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A mortgage commitment letter is a step beyond prequalification and preapproval and could give a homebuyer an edge in a competitive market. It lays out the loan details and indicates that a buyer has an agreement for a mortgage.

But who should obtain a mortgage commitment letter and when? Let’s take a look at those answers and more.

What Is a Mortgage Commitment Letter?

A mortgage commitment letter — conditional or final — is a step closer to finalizing a mortgage but short of “cleared to close.” The letter signals to the seller that the buyer and a chosen financial institution have forged an agreement.

Buyers may seek a conditional mortgage commitment letter when they’re house hunting, and a final commitment letter when they’re ready to make an offer on a specific home.

In both types of loan commitments, the lender outlines the terms of the mortgage.

Recommended: Buying in a Seller’s Market With a Low Down Payment

Types of Mortgage Loan Approvals

In the mortgage loan process, buyers will hear “approval” thrown around a lot. But not all approvals are built equally, and each type signifies a different part of the process.

Prequalification

Getting prequalified is often an early step for buyers in the home search. It’s quick, can be done online, and doesn’t require a hard credit inquiry.

To get prequalified, buyers provide financial details, including income, debt, and assets, but no documentation, so this step serves as an estimate of how much home they can afford.

Prequalification can help buyers create a realistic budget, but the amount, interest rate, and loan program might change as the lender gets more information.

Preapproval

Preapproval is slightly more complicated, requiring a hard credit inquiry and documentation from the buyer. Lenders may ask for the following:

•   Identification

•   Recent pay stubs

•   W-2 statements

•   Tax returns

•   Activity from checking, savings, and investment accounts

•   Residential history

Armed with this information, a lender will give buyers a specific amount they’ll likely qualify for.

Preapproval also shows sellers that a buyer is serious about a home, as it means a lender is willing to approve them for a mortgage.

Conditional vs Final Commitment

Prequalification and preapproval can be important steps during the home search. But especially in a seller’s market and in certain cities, the mortgage commitment letter can become an important tool.

While a mortgage loan commitment letter can show a seller that the buyer is serious, not all letters are the same.

A conditional mortgage approval letter, the most common type, means that the lender will approve buyers as long as they meet certain conditions.

Conditions could include:

•   No change to the buyer’s finances before the closing date

•   Proof of funds to cover the down payment and closing costs

•   Passing of a home inspection

•   An appraisal

•   Proof of homeowners insurance

•   No liens or other problems with the property title

A final commitment letter means the lender has unconditionally approved the buyer for a loan to purchase a home. However, this doesn’t mean the buyer is guaranteed a loan; it just means the lender is ready to approve the mortgage.

Having a mortgage commitment letter in hand is a good way to ensure that nothing will go wrong during underwriting.

Recommended: See Local Housing Market Trends by City

How to Know If You Need a Mortgage Commitment Letter

Buyers don’t need to provide a mortgage commitment letter to a seller. Still, that extra step beyond preapproval indicates how serious they are about a property.

Since it may require a little extra work, it shows sellers that a buyer is less likely to back out, especially due to financing issues.

A mortgage commitment letter could convince a seller to take a buyer more seriously in a seller’s market. And it could calm the nerves of buyers who face home-buying angst, including the challenge of covering a down payment and closing costs (even if they plan to roll closing costs into the loan).

How to Get a Mortgage Commitment Letter

Getting a mortgage commitment letter might sound like a hassle during an already stressful home-buying process, but doing so could save buyers time and provide a sense of relief as they creep closer to closing.

First off, buyers will need to be preapproved. If they have chosen a home, once under contract, their lender or underwriter will want more information, which may include:

•   A gift letter if another party is helping with the down payment

•   Employment verification

•   Explanation of any late payments

•   Proof of debts paid and settled

From there, it could be a back-and-forth between the lender and buyer, with the lender asking for clarification or additional documentation. Common issues that arise include:

•   Tax returns with errors or inconsistencies

•   Unexplained deposits into buyer bank accounts

•   Multiple late payments or collections on a credit report

•   Unclear pay stubs

At this point, the lender may grant a conditional commitment letter, with the caveat of additional information and an appraisal. If the buyer has an appraisal and meets lender expectations with documentation, they’re likely to get a final commitment.

Contents of a Commitment Letter

A commitment letter will vary from lender to lender but generally include the following details:

•   Loan amount

•   Loan number

•   What the loan is for

•   Mortgage loan term

•   Type of loan

•   Lender information

•   Expiration date of the commitment letter

What happens after the commitment letter? The lender and underwriter will continue to iron out the mortgage details, aiming for cleared-to-close status before the closing date on the property.

The Takeaway

A mortgage commitment letter is like a short engagement before the wedding: It signals an agreement before the real deal. Buyers in an active seller’s market might find a mortgage commitment letter advantageous.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How long does it take to get a mortgage commitment letter?

It typically takes 20 to 45 days to get a mortgage commitment letter. The average closing process takes 50 days.

Does a mortgage commitment letter expire?

Yes.

How long is a mortgage commitment letter valid?

Timing can vary by lender, but the length of commitment is typically 30 days.

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Photo credit: iStock/MartinPrescott

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

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

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

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

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

SOHL-Q224-1917095-V1

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Subprime mortgages allow borrowers with lower credit scores to obtain homeownership, but the homebuyers pay a steep price for the privilege, thanks to the higher risk to lenders. Fortunately, there is hope for subprime borrowers who raise their credit profiles through consistent, on-time payments: They can look into refinancing. Here’s a closer look at the subprime mortgage world.

What Is a Subprime Mortgage?

A subprime mortgage is a housing loan made to a borrower with a subprime credit score, typically one in the 580 to 669 range, although what constitutes a prime and subprime credit score can vary among lenders and organizations. A credit score above 670 is considered prime, according to Experian, which tracks data on the credit industry. (And generally speaking, to qualify for the best interest rates, a borrower needs a “super prime” score of 740 or better.)

Borrowers with lower credit scores represent a greater risk to the lender; they are statistically more likely to have trouble paying on time. So subprime mortgages often come with higher interest rates and larger down payments to help protect the lender from the increased risk of default.

Subprime borrowers accept these terms because they cannot qualify for a conventional mortgage — one from a private lender like a bank, credit union, or mortgage company — with lower costs. Subprime mortgages are different from government-backed loans for borrowers with low credit scores (such as FHA loans backed by the Federal Housing Administration).

Note: SoFi does not offer subprime mortgages at this time. However, SoFi does offer mortgage loan options.

💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.

How Subprime Mortgages Work

The main difference between a mortgage loan offered to a prime borrower vs. a subprime borrower is cost. Borrowers go through the same rigorous underwriting process with a lender and must submit documentation to verify income, employment, and assets.

But in the end, a prime borrower is offered the best rates, while a subprime borrower with so-called bad credit has to put more money down, pay more in fees, and pay a much higher interest rate over the life of the loan. Subprime mortgages also are often adjustable-rate mortgages, which means the payment can go up based on market indices after a predetermined period of time.

Subprime Mortgages and the 2008 Housing Market Crash

Subprime mortgages became popular in the 2000s as more high-risk mortgages were made available to subprime borrowers. In 2005, subprime mortgages accounted for 20% of all new mortgage loans.

It became possible for a lender to originate more of these high-risk mortgages because of a new financial product called private-label mortgage-backed securities, sold to investors to fund the mortgages. The investments masked the risk of the subprime mortgages within.

Home prices soared as more borrowers sought out the various subprime mortgages being offered. Rising home prices also protected the investors of mortgage-backed securities from losses.

When the housing market had passed its peak and borrowers had no viable option for selling or refinancing their homes, properties began to fall into default. In an attempt to reduce their risk exposure, lenders originated fewer loans and increased requirements for all borrowers. This depressed the market further.

Financial institutions that had taken strong positions in mortgage-backed securities were also in trouble. Many of the largest banking institutions in the world filed for bankruptcy, and the world learned once again what stock market crashes are.

In response to the financial crisis, the Federal Reserve implemented low mortgage rates in an attempt to jumpstart the economy.

Subprime Mortgage Regulations

In the wake of the financial crisis, Congress passed the Dodd-Frank Act to reduce excessive risk-taking in the mortgage industry. It established rules for what qualified mortgages are, which gave lenders a set of rules to follow to ensure that borrowers had the ability to repay the loans they were applying for.

It also provided regulation of qualified mortgages, including:

•   Limiting mortgages to 30-year terms

•   Limiting the amount of debt a borrower can take on to 43%

•   Barring interest-only payments

•   Barring negative amortization

•   Barring balloon payments

•   Putting a cap on fees and points a borrower can be charged for a loan

Subprime mortgages are not qualified mortgages. Borrowers who seek non-qualified mortgage loans may include self-employed people who want a more flexible financial verification process, people who have high debt, and people who want an interest-only loan.

Types of Subprime Mortgages

The most common types of subprime mortgages are adjustable-rate mortgages (ARMs), extended-term mortgages, and interest-only mortgages.

•   ARMs. Adjustable-rate mortgages have an interest rate that will change over the life of the loan. They often come with a low introductory rate, which after a predetermined time period changes to a rate tied to market indices.

•   Extended-term mortgages. A subprime mortgage may have a term of 40 years instead of the typical 30-year term. Add to this the higher interest rate, and borrowers pay much more for the mortgage over the life of the loan.

•   Interest-only mortgages. Interest-only loans offer borrowers the ability to only repay the interest part of the loan for the first part of the repayment period. Borrowers have the option of not repaying any principal for five to 10 years. The annual percentage rate is typically higher than for conventional loans. Origination fees may be higher as well.

The “dignity mortgage,” a new kind of subprime loan, could help borrowers who expect to redeem their creditworthiness. The borrower makes a down payment of about 10% and agrees to pay a higher rate of interest for a number of years, typically five. After that period of on-time payments, the amount paid toward interest goes toward reducing the mortgage balance, and the rate is lowered to the prime rate.

Subprime vs Prime Mortgages

Subprime mortgages have many of the same features as prime mortgages, but there are some key differences.

Subprime Mortgage	Prime Mortgage
Higher interest rate	Lower interest rate
Borrowers have fair credit, with scores generally between 580 and 669	Borrowers have good credit, with scores generally from 670 to 739
Larger down payment requirements	Smaller down payment requirements
Smaller loan amounts	Larger loan amounts
Higher fees	Lower fees
Longer repayment periods	Shorter repayment periods
Often an adjustable interest rate	Fixed or adjustable rates

Applying for Subprime Mortgages

Most lenders require a minimum credit score of 620 for a conventional mortgage, but there are lenders out there that specialize in subprime mortgages.

Generally, applying for a subprime mortgage is much the same as applying for a traditional mortgage. Lenders will check your credit and analyze your finances. They will ask for proof of income, verification of employment, and documentation of assets (such as bank statements). They may also ask for documentation regarding your debts or negative items in your credit reports.

Mortgage rates for subprime loans will vary depending on the prime rate, lending institution, the home’s location, the loan amount, the down payment, credit score, the interest rate type, the loan term, and loan type. The rate is typically much higher than a prime mortgage’s.

A mortgage calculator can help you find out what your monthly payments will be with a subprime mortgage. Simply adjust your mortgage rate to the one quoted by a lender for your credit situation.

Alternatives to Subprime Mortgages

Subprime loans are not the only option for borrowers with fair credit scores. Borrowers with credit issues can also look at mortgages backed by the FHA and the Department of Veterans Affairs (VA).

FHA loans have more flexible standards for borrowers than conventional loans. Though borrowers can obtain a mortgage with a credit score as low as 500 (assuming they have a 10% down payment), FHA loans are not considered subprime mortgages. Instead, FHA loans are government-backed loans that provide mortgage insurance to FHA-approved lenders to use if the borrower defaults on the loan.

For many borrowers with good credit and a moderate down payment, FHA loans are more expensive and don’t make sense. However, for borrowers with lower credit scores and smaller down payments, an FHA loan could be the best option.

VA loans have no minimum credit requirement, but instead, lenders review the entire loan profile. The VA advises lenders to consider credit satisfactory if 12 months of payments have been made after the last derogatory credit item (in cases not involving bankruptcy).


💡 Quick Tip: Keep in mind that FHA loans are available for your primary residence only. Investment properties and vacation homes are not eligible.1

The Takeaway

Subprime mortgages allow borrowers with impaired credit to unlock the door to a home, but to mitigate risk, the lender may charge more for the loan. Borrowers considering this type of mortgage would be smart to look closely at terms and costs, and to also consider other options such as FHA loans.

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

SoFi Mortgages: simple, smart, and so affordable.

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Photo credit: iStock/shapecharge

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

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

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

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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

SOHL0124027

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Can a person on disability buy a house? Yes, if that aspiring homeowner’s income, debt, and credit qualify them for the house they want to buy. Lenders look at those factors for all applicants.

Income can come from Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), long-term disability from an employer or insurer, or veterans disability compensation.

Let’s take a look at housing rights, how to qualify to buy a house on disability, and home loans that make sense.

Legal Protections for People With Disabilities

The Fair Housing Act prohibits housing discrimination when people are buying or renting a home, applying for a home mortgage loan, or finding housing assistance. That shields people with disabilities, among many others.

Mortgage lenders are not to:

•   Approve or deny loans based on an applicant’s disability

•   Refuse to provide a mortgage or information about a mortgage to a person with a disability

•   Create different terms, rates, or fees for a disabled person

•   Appraise a property differently for a disabled person

•   Modify homeowners insurance for a person with a disability

•   Discriminate in a home loan modification

Section 504 of the Rehabilitation Act of 1973 and the Americans with Disabilities Act (ADA) also stipulate that people with disabilities should not be excluded from federal housing programs offering financial assistance and require accommodation in the construction and modification of public and commercial spaces.

How to Buy a Home on Disability

If you receive disability pay and want to buy a house, you might start by seeking prequalification and preapproval for a mortgage. Prequalifying is quick and provides a ballpark figure of how much of a mortgage you can afford. Using an online mortgage calculator can also give you an idea.

Preapproval begins with a mortgage loan application, which can be made for many different types of mortgage loans. A lender will look at your credit scores, income, debt, and assets.

If you’re preapproved for a mortgage, the lender will issue a letter with a maximum amount you can likely borrow. Buying a home under this amount gives your loan a good chance of closing because it’s based on hard credit inquiries and documentation you provided.

You may have a chance to buy a house from a family member. If so, a gift of equity is a wonderful one: The relative sells the home to you for less than full market value. There are potential gift tax implications; consult a tax advisor for help navigating the process.

Credit Scores

Your credit scores and history are a big part of qualifying for a mortgage. Your median credit score of three represents your risk to the lender. A higher credit score means you pay your bills on time and are less likely to default.

Lenders often offer the most favorable interest rates to borrowers with credit scores above 740, but a government home loan like an FHA loan is available to people with credit scores as low as 500.

If you have an imperfect credit history as a result of your disability, you can focus on factors that affect your credit score and make improvements as needed. Making on-time payments and paying down debt can go a long way toward helping your credit.

Income Requirements

Income and debts help determine home affordability.

Your disability income counts as long as there is no expiration date on your benefits in the next three years (or you have a guaranteed job waiting with the same pay once you’ve recovered, as can be the case with a maternity leave).

General guidelines suggest looking for a home with a monthly payment that is around 28% of your gross monthly income, or three to five times your yearly income.

Debt Requirements

Your debt also plays a large factor when your lender determines how much you’re able to borrow. Lenders will look at your debt-to-income ratio, which is your debt payments each month divided by your gross monthly income. Many lenders like to see a DTI ratio of 36% or less, though the exact ratio will depend on the mortgage loan you’re applying for.

Generally, the lower the number, the better your chances of being approved for the mortgage you want.

To find your DTI ratio, add up your monthly bills (not including groceries, utilities, cellphone bill, car insurance, or health insurance) and divide that sum by your monthly gross income. Then turn it into a percentage.

Sometimes qualifying for a mortgage with your own income isn’t enough. There are assistance programs worth looking into.

Financial Assistance in Your State

One of the first places you can look for homeownership assistance is your individual state. Once you click on your state, you’ll see a link for “homeownership assistance” or “homebuying programs.” From there, you’ll be directed to programs in your area that offer down payment assistance and other help.

Are you a first-time homebuyer, meaning you haven’t owned a principal residence in the past three years? If so, you may qualify for more housing perks than others.

Another reference is the National Council of State Housing Agencies, which has a state-by-state list of housing finance agencies, which cater to low- and middle-income households.

Recommended: Short-Term vs. Long-Term Disability Insurance

Home Loan Programs for People With Disabilities

There may be a specialized program to fit your needs. Take a look at some of these options.

Section 8 Housing Choice Voucher Homeownership Program

Most know the U.S. Department of Housing and Urban Development’s Section 8 housing program as providing rental assistance for the elderly, very low-income families, and people with disabilities. But did you know that low-income families may be able to use the HUD vouchers to buy a home and assist with mortgage payments?

The conditions are up to the public housing agencies in your area. Contact information for each state can be found on HUD’s website.

General qualifications may include:

•   Be eligible for the Housing Choice Voucher program

•   Be a first-time homebuyer

•   Family cannot pay more than 40% of monthly income for housing expenses and utilities

•   Must meet minimum income standard

•   Full-time employment

•   Applicant cannot have defaulted on a previous mortgage

•   Complete homeownership counseling sessions

VA Loans

Whether you receive Veterans Affairs disability compensation or not, if you’re a veteran, VA home loans make a lot of sense. There’s no down payment and the VA has no minimum credit score requirement (although many lenders require a FICO® score of at least 580 to 620). Most borrowers pay a one-time funding fee.

Disabled Veteran Housing Assistance

Veterans who have service-related or aging-related disabilities may be able to qualify for grants through the VA. Three types of grants can be used to modify a home for your needs.

•   Specially Adapted Housing or a Special Home Adaptation grant. This grant allows veterans with a service-related disability to buy, build, or modify a home to help them live independently.

•   Temporary Residence Adaptation grant. If you’re living with a family member or in another temporary living situation, you may be able to qualify for grant money to modify the home to meet your needs.

•   Home Improvements/Structural Alterations grant. This grant allows you to make structural or medically necessary improvements to your home. Veterans may not need to have a service-connected disability to qualify, although they do need a prescription written or approved by a VA physician, describing the medical need for the alterations.

FHA Loans

Credit scores of at least 500 are required for an FHA loan. If your credit score is between 500 and 579, you’ll need a 10% down payment. A score of 580 or above earns the privilege of putting as little as 3.5% down.

Conventional Loans

If you have good credit and a decent down payment, a conventional loan may be a less expensive option than an FHA loan.

A Fannie Mae “family opportunity mortgage” can also make sense for a parent who wants to buy a home for an adult disabled child and retain owner-occupant status, even if the parent won’t be living in the home.

A Fannie Mae HomeReady® Mortgage is ideal for low-income borrowers who may need down payment assistance. It allows for a down payment as low as 3% to come from various sources, such as grants, gifts, and “Community Seconds” second mortgages. Borrowers must have a FICO score of at least 620, but a credit score above 680 gets the best pricing.

USDA Loans

The U.S. Department of Agriculture (USDA) has nothing-down options to buy a home through its Rural Development office. Low- and moderate-income buyers in rural areas may apply for a USDA loan through approved lenders. Low- and very-low-income buyers may apply directly to the USDA for a subsidy to lower mortgage payments for a period of time.

Note: SoFi does not offer USDA loans at this time. However, SoFi does offer FHA, VA, and conventional loan options.

Recommended: First-Time Homebuyer Programs and Loans

The Takeaway

Receiving disability benefits shouldn’t stand in the way of owning a home, and
a person who receives disability benefits should be able to buy a house if they qualify based on income, debts, and credit score. There are also programs to help buyers who receive disability benefits or who have a family member with a disability qualify for a mortgage.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can you get preapproved for a mortgage while on disability?

Yes, it is possible to get preapproved for a mortgage while on disability. You’ll submit an application to one or more lenders, which will look at your income, debt, assets, and credit history.

Is it possible to buy a house on disability?

Yes. You will need to show that your disability income will continue for at least three years or that you have a job providing comparable income waiting once you’ve recovered.

Can I buy a house on SSI?

Yes, you can use Supplemental Security Income to qualify for a home as long as there’s no documented expiration date in the next three years. SSI payments alone usually aren’t enough to pay mortgage payments, but it might be possible to buy a house with help from family members.

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Photo credit: iStock/baona

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

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

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

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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

SOHL-Q125-019

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In housing markets teeming with buyer demand, it’s not uncommon to put an offer on a home only to be outdone by a competing offer. If two or more potential buyers want a property badly enough, they may find themselves locked in a bidding war.

Some market watchers think that pent-up demand from homebuyers and increasing seller activity will make for a busy homebuying market in 2025. And let’s face it: Some markets are always competitive, and new “hot” markets are born regularly.

Here’s how to increase your chances of winning a bidding war so you don’t have to bid adieu to a home you really want.

1. Know How a Bidding War Works

Bidding wars usually take place in a seller’s market, when demand outpaces housing inventory. They also typically occur when there are multiple interested parties and when there is some sort of constraint, like timing.

When a seller’s agent receives offers for a property that has attracted a lot of buzz, the agent may set a date by which would-be buyers should make their “highest and best” offer. Sellers can accept the best offer, counter one offer while putting the others to the side while awaiting a decision, or counter one offer and reject the others.

This brings up a salient point: It’s true that you can buy a house without a Realtor® or real estate agent, but an experienced agent can guide you through offers and counteroffers, contingency snags, and more.

2. Line Up Your Financing

One of the best things you can do to be prepared for a potential bidding war — or really any time — is to get your finances, and financing, in order.

Be sure to know how much house you can afford, including a down payment and monthly payments.

Determine if you qualify for a mortgage by going through the prequalification with several lenders. Familiarize yourself with the types of mortgage loans that are available: government-backed loan or conventional loan, fixed rate or adjustable rate.

Taking the next step beyond prequalification and go through the mortgage preapproval process. Getting preapproved for a mortgage will give you a specific amount that a lender is tentatively willing to let you borrow. A preapproval letter shows sellers that you are a serious candidate to buy a home. Many experts recommend getting at least three preapproval letters from three lenders.

And a preapproval letter shows sellers that you are a serious candidate to buy a home. Many experts recommend getting at least three preapproval letters from three lenders.

3. Lessen or Drop Contingencies

Contingencies are certain conditions that must be met before a real estate deal becomes binding. Potential buyers can back out of a deal without penalty if the contingencies aren’t met.

A clean offer, one with as few contingencies as possible, is attractive to sellers in a competitive market.

In a typical real estate market, a common contingency is the mortgage contingency, or financing contingency, which allows homebuyers to exit the deal and have their earnest money returned if they cannot secure financing by the agreed-upon deadline.

Another is the inspection contingency. Based on the findings of a professional inspection, the buyer may be able to negotiate repairs or the price, which are known as seller concessions if the sellers are agreeable, or cancel the contract.

Waiving contingencies shows your eagerness to triumph, but it comes with risk. The biggest is losing your earnest money deposit if you hit a snag.

4. Be Quick About Any Remaining Contingencies

Sellers want to avoid spending a lot of time with a potential buyer only to have the deal fall through. If you’re including appraisal and inspection contingencies, do what you can to expedite them.

The real estate purchase contract includes any contingencies, the sales price, the closing date, and the date of the title transfer and possession. The contract is considered a working document until both parties agree on the terms.

5. Use an Escalation Clause

Unsurprisingly, one of the best ways to win a bidding war is by offering more money.

You may want to include an escalation clause in the contract if you assume there will be multiple offers. The clause asserts that if another buyer makes a competing offer, your bid will automatically increase by a certain amount, up to a limit, to exceed the offer.

Say you put a $400,000 offer on a home, with an escalation amount of $10,000 and a ceiling of $430,000. If someone else bids $410,000, you will automatically bid $420,000, up to your ceiling.

6. Stay Flexible

A willingness to be flexible can give you a leg up in the eyes of a seller.

For example, a seller might be moving across the country for work and need to close by a specific date. So if you can get the appraisal and inspection done swiftly, that could be a huge plus.

Alternatively, sellers may need to stay in the house for a while. Working with them on their specific needs could give you an edge.

7. Pay With Cash

If you are able to do it, buying a house with cash can be very attractive to sellers. The process is typically much faster than going through a lender, and sellers don’t want to worry about financing issues that might hold up the deal or cause it to fall through.

It’s even possible that a seller would choose a cash offer over a slightly higher offer backed by a mortgage.

8. Increase Your Deposit

There are timeless standards for how to make an offer on a house. One is determining the size of your earnest money deposit.

The deposit, held in escrow by the title company, secures the real estate contract. It tells the seller that you are serious about buying the house.

Earnest money is typically 1% to 3% of the purchase price but can be more in a competitive market. If you close on the home, the deposit will be applied to your closing costs.

9. Write a Personal Letter

When sellers are choosing a buyer during a bidding war, they’re often just looking at numbers on a page. Consider writing a offer letter, aka a love letter, to humanize the transaction.

You might want to make a case for why you’re the ideal candidate to buy the home, and note commonalities: You’re a ceramicist and noticed an artist’s studio in the backyard. You have dogs; they have a dog. That big elm reminds you of the one at your childhood home.

Be complimentary about the things you like about the house and how it has been maintained. And be concise.

The Takeaway

Whether you’re buying in a time of burgeoning bidding wars or not, it’s good to know how they work. The tactics help homebuyers understand the lay of the real estate land — contingencies, earnest money, escalation clauses, love letters — and use them to best effect.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can a homeowner refuse to sell a house to a particular buyer?

Yes, a seller can refuse to sell a home to a buyer without penalty as long as there is no purchase agreement in place, and as long as the refusal is not a violation of the Fair Housing Act. The act prohibits housing discrimination based on sex, race, color, familial status, or national origin.

When should you walk away from a bidding war?

You’ll know you should walk away from a bidding war when you run the numbers on a home mortgage calculator and determine that the monthly payments just aren’t feasible (or are doable but will keep you awake nights). Other reasons to walk away include: The home was pricey for the market or a stretch for your budget at its initial asking price; there are multiple bidders; or the house wasn’t your dream home to begin with.

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

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

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

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

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

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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If you’re shopping for a home loan, you may be wondering if using mortgage points to “buy down” your interest rate is a good move for you.

The answer is … it’s complicated.

Whether you’re buying or refinancing your home, purchasing mortgage points from your lender can lower your monthly payment and reduce the overall amount of interest you’ll pay on your loan. And that’s certainly an appealing prospect.

But it’s important to understand how points work — how much they can cost and how much they might save you over the life of your loan — before you decide to hand over that extra cash up front at your closing.

What Are Mortgage Points?

Mortgage points, also known as discount points, may be used by a borrower to prepay some of the interest on a home loan in exchange for a lower mortgage rate. The borrower pays more up front (the points are paid as a fee at closing) but can end up saving money over time because the interest rate is then reduced for the life of the loan.


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

How Do Mortgage Points Work?

Lenders typically base their interest rate offers on several factors, including a borrower’s credit profile and current market rates. But once you receive that initial offer, your lender also may give you the opportunity to buy down your rate through the use of mortgage points. (If the lender doesn’t bring it up, you can ask.)

Every point purchased reduces the interest rate a borrower pays by a predetermined percentage, which can vary from one lender to the next. But let’s say your lender offers you an initial rate of 3.25% and provides a 0.25% rate reduction if you purchase one discount point. If you decide to buy the point, your rate would then be 3%.

Each point you buy typically costs 1% of the amount you’re borrowing, and that money is due up front. So, for example, if your loan is for $200,000, a point will cost $2,000 at closing. If that seems too steep, you may be able to purchase a fraction of a point. A half-point in this scenario would cost $1,000, or three-quarters of a point would be $1,500.

How Do Points Affect Your Mortgage?

Here’s a hypothetical example to illustrate how buying one point could reduce the cost of a 30-year, fixed-rate $200,000 mortgage. (This is a bare-bones example, so the payment amount includes principal and interest only.)

Discount points purchased	None	1 point ($2,000)
Loan principal	$200,000	$200,000
Interest rate	3.25%	3%
Monthly payment	$870	$843
Total interest paid over life of the loan	$113,348	$103,555
Total saved over life of the loan	None	$9,793

Keep in mind that the borrower in this scenario would have to stay with the loan for the entire 30-year term to get the full savings — and that can be rare these days. Homeowners only stay in a home for an average of eight years, and many refinance their home loans.

That’s why it’s important to factor in your “break-even point” — when the savings from the lower mortgage cost offset what you paid for the discount points — before you make your decision.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

What Is the Break-Even Point?

Paying points on a mortgage can lower your monthly payment and save you thousands of dollars — if you keep the same loan long enough to recover the money you paid up front. If you plan to move or refinance before you reach and pass that threshold, paying points may not make sense.

To calculate the approximate point at which you would get back what you spent on prepaid interest, you can divide the amount you paid for any points by the amount you’ll save each month on your payment. For example, as noted in the chart above, if you purchased one point for $2,000 at closing, you’ll save $27 each month. Divide $2,000 by $27 and you’ll see you can expect to break even in 74 months — or about six years. If you plan to stay in your home much longer than that, buying down your rate could be worth considering.

Can You Buy Points for an ARM?

You can buy points if you decide to go with an adjustable-rate mortgage (ARM) instead of a fixed-rate mortgage. But it may not be worth it if the points apply only to the ARM’s initial interest rate, which typically lasts for three, five, seven, or maybe ten years. If the rate goes up after that and you decide to refinance, you could lose out on the savings you hoped to get when you paid for the points.

Recommended: How an Interest-Only Mortgage Works

Are Mortgage Points Tax Deductible?

Discount points, which are considered prepaid interest, may be deducted as home mortgage interest if you itemize deductions on Schedule A of your Form 1040. But you’ll need to meet certain criteria in order to deduct mortgage points and you may not be able to deduct all of the mortgage interest and points in the year you paid them.

It’s important to note that only discount points, which represent prepaid interest, are tax deductible. “Origination points,” which also may be referred to as mortgage points, are not tax deductible. These points, which you’ll also pay at closing, refer to the various fees lenders may charge in preparing your mortgage (such as processing, underwriting, administration, or document preparation costs).

Your accountant or tax preparer should be able to answer your questions if you aren’t clear about the amount you can deduct on your annual return.

Is There a Limit on the Points You Can Buy?

The maximum number of points you can purchase to reduce your interest rate may differ based on factors like the financial institution, type of loan you choose, or how much you need to borrow. According to a survey of lenders performed weekly by Freddie Mac, the average number of points reported on 30-year, fixed-rate conventional loans in 2022 was 0.9.

Benefits and Risks of Mortgage Points

Here are some things to consider when you’re deciding if buying points makes financial sense for you.

How Long Do You Plan to Stay in the Home?

If you run the numbers and think you’ll keep your loan past your break-even point, it could be worth paying extra up front. But if it’s a starter home, or you expect to relocate for your career, buying points may not be prudent.

Do You Have Plenty of Money Saved?

Homeownership can be expensive. Are you certain you have enough saved to make a decent down payment, pay for points as well as other closing costs, and still have funds in reserve for the inevitable expenses related to homeownership? If not, you may want to reconsider the benefits of buying down your interest rate.

Did the Seller Agree to Pay Some Closing Costs?

If the seller agreed to pay some or all of your closing costs, you may be able to negotiate discount points as part of that offer.

Do You Plan to Make Extra Payments?

Paying for points could be a smart strategy if you expect to hold on to the same loan for a long time. However, if your goal is to pay off your mortgage early — perhaps by paying more toward the loan principal whenever possible — points may not offer the savings you expected.

Would the Money Be Better Spent on Your Down Payment?

If you have plenty of money saved and you’re trying to decide between increasing your down payment or buying points, you may want to run the numbers to determine which choice will give you a better return on your investment.

If your time horizon is short, you may save more by making a bigger down payment. If you plan to stick around for several years at least, you may choose to put your money toward discount points.

Remember, depending on the type of loan you have, if you make a down payment that’s less than 20%, your lender probably will require that you purchase private mortgage insurance. PMI could add about 0.3% to 1.5% to the cost of your mortgage. And you’ll likely have to pay it every year until your equity in the home reaches 20%.

Pros and Cons of Mortgage Points

Pros	Cons
You can lower your monthly mortgage payment	High up-front costs can make closing even more expensive
You may be able to save on interest over the life of your loan	Could deplete cash needed for furniture, renovations, moving, etc.
Discount points may be tax deductible for those who itemize	Could lose money if you sell or refinance before breaking even

Ready to Go Rate Shopping?

Make sure when you shop rates, you’re comparing apples to apples. Some lenders may offer an interest rate that appears lower than others but has a fraction of a point or a point tied to it. If two lenders are offering a 3% interest rate on a 30-year, fixed-rate loan, but one is charging a point to get that rate and one isn’t, the one that isn’t charging the point is offering you a more affordable deal.

Be cautious when comparing mortgage rates: If it isn’t clear how much you’ll pay to borrow, you can ask a loan officer to walk you through your loan estimate and/or to calculate your costs based on different time frames. Lenders are required to disclose information about their products in a way that allows borrowers to make meaningful comparisons.

The Takeaway

What’s the point of mortgage points? They allow homebuyers to reduce their loan’s interest rate by paying some of the interest up front. Buying discount points can save you money on interest over time, but only if you keep the loan long enough to recover the upfront cost.

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

SoFi Mortgages: simple, smart, and so affordable.

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Photo credit: iStock/Prostock-Studio

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

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

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

⁺Lock and Look program: Terms and conditions apply. Applies to conforming, FHA, and VA purchase loans only. Rate will lock for 91 calendar days at the time of pre-approval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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