, including the payment breakdown, payment amount due, and principal balance.

17. Do You Need Mortgage Insurance?

Your mortgage lender will guide you through the process of acquiring PMI if you need it. Mortgage insurance is required for most conventional mortgages made with a down payment of less than 20%, as well as for FHA and USDA loans.

It’s not insurance for the buyer. Instead, it protects the lender from risk. A good mortgage lender can also help advise borrowers on dropping PMI as soon as possible. A home loan help center can help you learn more about PMI and other mortgage questions.

Recommended: What Is PMI and How to Avoid It?

18. How Much Is the Lender Making Off of You?

Lenders are required to be clear and accurate when it comes to the costs of the loan. These should be fully disclosed on your Loan Estimate and closing documents. If you want to know how much the lender is charging for its services, you’ll find it under “origination fee.”

The Takeaway

If you’re shopping for a home loan or thinking about it, you might have mortgage questions — about down payments, APR, points, PMI, and more. Don’t worry about asking a lender too many questions, because many buyers need a guide throughout the home-buying journey. Asking questions is a great way to get to the lender and loan terms that make the most sense for your financial situation.

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 should you not say to a mortgage lender?

The most important thing to remember when communicating with a prospective lender is that you should be truthful about your circumstances. This is especially important when discussing your finances.

How will I know what fees I will be responsible for in my loan?

You’ll receive an official Loan Estimate when you apply for a mortgage. It will include details such as estimated interest rates, closing costs, insurance rates, and penalties you need to be aware of, among other information.

What questions can a mortgage lender not ask?

Generally speaking, most of the topics that are off limits in a job interview are also off limits in a mortgage negotiation. A lender shouldn’t ask you about race, ethnicity, religion, or sexual orientation, for example. You also shouldn’t be asked about your age (unless you’re applying for an age-based loan), your family status (married vs. divorced, whether you’re planning to have kids, etc.), or your health.

Photo credit: iStock/Ridofranz

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.

SOHL-Q126-232

If you’re strapped for cash and have a hard time qualifying for traditional loans, or you live in an underbanked area, you may be considering a pawnshop loan. They appear to be a convenient option for fast cash, but they can also come with significant disadvantages, including high costs.

Before putting your valuables down in pawn, learn more about what pawnshop loans are so you can understand how pawning works.

What Is a Pawnshop Loan?

A pawnshop loan is a secured (vs. unsecured) loan, also known as a collateralized loan. To comprehend how this type of loan works, you’ll need to understand how does pawning work: To borrow the money, you must produce an item of value as collateral that provides backing for the loan. You and the pawn shop and loan operator, known as a pawnbroker, agree to a loan amount and a term. If you don’t pay back the loan (plus fees) within the agreed amount of time, the pawnshop can sell the item to recoup its losses.

Pawnshops will typically offer you 25% to 60% of the resale value of an item. The average size of a pawnshop loan is $150 with a term of around 30 days.

What Items Can You Pawn?

Items that can be pawned include jewelry, musical instruments, electronics, or antiques. It’s even possible to pawn the title to a vehicle. The pawnbroker will determine whether or not an item can be pawned, and borrowers can bring practically any possession for the broker’s scrutiny.

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How Does Pawning Work?

Take a look at this example to see how pawning works: Say you bring in a $600 guitar to a pawnshop. The pawnbroker might offer you 25% of the resale value, or $150. On top of that, it would not be unusual for the pawnshop to charge a financing fee of 25% of the loan. That means you’ll owe $37.50 in financing fees, or $187.50 in total.

If you agree to the loan, the pawnbroker will typically give you cash immediately. The broker will also provide you with a pawn ticket, which acts as a receipt for the item you’ve pawned. Keep that ticket in a safe place. If you lose it, you may not be able to retrieve your item.

You’ll usually have 30 to 60 days to repay your loan and claim your item. According to the National Pawnbrokers Association, 85% of people manage to do this successfully. Nevertheless a pawnshop loan is considered a kind of high-risk personal loan, in that the borrower has a higher than average chance of defaulting. When a borrower pays off a pawnshop loan, they can retrieve the item they pawned. If a loan isn’t repaid, the pawnshop will keep the item and put it up for sale. There is no other penalty for failing to pay off your loan, but you do lose your item permanently.

Pawnshop Loan Fees and Interest Rates

Pawnshops don’t typically charge interest on the loans they offer. However, the borrower is responsible for paying financing fees or storage fees that can make the cost of borrowing higher than other loan options. Aside from the need for collateral, there are few other requirements to qualify for a pawnshop loan. You typically don’t need to prove your income or submit to a credit check.

Regulations around what pawnshops can charge vary by state, but you could end up paying the equivalent of many times the interest charged by conventional loans.

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Pros and Cons of Pawnshop Loans

In general, it’s best to seek traditional forms of lending, such as a personal loan from a bank, credit union, or online lender, if you can. These loans tend to be cheaper and can help you build credit. However, if you need cash the same day and you don’t qualify for other loans — and have a possession you are willing to risk losing — you might consider a pawnshop loan. Carefully weigh the pros and cons to help you make your decision.

Pros of a Pawnshop Loan

•   Access to cash quickly. When you agree to a pawnshop loan, the pawn shop and loan broker will typically hand over cash immediately.

•   No qualifications. The ability to provide an object of value is often the only qualification for a pawnshop loan.

•   Failure to pay doesn’t hurt credit. While you will certainly lose the item that you put in pawn if you don’t pay back your loan, there are no other ramifications. Your credit score will not take a hit.

•   Loans aren’t sent to collections. If you don’t pay back your loan, no collections agency will hound you until you pay.

Recommended: How Do Collection Agencies Work?

Cons of a Pawnshop Loan

•   High fees. The financing fees associated with pawn lending can be much more expensive than traditional methods of obtaining credit, including credit cards and personal loans. Consider that the average annual percentage rate (APR) on a personal loan is currently 11.40%, whereas pawnshop financing fees, when converted into an APR, can be 200% or more.

•   Loans are relatively small. The average size of a pawnshop loan is just $150. If you need money to cover a more costly expense, you may end up scrambling for cash elsewhere.

•   You won’t build credit. Pawn lending isn’t reported to the credit reporting bureaus, so paying them off on time doesn’t benefit your credit.

•   You may lose your item. If you can’t come up with the money by the due date, you’ll lose the item you put in pawn. (Same if you lose your pawn ticket.)

Pros and Cons at a Glance

What Is a Pawnshop Title Loan?

As noted above, it’s possible to pawn a vehicle if you wish to do so. A pawnshop title loan is a loan in which you use the title of your car as collateral for your loan. You can typically continue driving your vehicle over the course of the loan agreement. However, as with other pawnshop loans, if you fail to repay your loan on time, the pawnbroker can seize your car.

Typical Requirements to Get a Loan Through a Pawnshop

There are typically few requirements to get a pawnshop loan, since the loan is collateralized by the item you put in pawn and the pawnbroker holds on to that item over the course of the loan. Business is done in cash so you don’t need a bank account to get a loan. However, pawnbrokers do want to avoid dealing in stolen goods, so they may require that you show some proof of ownership, such as a receipt.

Alternative Loan Options

There are a number of benefits of personal loans that make them a good alternative to pawnshop loans. Personal loans are usually unsecured, meaning there is usually no collateral required for a personal loan. Lenders will typically run a credit check, and borrowers with good credit scores usually qualify for the best terms and interest rates. That said, some lenders offer personal loans for people with bad credit.

If you qualify for a personal loan, the loan amount will be given to you in a lump sum, which you then typically repay (plus interest) in monthly installments over the term of the loan, often two to seven years. The money can be used for virtually any purpose.

Personal loans payments are reported to the credit reporting bureaus, unlike pawnshop transactions, and on-time payments can help you build a positive credit profile.

Other alternatives, such as payday loans may have very high interest rates that make them a less attractive way to borrow.

The Takeaway

If you only need a small amount of money, you don’t qualify for other credit, or if you’re looking for a loan without a bank account, you may consider a pawnshop loan. Just beware that they are potentially costly alternatives to other forms of credit, and if you don’t repay the loan you will lose the item you have pawned.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How is a loan obtained through a pawnshop?

To borrow money from a pawnshop you must present an item of value that can act as collateral for the loan. The pawnbroker may then provide a loan based on the value of that item.

What happens if you don’t pay back your pawnshop loan?

If you fail to pay back your pawnshop loan on time, you won’t be able to reclaim the item you put up as collateral for the loan. The pawnshop will sell it to recoup their losses.

What’s the most a pawnshop loan will pay?

On average, a pawnshop will loan you about 25% to 60% of an item’s resale value. The average pawnshop loan is $150 and is repaid in about 30 days.

Does a pawn loan affect your credit score?

Pawnshops do not report to the credit bureaus, so taking out a pawnshop loan, repaying a pawnshop loan, or failing to repay the loan and claim your pawned item will not have an impact on your credit score.

How long do you have to repay a pawn loan?

The average term of a pawnshop loan is about 30 days, though pawnshop regulations differ from state to state and policies may differ from pawnshop to pawnshop.

Photo credit: iStock/miriam-doerr

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The maturity date for an installment loan like a personal loan is the date on which you should be finished paying off your loan, assuming all payments are made on time and in full. It’s important to mark this day on your calendar, not only so you can celebrate successfully paying back your debt, but also because it can tell you important information like how much you’ll ultimately end up paying in interest.

Here’s a look at how to figure out the maturity date for your personal loan, and other important loan terms you should know.

What Is a Maturity Date On a Loan?

The term “maturity date” can be used with loans or investments. In investing, it refers to the day on which you’ll receive the money you invested, for example, in a savings bond or certificate of deposit (CD). You’ll get your investment back, plus any remaining interest that’s due to you.

If you’re a borrower, the maturity date of loans is the day a lender has scheduled for loaned funds and any interest to be paid off in full. Provided you’ve made regular and timely payments throughout the term of the loan, you’ll have no further obligation to the lender after the maturity date.

If, for whatever reason, you still have a balance after your loan maturity date, you’ll want to talk to your lender and work out a plan to pay off the remainder of your loan.

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How Does the Loan Maturity Date Work?

Your loan’s maturity date is a part of your initial loan agreement. So “What is a maturity date on a loan?” is not a question you should be asking midway through the loan process. You can find the maturity date on your loan contract. For example, say you take out a $10,000 personal loan on June 1, 2026 with a 36-month term. The loan maturity date will be 36 months later, on June 1, 2029.

It is possible to pay off your loan early before the loan maturity. This can save you money in interest payments. However, be mindful of whether your lender charges prepayment penalties. These penalties can outweigh the advantages of paying off your loan early.

Why Is the Loan Maturity Date Important?

The maturity date of a loan is its last major milestone. But choosing the personal loan term length that dictates the maturity date is an early step in the loan process. The maturity date is important because the length of time you have to pay off a loan, along with the loan amount and interest rate, are the things that determine your borrowing costs.

Length of a Personal Loan Maturity Date

The loan term is usually calculated in months. You can often find personal loans with terms from 12 to 60 months, and some lenders will offer loans with terms of up to seven years or longer.

The longer your term, the longer you’ll be paying interest, which generally makes longer-term loans more expensive for borrowers. When choosing a loan, you may want to consider one with the shortest term (and closest maturity date) possible, as long as you can comfortably afford the monthly payments.

Calculating Your Loan Maturity Value

A loan’s maturity value is the sum of what you’ve borrowed plus all of the interest you’ve paid (or will pay) on the loan. The maturity value (MV) formula is:

MV = P + I

Where “P” is the principal amount of the loan (the amount you borrowed) and “I” is the loan’s annual percentage rate (APR).

For example, say you take out a $10,000 personal loan with a 36-month term and 12% APR. In this case P = 10,000 and I = 12%. You would multiply $10,000 by .12 to arrive at the interest, or I — in this case: $1,957.15.

Then you would add the principal and interest to learn your maturity value, like this:

MV = $10,000 + $1,957.15
MV = $11,957.15

You can sidestep all the math by using a personal loan calculator to quickly compute the total costs of borrowing.

What Is an Amortization Schedule?

Your loan’s amount, term, and interest rate will be used to determine the amortization schedule that you may receive when you sign up for a personal loan. The schedule lists each loan payment’s total amount and how much of each payment is applied to interest vs. the loan principal. The amount you pay toward your loan each month will likely be fixed. But the portion of each payment that goes to principal vs. interest will change, with more of the payment going toward interest in the early months of the loan’s term.

If you refinance a personal loan, you’ll get a new maturity date, interest rate, and amortization schedule.

What Happens at the Personal Loan Maturity Date?

At the personal loan maturity date, you will make your final loan payment. Provided you have stayed on track with all of your payments, you will have fully paid off all of your loan principal and whatever interest you owe and have no further obligation to your lender.

If you think you’ll have trouble making any of your loan payments on time, it’s a good idea to reach out to your lender immediately and see if there’s anything it can do to help. The lender may allow you to pay at a later date.

Recommended: What Happens If You Default on a Personal Loan?

Other Key Loan Terms to Know

In addition to maturity and the principal amount, you’ll find other useful information on your personal loan agreement.

Loan Interest Rates

The interest rate is the amount that your lender charges you to borrow, and it’s the main way that lenders make money. Most personal loans rates are fixed interest rates, meaning the rate will not change over the life of the loan. The average personal loan interest rate is currently 11.40%. But rates will vary depending on your credit score.

Variable rate loans, on the other hand, carry interest rates that are usually pegged to a market interest rate. As a result, they can change over the life of the loan.

There may also be hybrid situations in which a loan starts with a fixed interest rate for a period of time, after which it switches to a variable rate. If market rates have gone down, this can be a good thing for borrowers. But if they’ve gone up, a variable-rate loan could be more expensive than its fixed-rate counterpart.

Recommended: What Is an Installment Loan and How Does It Work?

Monthly Loan Payments

You’ll be able to find the amount you owe each month on your personal loan agreement. Your loan payment should be the same over the course of your loan unless you have a variable interest rate.

Prepayment Penalties

If you’re wondering whether you can pay off a personal loan early, the answer is yes. Whether or not it makes sense to do so will depend on your loan agreement and the details of any prepayment penalties. Lenders may charge a fee based on the amount of interest you would have paid had you continued with regularly scheduled payment, or they may charge a flat fee or percentage of your remaining balance.

To avoid a prepayment penalty, read your loan agreement carefully before committing to a loan, as lenders handle prepayment differently. If you are midway through the life of the loan, it still pays to look at the loan agreement. Some lenders’ agreements allow a partial prepayment, which would reduce your interest costs. It’s possible the penalty will be less than the interest you would pay if you stuck with the payment schedule. Contact your lender to see if you can negotiate a reduced or waived penalty.

Paying off your loan early could hurt your credit score somewhat, as you will stop making regular payments on the loan and your credit utilization will change. However, if you can save money on interest by paying off the loan, it’s still a smart move to do so. Keep up the good financial habits that helped you pay the loan off early and your credit score should recover.

The Takeaway

For an installment loan like a personal loan, the maturity date of loan is the day of the final loan payment. This date is set based on the loan’s repayment period — how long you have to repay the loan, including both principal and interest. A personal loan is typically considered to have short- to medium-term maturity, since terms generally run from a few months to seven years.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What happens if the loan is not paid by the maturity date?

If your loan is not paid by the maturity date, you’ll need to work with your lender to come up with an extended repayment plan. If your last loan payment is late or your loan is in default, you may face penalties and your credit score may be negatively affected.

What is the maturity date on a loan?

The maturity date on a loan is the date by which a borrower has agreed to pay off the loan principal and interest in full. You generally make your final loan payment on the maturity date.

When is the maturity date on a loan?

The maturity date on a loan is the date when your final payment is due. It is based on the term of your loan. If you take out a personal loan on June 1, 2026 and the loan has a 36-month term, for example, the maturity date will be June 1, 2029.

Can you change the maturity date on a loan?

It may be possible to extend the maturity date on your loan through a process called loan modification. This is most often done in cases of financial hardship, when extending the date can help make payments more manageable. You could also consider refinancing the loan; though this is often done to obtain a lower interest rate, it could also allow you to make your loan term longer or shorter.

How does the loan maturity date affect my monthly payments?

The loan maturity date is the end point of your loan term, the number of months you have to repay what you have borrowed, with interest. The longer your loan term, the lower your monthly payments will typically be, but the more interest you will pay over the life of the loan. So a close-in maturity date usually means higher monthly payments and lower total interest.

Photo credit: iStock/Pekic

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.

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