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You may know someone who lost a home to foreclosure, but you might not know all the ins and outs of the process.

When the lender takes back a property when the mortgage has not been paid for a specified period of time, that’s a mortgage foreclosure. The process varies by state and by lender, but there are things you can do to avoid it.

Here’s what you need to know about foreclosure, as the numbers began rising, and moves you can make if you’re facing it.

What Does Foreclosure Mean?

When a buyer finances a home, the mortgage is secured with the property, meaning the property is used as collateral on the loan. If the homeowner fails to make the agreed-upon payments on the due dates, the lender can take the property back.

Each state has its own laws regarding foreclosure. Where you live will determine how properties are foreclosed. There are two main types of mortgage foreclosure.

Recommended: Help Center for Mortgages

Types of Mortgage Foreclosure

In some states, the lender is required to go through the court system to foreclose on a property. This is known as judicial foreclosure. In other states, the lender does not have to go through the court process.

Judicial

With a judicial foreclosure, a lender must get a court order to foreclose on a property. The lender must file a complaint with the court, which is also sent to the homeowner and any other lienholders. Generally, the mortgage note must also be filed with the court.

Some states require loss mitigation efforts before a suit can be filed. Most of these foreclosures are not contested, resulting in a default judgment against the homeowner.

After this, the property may be scheduled for sale (usually a foreclosure sale or sheriff’s auction). The homeowner may appeal the foreclosure judgment.

Nonjudicial

In a nonjudicial foreclosure, deeds of trust can be foreclosed without going through the court system. Lenders must give special notice to the property owner and wait a specified amount of time before auctioning the property off.

Some states allow both judicial and nonjudicial foreclosure, while others may only allow one or the other. Below is a summary of states and what process they follow for mortgage foreclosure.

State	Foreclosure process
Alabama	Primarily nonjudicial
Alaska	Primarily nonjudicial
Arizona	Primarily nonjudicial
Arkansas	Primarily nonjudicial
California	Primarily nonjudicial
Colorado	Primarily nonjudicial
Connecticut	Primarily judicial
Delaware	Primarily judicial
District of Columbia	Primarily nonjudicial
Florida	Primarily judicial
Georgia	Primarily nonjudicial
Hawaii	Primarily nonjudicial
Idaho	Primarily nonjudicial
Illinois	Primarily judicial
Indiana	Primarily judicial
Iowa	Primarily judicial
Maine	Primarily judicial
Kansas	Primarily judicial
Kentucky	Primarily judicial
Louisiana	Primarily judicial
Maine	Primarily judicial
Maryland	Primarily nonjudicial
Massachusetts	Primarily nonjudicial
Michigan	Primarily nonjudicial
Minnesota	Primarily nonjudicial
Mississippi	Primarily nonjudicial
Missouri	Primarily nonjudicial
Montana	Primarily nonjudicial
Nebraska	Primarily nonjudicial
Nevada	Primarily nonjudicial
New Hampshire	Primarily nonjudicial
New Jersey	Primarily judicial
New Mexico	Primarily nonjudicial
New York	Primarily judicial
North Carolina	Primarily nonjudicial
North Dakota	Primarily judicial
Ohio	Primarily judicial
Oklahoma	Primarily nonjudicial
Oregon	Primarily nonjudicial
Pennsylvania	Primarily judicial
Puerto Rico	Primarily judicial
Rhode Island	Primarily nonjudicial
South Carolina	Primarily judicial
South Dakota	Primarily nonjudicial
Tennessee	Primarily nonjudicial
Texas	Primarily nonjudicial
Utah	Primarily nonjudicial
Vermont	Primarily judicial
Virginia	Primarily nonjudicial
Washington	Primarily nonjudicial
West Virginia	Primarily nonjudicial
Wisconsin	Primarily judicial
Wyoming	Primarily nonjudicial

When Does Mortgage Foreclosure Begin?

Mortgage foreclosure begins with the first missed payment, though a lender’s actions will escalate the more payments a homeowner misses. With the first missed payment, the mortgage lender won’t take the property back, or even issue a notice of default, but will reach out to the borrower to help them get payments back on track.

The lender will also report a nonpayment or late payment to the credit bureaus and issue a late fee.

Typically, lenders won’t issue a notice of default until the borrower defaults on three missed payments, or 90 days past due (this is standard practice, but lenders can issue a notice of default sooner than 90 days). Default is the precursor to foreclosure.

Foreclosure Timeline: How Long Does Mortgage Foreclosure Take?

After the notice of default arrives after 90 days past due, the time it takes to complete the foreclosure will vary by state. In some states, it can be a matter of months. In others, much longer.

In jurisdictions where each step of the process requires court approval (judicial foreclosures), court backlogs can delay the foreclosure processes for years.

Why Do Foreclosures Happen?

Foreclosure occurs in a number of situations. Some of the most common:

•   Being underwater. When a homeowner has negative equity in the home, the property is more likely to be foreclosed on. Having an underwater mortgage is the most common reason for foreclosure.

•   Rising interest rates. When a borrower’s loan has an adjustable interest rate, a sudden rise in the amount owed each month can lead down the path to foreclosure. With the 5/1 ARM, the interest rate is fixed for the first five years and then adjusts once a year.

•   Mortgage types. Sometimes even the different kinds of mortgages can contribute to default. With an interest-only mortgage, for instance, after five or 10 years of interest payments, principal and interest kick in, resulting in higher payments.

•   Personal situations. When the payment on a mortgage loan becomes too much or when a life event (hospitalization, death, divorce, layoff) prevents homeowners from making monthly payments, they can slip into default and eventually foreclosure.

If the homeowner doesn’t work with the lender to make a plan for repayment of the missed payments, the mortgage servicer can seek foreclosure.

Can You Avoid Foreclosure?

Homeowners have options if they’re facing foreclosure, and the sooner they contact their mortgage lender or servicer, the more they will have. Some of these include:

•   Reinstatement. If you’re able to pay off the past due amounts and any penalty fees, the lender will stop the foreclosure process.

•   Repayment plan. A repayment plan allows you to tack on a portion of your past-due payments to your regular payment each month. This makes sense if you’ve only missed a small number of payments and will no longer have trouble making a monthly mortgage payment.

•   Forbearance. If you qualify for mortgage forbearance, your lender might pause or lower monthly mortgage payments for a short amount of time. When you start making payments again, you’ll add portions of your missed payments to your regular payment to catch up.

•   Loan modification. With a loan modification, the lender permanently alters the terms of the mortgage contract, so the payment is more manageable. This can include a reduced interest rate, adding missed payments to the loan balance, extending the term of the mortgage, or even canceling part of the mortgage debt.

•   Filing for bankruptcy. Filing for Chapter 13 bankruptcy may allow you to keep certain assets like a house or car. A court must approve your repayment plan. It stays on your credit report for seven years. You might want to consult with a bankruptcy attorney if you’re thinking about going this route.

•   Selling your home. If you have enough equity in your home to pay off the mortgage and pay for the cost of selling your home, you may be able to sell your home to avoid foreclosure.

•   Deed in lieu of foreclosure. A deed in lieu of foreclosure is essentially when you hand over the title of your home to the lender instead of going through a foreclosure. It is less damaging to your credit than a foreclosure.

•   Short sale. If the lender agrees to a short sale, it is agreeing to allow the home to be sold for less than what is owed. The deficit is taxable if the mortgage terms hold the borrower liable for the full amount of the loan.

Recommended: A Guide to Mortgage Relief Programs

Consequences of Foreclosure

Foreclosure has a huge impact on your credit. It will stay on your credit report for seven years after the first missed payment, and the multiple delinquent payments are a further knock against your credit scores, making it hard to go shopping for another mortgage and other loans.

After a foreclosure, it could take two to seven years to get a new conventional or government-backed mortgage.

But there are ways to deal with financial hardship.

The Takeaway

Facing mortgage foreclosure is one of the toughest things a homeowner can go through. As the financial landscape shifts, knowledge is power.

If you’re on solid financial footing, that’s a good spot to be in. Are you in that league and shopping for a mortgage? Take a look at SoFi’s menu of fixed-rate home mortgage loans.

Get started with mortgage pre-approval and find the home of your dreams sooner than you may have thought possible.

FAQ

Can I stop the foreclosure process?

Possibly. The sooner you contact your mortgage servicer, the more options you will have.

How will foreclosure hurt my credit score?

The lender reports each missed payment, and the further behind a borrower gets, the more delinquent they become. The credit score lowers with each report. A foreclosure stays on a credit report for seven years, which makes it harder to apply for other credit lines and loans.

Am I supposed to pay property taxes when my house is in foreclosure?

It’s true that a missed tax payment can also lead to foreclosure proceedings, but it depends on where you are in the process. If you’re working with your lender to get your missed payments back on track to avoid foreclosure, then your escrow account will be replenished and the mortgage servicer will pay your taxes. If you’re in foreclosure and not able to get your payments back on track, paying your taxes won’t help you get your house back. You’re better off working with your lender to put that money toward missed mortgage payments.

Do I have to move out of my house when it is in foreclosure?

The Federal Trade Commission advises staying in the house as long as possible if you’re facing foreclosure. You may not qualify for certain types of assistance if you move out.

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Photo credit: iStock/jhorrocks

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

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

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

SOHL0322010

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Mortgage bankers originate, sell, and service residential mortgages for consumers on behalf of the lender they work for. They also may provide escrow services. A mortgage banker plays a central role as people navigate the complexities of applying for a mortgage.

Mortgage bankers are often the first and last point of contact. Getting a home mortgage loan that works for your financial situation, as well as saves you money, is incredibly valuable.

What Is a Mortgage Banker?

An individual or an institution that originates, sells, or services a mortgage can be considered a mortgage banker.

Individual mortgage bankers work for a single lending institution and help applicants sort through the different mortgage types. Mortgage bankers are also called mortgage lenders or mortgage loan officers when referred to in this way.

Customers who want help understanding mortgages or who have questions about mortgages can be assisted by mortgage bankers.

Mortgage bankers can get homebuyers on the right road with mortgage preapproval. They serve as the primary point of contact for buyers’ lending needs.

A mortgage banker can also be an institution, such as a bank, credit union, or other direct mortgage lender. When talking about a mortgage banker that services a loan, for example, it’s in reference to the institution.

A mortgage loan originator employed by a credit union, bank, or a subsidiary of a bank does not have to obtain a loan originator license. Nonbank mortgage loan originators must be licensed in the states where they do business and must be registered with the Nationwide Multistate Licensing System & Registry.

The licensing requirements were put in place after the mortgage meltdown of 2008 to protect consumers from predatory lending and to prevent fraud.

Recommended: Home Loan Help Center

Services Offered by a Mortgage Banker

At their core, mortgage bankers have the ability to create or sell a new mortgage loan. They also have the ability to service it once the loan closes.

Originate Loans

Mortgage bankers originate loans, meaning they take an application and create a new mortgage for a residential home. The loan is usually sold to Fannie Mae or Freddie Mac.

Sell Loans

Mortgage bankers sell loans so they can engage in more lending. If it’s a conventional loan, the sale typically goes to the government-backed enterprises, Fannie Mae or Freddie Mac. This increases lenders’ liquidity so they can originate more loans to more customers instead of carrying the amount of the loan on their books.

Service Loans

Once the mortgage has closed, the lender needs to be paid every month. This is what mortgage servicers do: They take on the day-to-day task of making sure your payment gets to all parties that need to be paid. Servicing loans is usually in reference to the mortgage banker as an institution, not the individual mortgage loan officer.

How Do Mortgage Bankers Make Money?

Individual mortgage bankers may make money from a salary, commission, or a combination.

Institutional mortgage bankers make money from origination fees, mortgage points, mortgage servicing, mortgage-backed securities, and the yield spread premium. The yield spread premium is how much money they make based on what they charge a customer relative to how much it costs to obtain that financing.

Differences Between a Mortgage Banker and a Loan Officer

Mortgage banker and loan officer, or loan originator: These terms are often used interchangeably.

However, while a mortgage banker can refer to both individuals and institutions, a loan officer is always an individual.

Differences Between a Mortgage Banker and a Mortgage Broker

In your research to get the best mortgage, you may have also come across mortgage brokers. Though applying for a mortgage will have the same requirements whether you go through a mortgage broker or a mortgage banker, a mortgage banker is different from a mortgage broker in who they work for and how they obtain your mortgage.

A mortgage banker works for a single lending institution that makes loans directly to consumers. The lending decision and underwriting are typically made at the bank level, which can streamline the process.

A mortgage broker works with many different lenders. This is helpful if you want to shop around or need to find a specialty loan not offered by all lenders.

See also: Calculator for mortgage payments

When Is It Better to Have a Mortgage Banker Than a Broker?

Your best bet for finding a home loan with terms most favorable to your financial situation is to shop around for a mortgage. A mortgage banker is closer to the lending process than a mortgage broker, but a broker has access to a greater number of lenders.

Be sure you’re comparing apples to apples on the mortgages offered to you by studying the loan estimate you’re given by each lender after applying.

The Takeaway

A mortgage banker can play a major role in getting you to the closing table with the right loan. By any name — mortgage banker, loan officer, loan originator — this person is a key guide during the home-buying journey.

If you’re looking for a traditional home loan, jumbo loan, refinance, or home equity loan, see the competitive deals SoFi offers.

SoFi home loans come with appealing rates, low down payment options, and on-time closings. You may be able to lock in your rate for up to 90 days. Terms apply.

Get your personalized rate in minutes.

FAQ

What does a mortgage banker do?

A mortgage banker can originate, sell, and service loans for customers.

Is a mortgage banker similar to a mortgage broker?

Not really. A mortgage banker works for a single lender and makes loans directly to you. Mortgage brokers do not lend money but instead find a lender to work with their buyer.

How do you choose a mortgage banker?

Shopping around for a mortgage banker can help you choose one that works for your budget and financial situation.

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

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

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

SOHL0322016

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Hierarchies are everywhere, including in the mortgage world. Many people have a subordinate mortgage in the form of a home equity line of credit or home equity loan.

A subordinate mortgage is secured by your property but sits in second position, if you have a primary mortgage, for getting paid in the event you default.

Here’s what you need to know about subordination and why it matters.

What Is Mortgage Subordination?

Mortgage subordination is the process of ranking debts tied to your home in the order that they need to be paid in the event of a foreclosure. Whichever mortgage lien is recorded first usually has higher priority than those that are recorded later, but depending on state law, property tax liens, HOA “super liens,” and mechanic’s liens may have priority over previously recorded liens.

After a foreclosure, a second mortgage is only paid if there are funds left over after paying the primary mortgage.

Lenders that make second mortgages — also called junior mortgages, second liens, or junior liens — typically allow borrowers to tap only a portion of their home equity to help ensure that they will get paid in the event of a foreclosure.

And a subordinate mortgage represents a higher risk to the lender, so borrowers will likely see higher rates.

Recommended: Understanding Mortgage Basics

What Are Mortgage Subordination Clauses?

A mortgage subordination clause is typically included in the legal documents of the primary mortgage holder.

The subordination mortgage clause states that all other loans made using the property as collateral are subordinate to the primary mortgage, now and in the future.

What Is a Subordinate Lien?

A lien is a claim against your property. Generally, there are voluntary mortgage liens, such as mortgages you take out, and involuntary liens, like judgment, tax, HOA, and mechanic’s liens.

A subordinate lien is a claim against your property that usually can only be paid after the primary lien has been paid.

How Does a Mortgage Become Subordinate?

When a mortgage is subordinate to another, it simply means that the lender of the subordinate mortgage will get paid only after the senior lienholder is paid.

Again, mortgages are typically ranked in the order they are originated and recorded in county land records. The primary mortgage is first, and a second mortgage is subordinate because it came after.

If a property is refinanced, the situation changes.

Subordinate Mortgages and Refinancing

If a homeowner has two mortgage loans and wants to refinance the first mortgage, most refinancing lenders will ask the second mortgage lender to sign a subordination agreement to stay in second position after the refinance.

If the second lienholder balks at subordinating that loan, you may have enough equity to apply for a cash-out refinance and use the extra money to pay off the second mortgage. Or you could pay off the second mortgage with cash on hand.

This mortgage calculator can help you run the numbers to see if refinancing is right for you.

Recommended: What Are the Different Types of Mortgage Loans?

Subordinate Mortgage Loan Modification

Loan modification is a mortgage relief program in which the terms of the loan are changed so that the homeowner can better meet the monthly payment requirement.

Homeowners who anticipate a permanent change in finances, or are exiting mortgage forbearance but don’t qualify for refinancing, can ask for mortgage modification.

If you have a HELOC or home equity loan and you’re struggling to make the payments, the lender may be willing to modify the credit line or loan: lowering the rate, extending your repayment term, or reducing your principal balance.

The Takeaway

Though lenders are more concerned about subordinate mortgages than you may be, you may want to know how second mortgages and other liens may affect refinancing your primary mortgage.

Whether you want to refinance or you are shopping for a mortgage, SoFi is here to help.

SoFi offers a range of home mortgage loan options and competitive rates to meet your needs. Knowledgeable loan officers will guide you.

FAQ

What type of mortgage is subordinate?

If a homeowner has a first mortgage, home equity lines of credit and home equity loans are examples of subordinate loans. They will be paid second in the event of a foreclosure or cash sale.

Is a subordinate mortgage a second mortgage?

Yes. A second mortgage is a subordinate mortgage because it came after the primary mortgage.

What is subordinate financing?

Subordinate financing is a junior loan secured by an asset that can be sold if the loan is unpaid for a specified amount of time. Interest rates and terms can be more favorable than those of unsecured loans but not as favorable as those for a first mortgage.

How long does it take to subordinate a loan?

On primary loans, subordination is included in the contract. On a subsequent refinance when there is a junior (or subordinate) mortgage, the amount of time it will take to reach a subordination agreement will depend on the lenders involved, but it can often be done in 25 business days.

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Photo credit: iStock/wutwhanfoto

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

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

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

SOHL0322015

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Mortgage life insurance, aka mortgage protection insurance, covers the balance owed on your home loan in the event of your death.

It’s meant to protect your loved ones from having to worry about monthly mortgage payments or being forced to move if they can’t continue making payments.

Whether you might need mortgage life insurance depends on your health history, whether you’re the sole earner for your family, and whether you already have a traditional life insurance policy.

How Does Mortgage Life Insurance Work?

Unlike standard life insurance, mortgage life insurance is designed to pay a death benefit (typically the mortgage balance) to the lender rather than to heirs. The lender pays off the mortgage.

The length of the policy will be the mortgage term.

Mortgage life insurance is usually structured to match the declining balance on your mortgage and expires after your home is paid off. Depending on your age and mortgage size, the cost can be hundreds of dollars a month.

By contrast, term life insurance lasts for a set number of years and will pay a death benefit during that time to designated beneficiaries, who can use the lump sum however they want to. Term life tends to be the most affordable kind of life insurance.

A term life insurance policy will charge fixed premiums for 10 to 30 years. Mortgage life insurance premiums may be fixed for only five years.

(By the way, mortgage life insurance is a totally different animal than private mortgage insurance. PMI is insurance you typically must purchase if you put less than 20% down on a conventional loan.)

Different Options for Mortgage Life Insurance

There are a few variations on how mortgage protection insurance can be structured. Here’s how the most common ones function.

Decreasing Mortgage Principal

A decreasing mortgage principal policy ties the payout benefit directly to the outstanding mortgage principal balance.

The policy payout will automatically account for the declining balance as you pay off your home loan over time, along with any extra payments you make.

This is the most common type of mortgage insurance policy.

Level

A level payout policy keeps the death benefit at the same amount over the term of the mortgage loan, no matter how much has been paid off. This means that any payments or prepayments of principal have no effect on the death benefit.

Because these mortgage insurance policies are structured more like traditional life insurance policies, they sometimes allow for the direct payout of excess benefits to beneficiaries.

Recommended: Home Loan Help Center Is There to Inform

Mortgage Life Insurance Advantages

If you’re the sole breadwinner for your family, you might want to consider upsides of mortgage life insurance.

No Medical Exam

Unlike traditional life insurance, mortgage life insurance sellers don’t require a medical exam. This can help people qualify for mortgage life insurance when they might be rejected for traditional life insurance or find the quoted premiums too high.

You Can Add Riders

Home mortgage life insurance policies often allow you to tack on riders. A living benefits rider will allow you to directly access your policy’s benefits as a source of funds in the event you’re diagnosed with a terminal illness. This can be especially helpful when health insurance might fall short.

Another common add-on is a “return of premium” rider, which calls for returning a set amount of premiums paid if the policy ends without ever being used.

Many of these riders are also available for most term life insurance policies.

Mortgage Life Insurance Drawbacks

If you’re in good health or prefer benefit payouts with no strings attached, you may want to give thought to some drawbacks of mortgage life insurance.

Expensive for Healthy Homeowners

Individuals who are in good health won’t be able to benefit from a cheaper rate on their mortgage life insurance policy. That’s because insurers do not factor medical exams into their premium calculation.

The lack of a medical exam means insurers must cover all their bases: People with a poor health history and those in good health will pay the same rates.

Decreasing Payout

While your monthly mortgage life insurance premiums will remain constant, the potential payout benefit will continue to decrease as you pay down your mortgage over time.

If there’s no mortgage left, there’s no payoff. Ouch.

The only way around this is to apply for a mortgage insurance policy with a level payout benefit, which ensures that the payout remains the same regardless of how much time is left on your mortgage. This may be more expensive than a typical decreasing mortgage balance policy.

No Flexibility

Mortgage life insurance policies pay out to the mortgage lender. Your loved ones won’t see any cash during this transaction, which isn’t ideal if you’d like them to have the money for other purposes like day-to-day living costs, college costs, or investing.

If flexibility of use for any benefit payout is important, you may be better served by traditional life insurance.

Difficult to Get Quotes

It’s hard to gather quotes for mortgage life insurance online, unlike other kinds of insurance. That’s a concern because prices can vary widely.

Recommended: How to Shop for a Mortgage

Is Mortgage Life Insurance a Good Idea?

Unless you’re having difficulty qualifying for a reasonable rate on a traditional life insurance policy because of poor health, term life insurance is likely to have lower premiums than mortgage life insurance and will provide a direct payout to beneficiaries.

For some homeowners, the benefit payout to the lender, not heirs, will be a dealbreaker. Others may be willing to accept this restriction because they either have health conditions that make it difficult to qualify for traditional life insurance or because they want to ensure that the payout is dedicated toward housing payments or, in a sense, mortgage relief.

You also may want to learn about putting your house in a trust, to protect your home if you become incapacitated and to avoid the probate process.

The Takeaway

Mortgage life insurance ensures that your mortgage will be paid off if you die. If mortgage protection insurance isn’t your cup of tea, it could be worth looking into term life insurance to protect your loved ones.

While responsibility is on your mind and you’re hunting and gathering mortgage minutiae, look into a SoFi Home Loan or Refinance, or a SoFi-brokered home equity line of credit.

SoFi offers an array of mortgage home loan advantages. Click, scroll, and prepare to be impressed.

FAQ

Does mortgage life insurance pay off the mortgage?

Yes. Mortgage life insurance offers enough coverage to pay off your mortgage if you were to die.

Is mortgage life insurance the same thing as mortgage protection insurance?

Yes. Most policies only pay out when the policyholder dies, but a few also cover a post-accident disability or a temporary job loss.

When is mortgage life insurance a good idea?

Mortgage life insurance could be a good idea for homeowners whose health conditions keep them from qualifying for term life insurance.

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Photo credit: iStock/Inside Creative House

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

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

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

SOHL0322004

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A hard money loan is a nontraditional, secured loan provided by an investor to a buyer of a “hard asset,” usually real estate, whose creditworthiness is less important than the value of the asset.

Hard money loans are more common for real estate investments — purchasing a rental property or flipping a house, for instance — and can get you money quickly.

Individual investors or investment firms offer these loans. They typically have high interest rates and short repayment terms and can be risky.

Common Reasons to Get a Hard Money Loan

People typically look for hard money loans when they are interested in investing in real estate that needs repairs.

Amateur real estate investors who may not have another way of securing financing — or who may just need money fast — rely on hard money loans for:

•   Purchasing real estate to fix up and rent out

•   Buying a home to upgrade and flip for a profit

Business owners sometimes take out hard money loans to purchase commercial real estate as they expand their business.

Finally, some homeowners with poor credit but equity in a home may apply for a hard money loan to avoid foreclosure.

Recommended: How to Buy a Foreclosed Home

How to Get a Hard Money Loan

Unlike lenders of personal loans or traditional mortgage loans, hard money lenders aren’t all that interested in your credit scores. Instead, they care about the value of the investment — if you default on the loan, they’ll have made money on the interest and have legal claim to the investment.

That makes getting a hard money loan easier than a traditional loan. But how do you find hard money lenders if they’re not traditional direct lenders? Finding them could be as simple as asking a real estate agent or an industry friend (like another local landlord or house flipper) for a recommendation.

Hard money lenders are also online and accessed through mortgage brokers. It’s always a good idea to find trusted reviews of a lender before signing.

Recommended: Step-by-Step Mortgage Process

Hard Money Loan Requirements

Hard money lenders are less concerned about your credit scores than traditional lenders are, though they may check your credit and verify your income. Instead, there are three basic hard money requirements:

A Valuable Asset

The investment firms and financing companies that grant hard money loans are mainly interested in the value of the investment itself. A hard money loan is based on the after-repair value of a property.

Experience

Hard money lenders may want to know that you’re capable of completing the renovations you’re envisioning for your rental property or house flip. Being able to provide a portfolio of previous work may help your cause.

A Large Down Payment

Typically, hard money lenders require a down payment of 20% to 35%.

Hard Money Loan Rates and Terms

Hard money loans come with higher interest rates and shorter terms than traditional mortgage loans. This can make them higher risk for some borrowers.

•   Rates: Interest rates can range from 8% to 15%. This is higher than the typical 30-year fixed-rate mortgage.

•   Terms: In general, hard money loans come with short repayment periods. While most homebuyers choose a mortgage term of 30 years, hard money loans are often for six months to three years.

Recommended: How Rising Inflation Affects Mortgage Interest Rates

Pros and Cons of Hard Money Loans

So what are the advantages and disadvantages of hard money loans? Let’s break it down in easy terms:

Pros	Cons
Fast funding	High interest rates
Fair credit usually OK	Short repayment terms
Less stringent underwriting process	Large down payment
Easy way to start investing	Can’t work with traditional lenders

Hard Money Loan Alternatives

Hard money loans aren’t your only option if you want to start investing in real estate, though the condition of the property will be a factor, as will the size: Any multifamily property of five or more units requires commercial financing.

It’s important to consider every avenue and understand how it will affect your finances and the likelihood of getting an offer approved.

Traditional Mortgage

Properties that need structural repairs usually do not qualify for a conventional loan, but otherwise it could be possible to use a residential conventional loan for a property with up to four units if one unit will be owner occupied for at least a year.

The same is true for qualified borrowers of an FHA loan or VA loan.

Banks, credit unions, and mortgage companies also may offer commercial real estate loans to qualified borrowers.

Home Equity Loan or Cash-Out Refi

If you have significant equity in your home, you may be able to purchase an investment property by tapping your home equity with a home equity loan, home equity line of credit (HELOC), or cash-out refinance. Interest rates are typically lower, but your personal home serves as the collateral on the loan.

Personal Loan

Depending on the cost of the investment property, you may be able to cover the price with an unsecured personal loan — or a personal loan and cash reserves you may have.

Borrowers, depending on their credit score, may be able to secure financing for a lower rate than they’d get with a hard money loan.

A home improvement loan could also come in handy if you qualify.

The Takeaway

Hard money loans offer fast funding and don’t require a strong credit score, making them tempting for investment properties. But these loans — which are not available through traditional lenders — typically have high interest rates and short terms.

SoFi offers personal loans and mortgage refinancing and brokers a HELOC for up to 95% of home equity.

If you’re able to use traditional financing for a property purchase, consider a home mortgage loan from SoFi. Qualifying first-time buyers can put as little as 3% down on a principal residence.

Get your personalized rate today on a SoFi Mortgage.

FAQ

What is a hard money loan example?

Borrowers often seek out hard money loans for real estate investments. They may be interested in renovating a property to rent out or they may want to do a quick upgrade or more extensive rehab, then flip the home for a profit.

What are typical terms for a hard money loan?

Hard money loans typically require a down payment of 20% to 35%, come with an interest rate of 8% to 15%, and must be paid off within six months to a few years. This makes them high risk for some borrowers, but the fast funding and de-emphasis on credit history can be appealing.

Do hard money lenders run your credit?

Some hard money lenders may check your credit and verify your income, but in general, they are not as concerned with your credit scores as a traditional lender is. Instead, they want to see a large down payment, a history with rental properties, and an asset worth investing in, which serves as collateral for the loan.

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SoFi Mortgages
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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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