The Basics of a Qualified Mortgage

In the 2015 Academy Award–winning film The Big Short, there’s a scene in which actress Margot Robbie sips champagne in a bubble bath and explains the origins of the 2008 financial crisis. At the root of the crisis, she explains, was the practice of banks bundling an increasing number of subprime mortgages into bonds. “Whenever you hear subprime, think ‘shit,’” is how she puts it.

To help prevent history from repeating itself, Congress passed a rule in 2010, as part of the Dodd-Frank Act , to clamp down on the excessive risk-taking in the mortgage industry prior to 2008. The rule, which went into effect in January 2014, created something called a “qualified mortgage.”

Basically, a qualified mortgage is a type of loan that has certain, more stable features that help make it more likely that the borrower actually is able to repay their loan. This means the bank has to do some more in-depth work to make certain that a borrower can repay the loan, such as analyzing the borrower’s “ability to repay .”

It doesn’t necessarily mean more work for the borrower, but it does mean lenders will take a deeper dive into a potential borrower’s finances to better determine whether the mortgage they applied for is considered affordable for them under the guidelines. The rule is intended to protect consumers from harmful practices, but it may also make it harder to qualify under certain loan programs. Unfortunately, not everything in the financial world comes with a Margot Robbie explanation. Since the terminology around qualified and non-qualified mortgages can get confusing, here are a few basics.

What Is a Qualified Mortgage?

Qualified mortgages follow three basic tenets, as outlined by the Consumer Financial Protection Bureau (CFPB):

1. Borrowers should be able to pay back their loans.

2. A qualified mortgage will likely be easier for the borrower to understand.

3. The qualified mortgage should be a fair deal for the borrower.

Based on these simple ideas, the CFPB created stricter guidelines for loans not sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC) to ensure that borrowers could repay loans. FNMA and FHLMC are government-sponsored entities (GSEs)—this designation allows them a special pass on QM rules, commonly referred to as the “QM GSE Patch .” The conforming loans that follow GSE guidelines are normally input by lenders and approved in the automated underwriting systems set by FNMA and FHLMC.

For QM loans not approved and sold to FNMA or FHLMC, there is a limit on how much of a borrower’s eligible income used for qualifying can go toward debt. In general, total monthly debts cannot exceed 43% of gross monthly income, this is referred to as a debt-to-income ratio or DTI.

Limiting the amount of debt a borrower can take on can make them a safer bet for banks and less likely to default on their mortgage. Instead of granting a mortgage that’s possibly not affordable, keeping the loan within a reasonable DTI ensures a borrower is not borrowing more money than they can repay.

Next, the loan term must be no longer than 30 years. Once again, this is in place to protect the home buyer. A loan term beyond 30 years is considered a riskier loan because of the extended loan term with longer payback and additional interest. In addition, a qualified mortgage is barred from some other risky features, such as:

•   Interest-only payments. Interest-only payments are payments made solely on the interest of the loan, with no money going toward the paying down the principal. When a borrower is only paying interest, they don’t make a dent in paying off the loan itself.

•   Negative amortization. Amortization means “paying off a loan with regular payments, so the amount goes down with each payment.” In the case of negative amortization, the borrower’s monthly payments don’t even cover the full interest due on the mortgage. The unpaid interest then gets added to the outstanding mortgage total, so the amount owed actually increases over time. In some cases, depending upon market conditions, a borrower could end up owing more than the home is worth.

•   Balloon payments. These are large one-time payoffs due at the end of the introductory period of the loan, historically 5 or 7 years. These loans are fully amortizing during the full term and are unlikely to carry any sort of prepayment penalty.

In this example, we will refer to points as origination discount points. Origination discount points can vary based on many things such as lender, loan program, rate chosen, but a qualified mortgage will have a cap on the number of total points allowed to be charged to the consumer.

According to the Consumer Financial Protection Bureau , effective in 2017, the maximum total points and fees a borrower could be charged are limited to the following without being referred to as a high priced mortgage which carries additional guidelines:

•   For a loan of $100,000 or more: 3% of the total loan amount or less
•   For a loan of $60,000 to $100,000: $3,000 or less
•   For a loan of $20,000 to $60,000: 5% of the total loan amount or less
•   For a loan of $12,500 to $20,000: $1,000 or less
•   For a loan of $12,500 or less: 8% of the total loan amount or less

Lenders also verify a borrower’s ability to repay the loan. The ability-to-repay rule encompasses different aspects of a borrower’s financial history that a lender must review. The ability-to-pay rule means the lender is likely to review items such as:

•   Income
•   Assets
•   Employment
•   Credit history
•   Alimony or child support, or other monthly debt payments
•   Other monthly mortgages
•   Mortgage-related monthly expenses (PMI, HOA fees, taxes)

Under some circumstances, lenders might not have to follow the ability-to-repay rule but still count the loan as a qualified loan. These lenders and institutions may include:

•   Groups certified by the U.S. Treasury Department to provide mortgage services to underserved populations
•   Nonprofit service groups that receive aid from HUD to make down payments affordable in developing communities
•   Small nonprofit organizations that lend to a select number of low- to moderate-income consumers each year
•   State agencies that provide low rates and down payment assistance
•   Any loans made through the assistance of the Emergency Economic Stabilization Act

In addition to the protections provided to borrowers, the rule also grants lenders safe harbor through verification of the borrowers ability to repay by limiting the ability of borrowers who can’t pay their mortgages from suing the lender. Qualified mortgages offer safe harbor to the lender if ability to repay rules were properly adhered to when qualifying the borrower(s) for the requested loan program.

In these instances, borrowers cannot sue based on the claim that the institution had no basis for thinking they could repay their loans. They also make it harder for borrowers to buy more home than they can afford.

While qualified mortgages include a more involved process, they’re ultimately meant to protect both the lender and the borrower.

What Is a Non-Qualified Mortgage?

A non-qualified mortgage (non-QM) is a home loan that does not meet the standards required for a qualified mortgage.

But a non-QM loan is not the same as the subprime loans available before the housing market crash. Typically, with a non-QM loan, lenders confirm that borrowers can repay their loans based on reasonable evidence, which can include verifying many of the same information as QM loans such as assets, income, or credit score.

Non-QM loans allow lenders to offer loan programs that don’t necessarily meet the strict requirements of qualified mortgages. Because non-QM loans don’t have to adhere to the same standards, it means the underwriting requirements like the QM DTI limit for instance, can be more flexible and provide eligible borrowers with more loan program choices.

Non-qualified loans can also vary by lender, so borrowers who take this route should research their options carefully.

Not all lenders are built the same, similar to borrowers. In some situations a non-QM loan might be the right choice for a borrower.

When Could a Non-QM Loan Be the Right Option?

Many lenders offer non-QM loan programs because they have more flexible loan features. This type of loan may be right for borrowers who can afford to pay but don’t conform to additional qualified-mortgage requirements.

Examples of borrowers who might seek a non-qualified mortgage are:

•   The self-employed. Borrowers with streams of income that might be difficult to document, like freelance writers, contractors, and others, might consider a non-qualified mortgage.

•   Investors. People investing in real estate properties, including flips and rentals, might choose to apply for a non-qualified mortgage because they need funding faster, or have a challenging time proving income from their rental properties.

•   Non-U.S. residents. People who are not U.S. residents can be challenged by qualified mortgages, because they may have a low or nonexistent credit score in the U.S.

Qualified mortgages have safeguards in place for both the lender and the borrower, but in some circumstances, it can make sense for a borrower to choose a non-qualified mortgage. In some instances, this type of loan may be chosen because of property issues such as a condo that doesn’t meet certain criteria, property type, etc.

If you are looking for a mortgage to fit your financial needs, you could check out SoFi’s home loans. Borrowers can put as little as 10% down for loans up to $3 million, and with competitive rates and dedicated mortgage loan officers, applying for a new home might be easier than you think.

While the nitty-gritty of qualified mortgages versus non-qualified mortgages might not be as fun or thrilling as a Hollywood blockbuster, deciding the route to take as a borrower is an essential and important step of the home-buying process, so do your research and ask your chosen lender questions about the different loan programs available.

Understanding the differences between the qualified and non-qualified mortgage programs might make choosing the best loan fit for your needs easier. The process of securing a mortgage has changed considerably in the past decade, but policies have been put in place to ensure better protections and in turn, a better experience for the borrower.

If you’re considering financing a home and are ready to learn more about qualifying for a mortgage, visit SoFi Home Loans today.

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A Homeowner’s Guide to HELOC Loans

Buying a home is normally one of the largest investments most people make. It may also be the largest asset many people have. As years of mortgage payments go by, more and more of your money gets tied up in your home. You might start looking at your home and wishing you could have some of that cashflow back.

Maybe your home’s 1970s Formica kitchen desperately needs to be put out of its misery to make way for a top-of-the-line chef’s kitchen.

Maybe it’s time to finally turn that boring bookshelf into a secret door. On the other hand, you might be considering using your home equity—that’s the market value of your home minus your outstanding mortgage balance—to cover things like your existing student loan debt or to pay for your kids’ education.

Lenders have come up with a few creative ways to help you tap into your available home equity, one of which is a home equity line of credit, or HELOC (pronounced “he-lock”). A HELOC can help you finance large expenses like major renovations or higher education for you or your children.

However, like all financing options, it comes with some risks as well. To make things a little simpler, here are some basics on how the majority of home equity lines of credit work.

What Are Home Equity Lines of Credit?

A HELOC is a type of loan that uses the value of your house as collateral. However, unlike a lump-sum home equity loan, a HELOC is a revolving line of credit that works a bit like a credit card: You can borrow money as needed up to the lenders approved credit limit, pay back all or part of the balance, and then borrow up to the limit again throughout the line of credit “draw period.”

The interest rates offered for HELOCs are usually variable and are frequently tied to the prime rate which is a benchmark index that closely follows the economy, which means even if your rate starts out low, it could go up depending on the movement of the rate index the loan is tied to.

HELOCs can be used for most anything, but are most commonly used to cover the costs of big home expenses, like a major renovation or addition. If you are thinking of making home renovations and would like to get an idea on the possible rate of return for a particular project, check out our helpful ROI estimator tool.

Millennials are also more likely than older borrowers to use HELOCs to invest in a new business, make an expensive purchase, take time away from work to care for a dependent, or take a vacation.

It is important to note that utilizing home equity to invest in a new business is considered a risky proposition. If the business fails and you are unable to make the payments, you could be risking your home.

HELOCs have been declining in popularity since 2013, as interest rates for fixed rate loans have declined and combined with increased property values, a fixed rate cash out refinance has become the more popular loan choice. But HELOCs could again become an increasingly attractive option if home equity continues to increase in the U.S. to a near-record high while interest rates dip.

How Is a HELOC Calculated?

Taking out a HELOC typically allows you to access a certain percentage of the appraised market value of your home, minus the amount you still owe on your mortgage loan. The line of credit amount you are approved to access can vary from lender to lender depending upon a variety of factors, such as property value, the financial profile of the borrower, even the type of first mortgage you have on the home.

For example, if your home is appraised at $500,000 and you owe $300,000 on your mortgage, your available home equity would be $200,000. Depending on the factors noted above, a lender might allow you to take out up to 85% of that combined equity ($170,000 maximum equity line in this example). You could then draw on that amount as you need it.

You would receive the ability to access the funds in the form of a credit card or a checkbook. In this example, the liens on your home would then be a first mortgage with its own existing terms at $300,000 and a separate second mortgage (HELOC) with its own terms at $170,000, for a combined loan to value (CLTV) of 85%.

With a HELOC loan, you have a set draw period in which you can draw on the line and pay it back (like a credit card.) The “draw period” can vary but normally lasts 10 years, depending on the loan program you choose.

Many HELOCs allow you to make interest-only payments during the draw period. After the draw period ends (let’s say 10 years for this example) in which you can utilize the revolving line of credit, the line shuts down after 10 years to allow for loan payback.

Full principal and interest payments will be billed for the next 20 years so the loan can be paid off in 30 years total (10 year draw, 20 year payback). During the subsequent repayment period, you’ll generally make monthly payments until the loan is paid in full.

It is recommended that you read the initial disclosures for each HELOC program you are interested in to understand the repayment terms before applying. Choose the program that best fits your needs and one where you can best manage repayment.

What Are the Pros of Taking Out a HELOC?

Potentially Low Initial Interest Rates

Since the lender uses your home as collateral, a HELOC may cost you less in interest compared to other unsecured lines of credit. If your HELOC interest rate is variable, it may be tied to and rise and fall alongside the prime rate. Most HELOCs are tied to the prime rate as a base rate and then a lenders margin is added on top of the prime rate, which makes up the full interest rate charged.

For instance, in October 2019, the prime rate was lowered to 4.754%. As an example, using the October 2019 prime rate of 4.75% plus a lenders margin of, say, 2.25%, (normally rounded to the nearest 1/8th) equals 7.00% variable interest rate charged.

Because prime can rise with the Fed funds rate and change on a monthly basis, lenders normally place annual and lifetime caps on their HELOC loans to keep the payments in line for the borrower. These loans carry yearly and lifetime interest rate caps to help control changes due to index fluctuations.

Read the loan terms carefully and ask questions about how the rate and payments can change over time. Keep in mind that for equity loans against a primary residence, under the Truth In Lending Act, borrowers have three days after signing to change their mind if they sign the loan papers and then find when they get home that the loan terms are not the best fit for them. A borrower has until midnight of the third business day to contact the lender in writing to cancel the loan.

Take Out Money as You Need It

Instead of receiving a lump sum loan, HELOCS give you the option to draw on the money over time as needed. That way, you don’t borrow more than you actually use, and you don’t have to go back to the bank to apply for more loans if you end up requiring additional funds. Draw period may be for the first 10 years of a 30 year loan.

Only Pay Interest on the Amount You’ve Withdrawn

With a HELOC, you draw on the line of credit as needed, which also means under most terms, you only pay interest on the amount you’ve taken out during the draw period.

This is good for projects that you are not sure how much money will be needed or if you need to pay at different intervals. Also, with a line of credit, you can pay the line off and let it sit open at a zero balance during the draw period in case you need to draw on it again later for other needs.

Could Be Tax Deductible

Depending upon the borrower’s circumstances and even with the tax changes, interest could still qualify for tax deductibility . Check with your tax professional.

What Are the Cons of HELOCs?

Variable Interest Rates

Even though your initial interest rate may be low, if it is variable and tied to the prime rate, it will likely go up and down with the Fed funds rate. This means that over time, your monthly payment may fluctuate and become less (or more!) affordable.

Although these variable HELOCs come with annual and lifetime rate caps, the lifetime rate caps on some of these programs can run as high as 21% according to

Upfront Costs

Taking out a HELOC is placing a second mortgage lien on your home: There is plenty of paperwork involved, and you’ll likely have to deal with some upfront fees, such as an appraisal and other costs similar to closing on a house in the first place.

Some HELOCs offer low or zero fees. Sometimes loans with zero or low fees may have an early closure fee on the HELOC. Check your loan terms for details. Shop around and be sure to compare the fees charged along with items like any early closure fees on the line and the amount of the lenders margin that is charged.

<3>Your Home Is Used as Collateral

This means that if you aren’t able to make payments and go into loan default, your lender could foreclose on your home. And if the HELOC is in second lien position, they could work with the first lien holder on your property to recover the borrowed funds.

Adjustable mortgages such as HELOCs can be riskier than other loans because fluctuating interest rates can change your expected repayment amount. It’s generally not advisable to take out a HELOC to pay off other unsecured debts, since you risk losing your home if you can’t make payments.

You Might Not Get as Much Money as Expected

If your home loses a lot of value, your lender has the option to freeze the line of credit tied to the home’s value, even if you haven’t maxed out the original credit limit. So depending upon market conditions, there’s a chance you won’t actually be able to access as much money as you anticipated during the draw period.

It Could Affect Your Ability to Take On Other Debt

Just like other liabilities, adding on to your debt with a HELOC could affect your ability to take out other loans in the future. That’s because lenders consider your existing debt load before agreeing to offer you more.

Lenders will qualify borrowers based on the full line of credit draw even if the line is at a zero balance. This may be something to consider if you expect to take on another mortgage, a car loan, or other debts in the near future.

What Are Some Alternatives to HELOCs?

If you’re looking to finance a big-but-not-that-big project for personal reasons and you have a good estimate as to how much money you may need, a personal installment loan that is not secured against your property might be a better fit. With possibly fewer to zero upfront costs and minimal paperwork in comparison to a mortgage loan, personal loans could be a quick way to access the funds you need.

Personal loans might also be a better alternative to a HELOC if you bought your home recently and don’t have much equity built up in it yet. Instead of attempting to tap the little equity you have built up, you could continue to let it grow and instead opt for an unsecured personal loan.

Another option to a HELOC is a cash-out refinance. With a cash out refinance, you replace your existing mortgage with a larger mortgage with new loan terms and take the difference back in cash-out.

In the current lending environment, this is generally considered a good option if you have an idea of how much money you will need and have sufficient equity in your home, because fixed rates for mortgages have been on the lower side in recent years. Generally, cash-out refinance guidelines may require more equity in the home vs. a HELOC and could have higher fees associated with it.

Another option is a home equity loan. This loan is similar to a HELOC in that it is a second lien, as your home is used as collateral. The major difference is that a home equity loan funds a lump sum loan amount rather than a line of credit to draw from as needed. Home equity loans also come with a fixed interest rate option.

Moving Forward With Care

If you’re considering taking out a HELOC or another loan that uses your home as collateral, it might be worth going the extra mile to understand all the terms and risks involved before signing the paperwork.

You may want to evaluate alternatives for accessing the money you need, including personal loans, refinancing, and delaying your goal so you can save up for it.

Ready to take the next step in securing financing? Check out SoFi’s personal loan and cash-out refinancing options and check rate options within minutes.

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.
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.
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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SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See for more information.


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Home Mortgage Loans: Is 20% Down Dated Advice?

Buying a home can be one of the biggest and most exhilarating purchases of your lifetime. Especially in a time when young people are having more difficulty locating affordable housing, finding yourself in a situation where you think you have finally saved up enough money for a down payment on your first home can be a huge milestone, but it can also bring up a lot of questions.

There can be times when simply figuring out how much money is required for a downpayment on any given loan program can put you into a tailspin. Though there are generally traditional numbers that many people stand by, there are many reasons to wonder if these guidelines still apply.

If you’re ready to buy your first home, you’ve likely heard that a 20% down payment on a mortgage has been the traditional standard. Generally speaking, putting 20% or more down on your new home can help lenders to view you as a less risky borrower, which may ultimately help you get a better deal on your loan terms.

But given that as of January 2020 the median home listing price was the U.S. is nearly $244,054, according to Zillow , 20% can be a substantial chunk of change for most people.

But is the 20% down sage advice or an opinion that’s no longer relevant? In the 2019 National Association of Realtor Profile Report , first time homebuyers financed 94% of their home and repeat buyers financed 84% of the purchase price. So, it seems that times are a changin’.

This article will review different loan programs and down payment options to hopefully provide clarity and demystify how different down payment options can impact your mortgage choices. These tips may help you better identify the loan programs that best fit your financial scenario to help put you on the road to owning your own home.

Why Does 20% Seem to be the Magic Number?

The simple answer is that there are some advantages to putting down that much. For example, it may be easier to secure a mortgage with better terms when putting down a larger amount.

A 20% down payment has traditionally been the gold standard for borrowing a mortgage. From a lender’s perspective, a borrower who can afford a 20% down payment is viewed as a less risky option from a credit perspective.

In addition, the amount of equity in the home allows for value fluctuations and the borrower is less likely to find themselves underwater or upside down on their mortgage in a declining market .

Plus, with a 20% down payment, you won’t have to buy private mortgage insurance (PMI). PMI benefits the lender in case of loan default which can cost anywhere from 0.140% to 2.33% of your total loan amount annually depending upon many factors.

Don’t confuse Private Mortgage Insurance (PMI) with FHA’s Mortgage Insurance Premium (MIP) which is government loan insurance, not private loan insurance.

And then there’s the most obvious perk: putting more money down up front means that you’ll owe less, which normally equates to lower monthly mortgage payments and less interest charges over the life of the loan.

But let’s face it: Even if you’re making a decent—heck, a pretty awesome—salary, saving up 20% of the total cost of a home can be difficult, especially if you’re paying rent, juggling student loans, and trying to reach other long-term goals, including saving up for a retirement. Today, it can seem that the goal of owning your home is close to impossible.

But think again.

There may be some very valid reasons why it might just be more beneficial for you to put down less than 20% on your dream house. Again, it will depend on your exact financial circumstances and long term goals, but it could be worth considering the following:

Preserving Your Nest Egg

Putting 20% down on a home might force you to rely heavily on funds you’ve worked hard to save, liquidating these funds, even for an investment, may not always be in your best interest.

Given the financial circumstances many people find themselves in, allocating a big chunk of change to put towards a house before you’ve covered your other important life expenses—such as an emergency fund, saving for retirement, and other important long-term financial goals— may not be the most prudent option for you in the long run.

Remember, you may be able to borrow money to pay for school, to buy a new car, and to buy a home, but you definitely can’t borrow money to pay for your retirement. So you may want to consider alternatives before you dip into your savings.

And if there aren’t any other options available, you may want to check that all of your other financial bases are covered.
While you can withdraw qualified funds up to $10,000 from a traditional or Roth IRA without penalty to buy your first home, there are still taxes to consider.

With a traditional IRA, you have to pay taxes on the amount you withdraw, but with a Roth IRA, no taxes will be due if you’ve had the account for at least five years. This strategy could help you in the long run, especially if you expect income boosts as you make strides in your career.

If you are considering putting other financial goals on hold in order to buy your home, it might make sense to take a step back and look at your overall financial profile. This could help you see what makes the most sense for your circumstances.

To be sure, there’s no hard and fast rule about how to manage your money since everyone’s situation is different. But if you’re considering buying a home and aren’t sure how to prioritize your other financial needs, taking the time to assess your unique situation could help you make the decision that satisfies your priorities now—without sacrificing the wellbeing of your future self.

Your Other Big-Ticket Goals Won’t be in Limbo

Buying a home can be tricky if you find yourself saddled with student loans or other debt. It’s important to keep in mind what is going to help you get the most stable financial footing possible, but arriving at this answer isn’t always straightforward.

By putting less money down on your home, you’ll likely be able to make more headway on other short-term financial goals, such as paying off student loans and credit cards, as well as your long-term goals, such as saving up for retirement or perhaps setting aside enough money to finally take that year-long sabbatical.

You may also be able to invest more, which could help you grow your hard-earned cash and, in turn, keep living expenses low during retirement.
If you have other important financial goals that need achieving, you may want to consider waiting until you’ve reached your other important goals before buying a home, or choosing to put less money down so that you don’t have to abandon your other important financial objectives.

Exploring All Of Your Options

The homebuying process can be tricky—especially if it’s your first time navigating the process. Buying a home can be a complex financial decision.

There are many nuances in each buyers’ financial situation, including the amount of existing debt they currently have, their income bracket, where they are at when it comes to other important financial savings goals such as retirement, and so much more.

One good place to start is to determine how much house you can afford by taking a look at your monthly income, your ongoing monthly expenses—which could include car payments, insurance premiums, credit card bills, and any other debts.

From there, you can determine what down payment amount would make the most sense for your circumstances and what loan programs you could potentially apply for using this amount.

Mortgage lenders, whether banks or mortgage brokers, are required to figure out a borrower’s ability to repay the loan before making it. Even so, lenders don’t normally take all monthly obligations into consideration when qualifying a borrower for a home loan.

You ultimately know your budget better than anyone else does, so it’s important to develop a firm understanding of where you are at financially and how much you want to—and are able to—pay every single month for a home until you own it outright.

Shopping for the loan program that’s right for you can be one of the most crucial steps in the home buying process.

Loan types determine things like—down payment amount, debt to income ratios, credit score and more. And though there are countless mortgage products out there, you’ll have to figure out what makes the most sense for your budget, lifestyle, and income.

SoFi puts its members first and, in some cases, your down payment on a mortgage up to $3 million can be as low as 10% with No PMI on Jumbo loans.

The Magic Percentage Can Be Personal

Sure, 20% down payment might be the tradition. But looking at the current down payment percentages, we can see that it’s normally not a loan requirement. Certain circumstances could call for a larger down payment requirement from a lender, such as the type of property or the size of the loan.

Everyone’s financial picture looks different, and if you find yourself in a situation where you can’t afford to put down a full 20% but still want to purchase a home, there are numerous options.

To be sure, putting less than 20% down on a home isn’t for everyone. But if you’re in a great place in your career and still moving up, and have a lot of your other financial bases covered, there’s a chance that doing so may be right for you.

Be sure to explore the different loan programs and their criteria in order to help identify which programs best fit your personal situation. For instance, are you eligible for a Veterans (VA) loan which allows for 100% financing? Or a First Time Homebuyer loan which may allow for as little as 3% down .

Putting down a smaller down payment could allow you to get in the housing market if you live in a popular city where you pay high rent or where home prices have soared in recent years.

Renting in the Bay Area? Lower down payment options on a new home could be a path to homeownership. And just like when searching for the perfect home, when it comes to landing on the right loan program and down payment percentage, you’ll likely want to shop around in order to find your best fit—there’s no one size fits all.

So, no matter where you find yourself currently in your home-buying journey, it’s recommended to do your homework and weigh all the pros and cons to choose what works best for you.

Eager to get a jump on the home-buying process? Discover your potential rate on a SoFi mortgage loan in less than two minutes.

We’re on your side to put you in your dream home with down payment options of as little as 10% on loan amounts up to $3M.

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How Much Should You Pay For a New Home?

Have you ever felt the pressure to become a homeowner? If so, you’re not alone. Even if you haven’t been encouraged into homeownership directly, you may have felt the pressure in subtle ways—from commercials, listening to friends talk about their mortgages, even from driving past those Open House signs on the weekend.

Owning a home with a white picket fence is part of the “American Dream,” after all. The idea that a home is a good financial investment is ingrained in our culture.

And hey, owning a home can be a good thing. But that isn’t always the case.

Sometimes, the pressure isn’t just to buy a home—it’s to buy a lot of home. It can be tempting to buy the most home that you can afford. But only using the maximum amount of mortgage approval offered by the bank as a barometer for knowing how much home you can afford might be more than you feel comfortable spending.

For instance, when reviewing W2 wage earners, banks use gross income. Try running your own numbers with your net take home pay to confirm the amount you are comfortable paying.

When you approach homeownership focusing on the size and amenities of the property rather than what you can realistically afford to pay each month, you may be putting yourself in a precarious financial position. A mortgage payment is one piece of your overall financial puzzle, and can be treated accordingly.

For those asking, “how much home can I afford?”, here are four tips to help determine whether your home works within your budget. This way, you can buy a house that helps you work towards your greater financial goals—and not the other way around.

2. Calculating Potential Housing Costs

A good next step is to list all potential housing costs, including your total down payment. You may want to make sure the list is exhaustive and includes property taxes, homeowner’s insurance, and any charge associated with your estimated mortgage interest rate, such as an origination fee, and other fees for taking out a loan, such as title insurance. It’s typically smart to be generous in your estimates so that you aren’t surprised by higher-than-expected costs.

Also, you may want to make a separate list of expected repairs and updates to potential properties in your budget—both upfront and ongoing. It may be tempting to leave this out of your initial budget, but it’s unlikely you’ll find a place that won’t require some changes and these estimates could play a factor in your decision.

Besides, you’ll want to make your new house a home, and there is nothing wrong with that so long as you’ve budgeted for the estimated expense. You may also want to include moving costs and the cost of furniture in your calculation.

Although these latter expenses aren’t part of your required monthly housing payments, they’re worthwhile to keep in mind.

3. Determining What Is Paid Up Front

Now that you have an all-encompassing list of what you think a potential property might cost, both for a monthly payment and possible expenses, you can divvy up those costs into two categories: Upfront costs and monthly costs.

Upfront costs include things like the down payment on the home, and other fees such as closing costs and paying for home inspections. Monthly costs are your monthly mortgage payment which includes property taxes, and insurance(s) (if you’re paying monthly), plus other possible expenses you may pay down the line for furniture, repairs, renovations, etc.

You may also find it helpful to have a cash buffer as you go into homeownership, in expectation of the unexpected.

4. Looking at Monthly Costs in Terms of Your Budget

Now that you have an idea of what your monthly housing costs could be, you can begin to fit those into your overall budget. Does it work, leaving you with some room to breathe? Are you able to save for other financial goals, such as retirement? Have you considered ongoing home maintenance? You won’t want to max out your income with your home purchase. Overextending yourself in order to purchase a home is not recommended and worrying about money after you buy could take some joy out of your new nest.

5. Considering Unexpected Costs

Being a homeowner can be wonderful and rewarding, but it can also be expensive and exhausting. You may want to set proper expectations with yourself regarding not only how much homeownership will cost in terms of dollars, but also the cost in terms of dollars . Budget accordingly.

Next, you might want to consider what could happen in the event of a job layoff. Even great employees can lose their jobs, so have a plan in the event that this happens.

If you have no plan for how to make a mortgage payment in the event that you or your spouse loses work, you might not quite be ready for homeownership. You may want to build up your cash reserve before making the dive.

For instance, it’s recommended that you save three to six months’ worth of expenses in an emergency fund, in case of a job loss, health emergency, or other financially difficult events.

Choosing a Great Mortgage Fit

Once you’re equipped with an idea of what you would like to spend and how it fits into your budget, it’s time to shop for a home and apply for a mortgage that best suits your needs.

Throughout this process, you likely have done research on the typical costs involved in taking out a mortgage. You may have even received some quotes from lenders. Once you’ve run the numbers and feel confident about the result, you may be ready to do some serious shopping for mortgages.

When you are ready to choose a lender and type of loan program, you can request quotes in writing from lenders which will include the rate, term, costs and more.

The mortgage Annual Percentage Rate (APR) was established to help make comparison shopping between lenders easier for the consumer, but not all fees related to purchasing a home are included in the APR. Therefore, it’s helpful to request a loan estimate in order to review the breakdown of all the costs of taking out the loan.

You may also want to take into consideration the loan approval and closing timeline expectations in relation to your purchase contract deadlines and consider the customer service reviews of each lender.

Don’t forget to check online lenders like SoFi. SoFi provides home loan options with competitive rates, no hidden fees, and with as little as 10% down. Best of all, SoFi can help make the process easier with an online digital application and representatives available to answer questions each step of the way.

You’ve worked hard to make homeownership part of your financial plan—and SoFi wants to be there to help.

Checking your rates with SoFi takes two minutes and won’t affect your credit score. See what you qualify for today.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See for more information.


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Adjustable Rate Mortgage (ARM) vs. Fixed Rate Mortgage: Understanding Home Loan Options

When you’re buying a house, it’s highly likely that you’ll need financing and may run into questions regarding a mortgage. How much money do you need to borrow? Should you opt for a 15-, 20-, or 30-year term? Which lender will offer you the best loan options and the most competitive rates?

Did you know that there are actually different types of mortgage loans and within these loan types different down payment and other program variances? That means there will likely be some research involved to help identify which lender and program best fits your needs.

If you’re in the market for a mortgage loan this year, this may be one of the first questions you have to ask yourself before taking the plunge. The most common types of mortgages are fixed and adjustable-rate mortgage (ARM) loans. The main difference between the two lies in how borrowers are charged interest.

Each of these different loan programs may have their own advantages, so the key is to choose the best home loan option for your particular situation. Let’s review a few basic options.

Fixed-Rate Mortgage Loans

In a nutshell: long-term predictability.

As its name suggests, a fixed-rate mortgage (FRM) has an interest rate that stays the same for the entire life or “term” of the loan, even if it’s 30 years. The rate remains fixed regardless of any changes that might occur in the broader economy.

Pros of Fixed-Rate Mortgage Loans

Fixed-rate mortgage loans offer greater stability and predictability over the long term when compared to their adjustable counterparts.

By its nature, a fixed-rate loan shields you from fluctuating interest rates. Interest rates tend to rise during periods of economic growth, so the cost of borrowing can rise as well. But with an FRM, you can lock in a mortgage rate and preserve it for the life of the loan—even if lending rates rise significantly during that period.

Cons of Fixed-Rate Mortgage Loans

Generally speaking, fixed-rate home loans have higher interest rates than most introductory rates on adjustable-rate mortgages. The differential between a fixed and the initial introductory adjustable rate depends upon things like market conditions and the Treasury bond yield curve. It’s the price you pay for stability and predictability.

The difference between 4% and 4.5% on a long term fixed rate mortgage, for example, may not seem like a notable difference—but it can be. Using a mortgage calculator you can calculate this simple example.

Let’s say you buy a house, and the purchase price is $240,000. You put down 10%, or $24,000, and finance the remaining $216,000. If you chose a 30-year fixed-rate mortgage and secured a 4.5% rate, you’d pay $1,094 per month. If you chose a 7/1 30-year adjustable-rate mortgage and started at the fixed introductory rate of 4%, your monthly payments would only be $1,031 for the first seven years.

That means that choosing a fixed rate would cost you an extra $63 per month in payments and with regards to interest paid at the end of seven years between the two, interest paid at 4.0% is $56,510 vs 4.5% $63,909. After the initial 7 years, the adjustable rate can change annually.

Lifetime rate caps on these hybrid type loans are typically 5% above the introductory or start rate. It is recommended before you commit to an adjustable rate mortgage, that you calculate what your maximum rate cap/payment may be so you can view the worse case scenario before signing on the dotted line.

Interest rates can affect home loan borrowers more than they realize. Sure, your home loan rate might be lower than the rate on your credit card or student loan. But because so many home loans contain much higher balances than other types of loans, tiny differences in percentages could make a noticeable difference depending upon your loan balance and amortization period.

Of course, the rate you receive from a lender will depend on several variables, including but not limited to the loan program you choose, type of property, credit score. For some borrowers, the advantages offered by a fixed rate loan outweigh the potentially comparable initial higher interest charges.

This may be especially true for home buyers who are planning to stay in a house or at least keep the loan, for a longer period of time. For example, SoFi offers fixed-rate mortgages with 15- and 30-year loan terms. This means the fixed rate you receive up front will stay the same for 15 or 30 years, respectively.

Bottom line: If you are planning to own your home for the long-term and want to avoid the uncertainty of a variable interest rate, consider choosing a fixed-rate loan.

Adjustable-Rate Mortgage Loans

In a nutshell: initial lower rates, more risk.

An adjustable-rate mortgage (ARM) loan is so named because the interest rate can change over time. In many cases, an ARM loan’s rate will stay the same for a specified period of time, such as five or seven years.

These types of loans are sometimes referred to as “hybrid” loans; fixed for an initial period of time such as 3, 5, 7 or 10 years, then after the initial or introductory fixed period they become adjustable rate mortgages, usually with an annual adjustment period.

ARM loans are usually labeled with numbers that delineate a) the length of the introductory fixed phase, and b) the frequency of rate adjustments following the fixed phase.

For example, SoFi offers a 7/1 adjustable-rate mortgage that has a fixed interest rate for the first seven years, after which time the rate changes annually usually based on the 1-Year LIBOR index. And for many first time home buyers or others who plan to refinance or move, they still have the option to pay off the loan before the seven year fixed period ends with no prepayment penalty.

Check the loan terms and ask questions. Is the loan fully amortized with full principal and interest payments throughout or is there an interest only payment option period? What is the lenders margin which is added to the ARM index (LIBOR)? What are the annual and lifetime caps that the loan can adjust to?

Pros of Adjustable-Rate Mortgage Loans

So why would anyone want a mortgage loan with a rate that changes over time? Why choose an ARM over the stability of an FRM? The reason can be summed up in a single word—savings. Borrowers who choose adjustable mortgage loans tend to secure lower initial interest rates than those who use fixed-rate loans.

If you’re concerned about the risk of rising interest rates, many ARM loans have caps on how much the interest rate can increase or decrease. There is usually both an annual limit and a lifetime limit. For example, an ARM loan may specify that the maximum interest rate adjustment each year cannot be more than 2%, and cannot be more than 5% over the life of the loan.

Cons of Adjustable-Rate Mortgage Loans

As you may have figured out by now, ARMs provide less stability than FRMs. This can prove to be a shock to your bank account every year, especially if rates consistently increase.

Another con is that adjustable-rate mortgages can offer interest only payment options for the first 10 years or so. This means you may not be paying down principal during that time. As you can see, different types of home loans offer different pros and cons.

Once you shop around and identify the loan program that best suits your needs, such as a conventional loan or a government loan; you will then be better informed as to what type of amortization that particular loan program offers. For instance, some first time home buyer loan programs may not allow for interest only or adjustable rate payments and may only offer a fixed rate option for stability.

Tips for Choosing Between a Fixed-Rate and Adjustable-Rate Mortgage

Now that you know the differences between fixed-rate and adjustable-rate mortgages, you may have a better idea of which one suits your needs. But in case you’re still on the fence, there are a few factors you may want to take into consideration before taking out a home loan.

Think about How Much You Have to Put Down

The amount of money you have for a down payment and other qualifying criteria may dictate the home loan programs you will likely choose or be eligible for, this in turn may dictate what loan program type (fixed/arm) the lender(s) offer.

Think About How Long You May Keep the House

For whatever reason, you might have no intention of completely paying off your mortgage and living in this house for the rest of your life. Numerous circumstances can make us decide to move, be it a new job, a growing family, or moving to take care of a loved one. If you have choices on the types of loan programs you can choose from,

Take time to think about how long you are likely to live in this home or keep the loan if you move and retain the property as a rental in the years that follow. If you only plan to retain the property for five years, you may be tempted to consider an adjustable-rate mortgage with a fixed introductory period because in most cases, ARM start rates are typically lower than fixed-rate mortgages, and you might sell the house or refinance before that low introductory period ends.

If you look back at our example of a fixed rate payment and interest vs an ARM, you can see that someone planning to sell or refinance during the initial ARM fixed rate period, could save thousands of dollars by choosing an adjustable rate option. However, if they retain the house and loan after the initial fixed rate period, there’s potential for that adjustable rate to increase.

Consider How Quickly You May Want to Pay off Your Mortgage

Maybe you do think you’ve found your forever home, or at least a home you’ll live in long enough to pay off the mortgage. Ask yourself how long you may want the term of your home loan to be.

You’ll frequently hear about 30-year or 15-year mortgages, but some people who can afford to make a higher monthly payment, take out 10-year loans. Even if you initially take out a mortgage for a certain number of years, you have the option to pay it off early or to refinance into a different loan.

If you take out a 30-year mortgage, home loan rates have the potential to fluctuate a lot during that time. In this case, choosing a fixed-rate mortgage could help you secure a low rate and feel peace of mind. You won’t have to worry about monthly payment amounts potentially increasing.

Understanding How Your Adjustable Rate Would Work

If you’re seriously considering an adjustable-rate mortgage, it is highly recommended that you know all the facts before making a commitment. What’s the limit on how high/low the rate can go, and how often will the rate change?

If your rate reaches the maximum, would you still be able to afford to make payments? When rates change, how quickly will that affect your monthly payment? Calculate all these contingencies with your potential lender.

Each lender is different, so don’t make any assumptions about how your adjustable-rate mortgage will play out. After learning the loan details, you may decide that an ARM is right for you. If you aren’t comfortable with the terms, you might opt for a fixed rate.

Buying a home is a huge financial step, and all the loan option decisions can feel overwhelming. A dedicated SoFi mortgage loan officer (MLO) will be happy to talk with you about any questions you have regarding your home loan options. Hopefully, they can help make the process less stressful and more exciting.

Do you have questions about home loans, interest rates, or down payments? You can talk to a SoFi mortgage loan officer to figure out how to meet your goals.

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.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See for more information.


Read more
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