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Getting mortgage preapproval can give you an edge in the home-buying process, especially when the housing market is tight. A mortgage preapproval from a lender lets sellers know that you have tentatively been approved for a specific loan type and amount. Not only does this show them that you’re a serious home shopper, it also helps give you a good sense of your budget as you go house-hunting.

Here, you’ll learn the ins and outs of how to get preapproved for a home loan.

What Is Mortgage Preapproval?

Mortgage preapproval involves a thorough review of your credit and financial history. If you look like a good candidate for a mortgage, a lender will issue a letter stating that you qualify for a loan of a certain amount at a certain interest rate. The letter is an offer — but not a commitment — to lend you a specific amount. It’s good for up to 90 days, depending on the lender.

You’ll want to shop for homes within the price range of your preapproved mortgage. Armed with your preapproval for a home loan, you can show sellers that you are a serious buyer with the means to purchase a property. In the eyes of the seller, preapproval can often push you ahead of other potential buyers who have not yet been approved for a mortgage and make it easier to compete when there are multiple offers on a house.

Once you find a house that you want to buy, you can make an offer immediately based on the loan amount for which you are preapproved. And if the seller accepts, it will be time to finalize your mortgage application. At this point, a loan underwriter will review your application and conduct other due diligence measures, such as having the house appraised to make sure it is valued at the price it’s selling for. If all goes well, the lender will issue another letter called a commitment letter, which officially seals the deal on your loan, and you can schedule a closing date.

When Should I Get Preapproved for a Home Loan?

Preapproval typically lasts for 90 days, at most, so you want to seek it when you are actively in the market for a new home. Maybe you’ve done some initial online research into available properties. Ideally, you’ve also had a good look at your finances and thought about how much you have available to spend on a down payment as well as what monthly mortgage payments you can afford long-term. It takes around 10 days after you submit a request to be preapproved, so factor that timing into your house search as well.

Mortgage Preapproval vs. Prequalification

If you are house hunting, you will likely hear two different terms regarding early mortgage moves: prequalification vs. preapproval. Prequalification is a simple, less involved look at your financial qualifications for a mortgage. Preapproval for a home loan is a more in-depth review of your finances and an indicator that your loan application will likely move forward smoothly. Each has its advantages — and its moment.

Mortgage Prequalification

Getting prequalified for a home loan involves a review of a few financial details — usually self-reported — such as income, assets, and debt. The lender will then estimate what size mortgage you can afford.

Pros of Mortgage Prequalification

•   It’s fast. The process can often be done in minutes, by phone or online.

•   You’ll zero in on house prices. Prequalifying for a home loan quickly gives you an idea of what your monthly payment might be and how much house you can afford.

•   You can shop around. You can prequalify with multiple lenders to see what types of terms and interest rates they offer.

•   It’s easy on your credit score. Prequalification will not affect your credit score because it only requires a “soft inquiry” into your credit record.

Cons of Mortgage Prequalification

•   It’s no guarantee. Because it is an unverified, high-level look at your finances, prequalification doesn’t ensure that you will actually qualify for a mortgage.

•   It won’t help you bargain. Being prequalified won’t help you negotiate a lower price with a seller or compete against other bidders in a competitive market.

Mortgage Preapproval

Requesting a mortgage preapproval is a more complicated process than getting prequalified. You’ll have to fill out an application with your chosen lender and agree to a credit check. The credit check will be a “hard pull” which will ding your credit score by a few points. You’ll also provide information about your income and assets. The evaluation process can take 10 days or more. Again, preapproval doesn’t mean it’s a done deal that you’ll get the loan, but it is a solid indication of your financial situation and ability to purchase a home.

There are a number of advantages to getting preapproval for a home loan, especially if you’re shopping in a fast-moving market.

Pros of Mortgage Preapproval:

•   It gives you an edge. Sellers will see that you are a serious buyer and have assurance that your financing won’t fall through and sink the deal.

•   It helps you get loan shopping done. When you’ve found your dream house, you don’t want to delay putting in an offer because you have to spend time getting your documents together and pursuing a loan. Going through the preapproval process helps you take care of these details before you’re in a fast-moving situation.

Cons of Mortgage Preapproval:

•   A mortgage preapproval expires. How long does a mortgage preapproval last? As noted above, the letter is only good for a certain period of time, usually 90 days, so you’ll want to make sure you’re seriously ready to start shopping once you have your mortgage preapproval in hand.

•   The application is time-consuming. You’ll need to provide a lot of documentation to get a mortgage preapproval and agree to a hard credit inquiry, which can drag down your credit score, though usually only by a bit.

•   Nothing is guaranteed. Even though your home loan preapproval letter likely has details on your loan amount and type, it is only a tentative approval — you still can’t be 100% sure that you will get the loan.

Here are the basic comparison points of prequalification vs. preapproval:

Steps to Get Preapproved for a Home Loan Process

Getting preapproved for a home loan will take some time, so it’s good to get the process started before you are ready to make an offer on a home. Here are some important steps along the way.

Check Your Credit Score

If you’ve established a credit history, a first step before applying for a mortgage is to check your credit reports, which are a history of your credit compiled from sources like banks, credit card companies, collection agencies, and the government.

The information is collected by the three main credit reporting bureaus: TransUnion®, Equifax®, and Experian®. You’ll want to make sure that the information on your credit reports is correct. Ordering the reports is free once a week through AnnualCreditReport.com.

If you find any mistakes in your credit reports, contact the credit reporting agencies immediately to let them know. You don’t want any incorrect information weighing down your credit score, putting your chances for preapproval at risk.

The free credit reports provided by the nationwide credit reporting agencies do not include your credit score, a number typically between 300 and 850. You can purchase your score directly from the credit reporting agencies, or from FICO®. Your credit card company also may provide your credit score for free, or you could try a money tracker app that updates your credit score weekly and tracks your spending at no cost.

Calculate Your Potential Mortgage

To help with the prequalification and preapproval process, use the mortgage calculator below to see what your estimated monthly mortgage would be based on down payment, interest rate, and loan terms.

Gather Documentation

Your credit score is only one of many factors a potential lender will consider when deciding on your mortgage qualification. So collect the many other documents you will need to paint a full picture of your financial life. Ask the lender what is needed, specifically. The list will likely include:

•   Recent pay stubs

•   Recent bank and investment account statements

•   Two years of tax returns and/or W2s, possibly more if you are self-employed

•   Verification of alimony or child support payments received and the court documents spelling out the terms of the payments

•   Social Security award letter, if you derive income from Social Security

•   Certificate of Eligibility from the VA, if you are applying for a VA loan

•   Gift letter documenting any money you are receiving from family or other sources toward a down payment

Receive Your Mortgage Preapproval Letter

Your first instinct when you receive preapproval will likely be to jump for joy. But next, take a moment to ask the lender if they made any assumptions about your finances in order to issue the letter, or if they flagged anything that could lead to you being denied a mortgage later on or that could increase your costs. Doing this could help you head off future problems that might scuttle a deal.

💡 Recommended: Getting Preapproved for a VA Home Loan

Upping Your Odds of Mortgage Preapproval

There are a number of steps you can take to improve your chances of preapproval or to increase the amount your lender may approve you for.

Build Your Credit

When you apply for any type of loan, lenders want to see that you have a history of properly managing your debt before they offer you credit themselves.

You can build your credit history by opening and using a credit card and paying your bills on time. Or you could consider having regular payments, such as your rent, tracked and added to your credit score.

Recommended: What Credit Score Is Needed to Buy a House?

Stay on Top of Debt

Your ability to pay your bills on time has a big impact on your credit score. If your budget allows, you should aim to make payments in full.

If you have any debts that are dragging down your credit score — for example, debts that are in collection — it’s smart to work on paying them off first, as this could help build your score.

“Really look at your budget and work your way backwards,” explains Brian Walsh, CFP® at SoFi, on planning for a home mortgage.

Recommended: Fixed-Rate vs. Adjustable-Rate Mortgages

Watch Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is your monthly debt payments divided by your monthly gross income. If you have $1,000 a month in debt payments and make $5,000 a month, your DTI ratio is $1,000 divided by $5,000, or 20%.

Mortgage lenders typically like to see a DTI ratio of 36% or less. Some may qualify borrowers with a higher DTI, up to 43%. Lenders may assume that borrowers with a high DTI ratio will have a harder time making their mortgage payments.

If you’re seeking preapproval for a mortgage, it may be beneficial to keep the ratio in check by avoiding large purchases. For example, you may want to hold off on buying a new car until you’ve been preapproved.

Prove Consistent Income

Your lender will want to know that you have enough money coming in each month to cover a potential mortgage payment, so the lender will likely want proof of consistent income for at least two years (that means pay stubs, W-2s, etc.).

For some potential borrowers, such as freelancers, this may be a tricky process since they may have income from various sources. Keep all pay stubs, tax returns, and other proof of income, and be prepared to show those to your lender.

What Happens If Your Mortgage Preapproval is Rejected?

Rejection hurts. But if you aren’t preapproved or you aren’t approved for a large enough mortgage to buy the house you want, you also aren’t powerless. You can ask the lender why it said “no.” This will give you an idea about what you might need to work on in order to secure the mortgage you want.

Then you may want to work on the factors that your lender saw as a sticking point to preapproval. You can continue to work to build your credit score, lower your DTI ratio, or save for a higher down payment.

If you’re able to pay more upfront, you will typically lower your monthly mortgage payments. Once you’ve worked to make yourself a better candidate for a mortgage, you can apply for preapproval again.

Dream Home Quiz

The Takeaway

In a competitive market, having a mortgage preapproval letter in hand may give a house hunter an edge. After all, the letter states that the would-be buyer tentatively qualifies for a home loan of a certain amount.

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

FAQ

What happens during the preapproval process?

During the mortgage preapproval process, you’ll provide lots of background information on your finances. A potential lender will also check your credit score. If the lender feels you’re a suitable candidate for a loan, you’ll receive a letter that you can show a seller to potentially better your chances when making an offer on a home.

Do preapprovals hurt your credit score?

The lender will do a “hard pull” to obtain your credit score prior to a preapproval. This may cause your rating to drop by a few points, but it should rebound quickly if you pay your bills on time.

How far in advance should I get preapproved for a mortgage?

Get preapproved for a mortgage when you have a sense of the housing costs where you are shopping for a home, and you are ready to start looking in earnest.

Which is better: preapproval or prequalification?

Prequalification and preapproval each have a place in the homebuying process. Prequalification is helpful when you are trying to get a sense of what you can afford and which lender might offer the best terms. It’s time for preapproval when you are serious about searching for a home and have researched possible lenders.

Is it OK to get multiple preapprovals?

You only need one preapproval, but it is fine to get a few if you want to see what loan amounts and rates you might qualify for. Make all applications within a 45-day window — the time frame during which multiple lenders can check your credit without each check having an additional impact on your score.

*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.

^†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.

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

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

SOHL-Q225-048

A home equity line of credit (HELOC) and a credit card can both come in handy if you need to pay for home renovations, consolidate debt, or make another big purchase. Each offers a revolving line of credit that you can draw on as needed and pay off over time. But they also have major differences, especially when it comes to interest rates, repayment terms, credit limits, and collateral requirements. Understanding what a HELOC is and how it differs from a credit card can help you determine whether a HELOC or credit card would better fit your needs in a certain situation.

What Is a HELOC?

A HELOC is a revolving line of credit that’s secured by your home. It’s not the same thing as a home equity loan, which provides a lump sum upfront.

Because you’re tapping into your equity, your home acts as collateral for the HELOC. If you can’t pay back what you borrowed, your home could go into foreclosure.

How a HELOC Works

As a revolving line of credit, a HELOC lets you borrow funds on an as-needed basis up to a maximum approved amount for a “draw” period of up to a decade. If you repay the funds during your draw period, they’ll become available again to borrow.

Depending on the lender, your maximum may be 80% to 90% of your available equity. To calculate home equity, subtract your home loan balance from your house’s appraised value.

As for how HELOC interest is calculated, rates are often variable, which can make your monthly payment amount somewhat unpredictable. There are some HELOCs that let you lock in a fixed rate for a period of time.

It can be easy to confuse a HELOC with a home equity loan. Make sure you understand a home equity loan vs. HELOC. Both of these borrowing methods, along with a cash-out refinance, are ways you can borrow money based on your home equity. But a home equity loan is a lump-sum loan and repayment begins immediately; with a HELOC, you can borrow in increments.

HELOC Draw Period vs. Repayment Period

As we’ve seen, HELOCs are divided into two phases: a draw period followed by a repayment period. During the draw period, you can withdraw money to pay for expenses, such as home renovations or debt consolidation. You’re generally only required to pay interest charges during the draw period, though you can choose to pay more. There isn’t a HELOC credit card, per se, but some HELOC lenders provide borrowers with a card that is similar to a credit card that they can use to access their credit line.

Once the draw phase ends, you can no longer withdraw from your HELOC and enter full repayment. During this repayment period, you’ll make both principal and interest payments. The repayment phase may span up to 20 years.

What Is a Credit Card?

Similar to a HELOC, a credit card offers a revolving line of credit that you can draw from to make purchases or withdraw money as a cash advance. Credit cards are typically unsecured, meaning they don’t use your home or any other asset as collateral.

Instead, your approval for a credit card is based on your creditworthiness. There are some secured credit cards, which are designed for people who have thin or damaged credit. These cards require a deposit upfront, which acts as your credit limit.

If you can qualify for an unsecured card, though, you’ll generally get a higher credit limit and may qualify for perks like cash back or travel rewards.

How Credit Cards Work

When you swipe your credit card at checkout or use it to make a purchase online, you’re borrowing money from your credit card issuer. If you pay off your balance in full each month, you can avoid interest charges.

If not, you’ll be charged interest, which often accrues at a high variable rate. You’re required to make minimum payments on your balance each month by a certain due date. Missing these minimum payments can lead to late fees and damage your credit.

With unsecured credit cards, your credit limit depends on your financial profile, including your credit score and debt-to-income ratio. You can access your credit line as long as the card is open.

Types of Credit Cards to Consider

There are various types of credit cards you can consider, including:

•  Rewards credit cards: These cards offer rewards back on your spending, such as cash back or travel miles.

•  Balance transfer cards: If you’re looking to consolidate debt, these cards usually offer 0% APR (annual percentage rate) on balance transfers for a period of time. You’ll still have to pay balance transfer fees.

•  0% APR cards: Some cards offer a promotional period of 0% APR on purchases that may span a year or longer. Interest will accrue when that period comes to an end.

•  Secured credit cards: Designed for borrowers with weak credit, secured cards require an upfront deposit, which acts as your credit limit. They can help you improve your credit score so you can eventually graduate to an unsecured credit card.

HELOC vs. Credit Card: Key Differences

While both HELOCs and credit cards offer revolving credit, they have major differences in how they work.

Interest Rates

Since HELOCs are secured by your home, they tend to offer lower interest rates than credit cards. Average HELOC rates currently fall around 7% to 8%, while the average rate on a credit card is 21%.

Some credit cards offer 0% APR for a limited time to new cardholders, but your rate will shoot up when the promotional period ends. You can avoid interest charges if you pay your balance in full each month.

Credit Limits and Borrowing Power

HELOC credit limits are often much higher than credit card limits. Depending on the lender and how much equity you hold, you might be able to borrow hundreds of thousands of dollars.

Credit cards limits tend to be lower. The average total limit across all cards is $33,980, according to Experian data.

Repayment Terms

Many HELOCs span up to 30 years, with a 10-year draw period and a 20-year repayment period. This long repayment term can make monthly payments more affordable, but stretching out repayment can also rack up interest charges.

This is another credit card vs. HELOC difference. Credit cards have no set term. Instead, you’re required to make minimum payments on your balance each month. You can avoid interest charges altogether if you pay off your balance in full each month. Unlike a HELOC, a credit card typically renews automatically as long as you don’t cancel the account or fail to make payments, and you continue paying any associated fees.

Risk and Collateral

HELOCs carry greater risk than credit cards, since they use your home as collateral. If you can’t afford repayment, you could lose your home to foreclosure.

Most credit cards are unsecured, so you don’t have to back them with collateral. Missing payments could still cause damage to your credit, but you won’t lose your house.

Impact on Credit Score

Whether you have a HELOC or credit card, missing payments will negatively impact your credit score. Making on-time payments, however, can improve it.

Your credit card use more directly impacts your credit utilization, which affects 30% of your score. It’s generally wise to keep your credit utilization below 30%.

Recommended: HELOC vs. Cash-Out Refinance

When a HELOC Makes More Sense

A HELOC may be a better choice than a credit card if you:

•  Need to pay for large expenses, like home renovations or major repairs

•  Can qualify for lower interest rates compared to a credit card

•  Hold sufficient equity in your home to qualify for a HELOC

•  Have a stable income source and are confident you can repay the HELOC

•  Are looking for lengthy repayment terms that may span up to 20 years

HELOCs are especially popular for home improvement projects with ongoing costs, since you can borrow funds as needed. Plus, they may come with a tax advantage — you can deduct the interest you pay on a HELOC if you use it to “build, build, or substantially improve” your residence. You’ll need to itemize on your federal tax return in order to claim this deduction, so talking to a tax advisor can be helpful. It can take a little more time to qualify for a HELOC than it does for a credit card because lenders typically require an appraisal of your home’s value as part of the qualification process.

When a Credit Card Makes More Sense

In the credit card vs. HELOC equation, a credit card may make more sense if you:

•  Need to cover small, short-term expenses

•  Can take advantage of a 0% introductory APR or balance transfer APR

•  Want to earn rewards on your spending, such as cash back or airline miles

•  Prefer not to use your home as collateral

•  Are looking for fast and easy access to funds

Credit cards are a better fit for everyday spending or short-term financing, especially if you can take advantage of a 0% APR offer or pay off your balance in full each month.

Can You Use Both Together?

You don’t necessarily have to choose between a HELOC and a credit card — you can use both as meets your needs. For example, you might use a HELOC to cover a major home renovation, but you could charge your credit card for smaller purchases related to the project or everyday spending.

Just be aware of interest charges and fees, and make sure not to over-extend yourself across multiple lines of credit.

Pros and Cons of a HELOC

Pros and Cons of a Credit Card

How to Choose Between a HELOC and a Credit Card

When choosing between a HELOC and a credit card, asking yourself these questions can help:

•  How much do you need to borrow? If you’re covering a large project, a HELOC may be the better fit. If you need a smaller amount, a credit card may be preferable.

•  How quickly can you pay back the debt? A credit card may be better for short-term borrowing, especially if you can qualify for a 0% APR offer. HELOCs often offer repayment terms up to 20 years.

•  Are you comfortable using your home as collateral? Consider the risk of taking out a secured HELOC vs. an unsecured credit card.

•  What are the total costs of borrowing? Compare interest rates, fees, and repayment terms to determine which financing option would cost less.

Whichever you choose, make sure you have a clear repayment strategy and understand your costs of borrowing so you don’t get into unmanageable debt.

The Takeaway

Both HELOCs and credit cards can be useful financial tools when used wisely, but they usually serve different purposes. A HELOC tends to be better suited for homeowners who need to cover large expenses and prefer a lengthy repayment term. A credit card is usually a more convenient option for everyday purchases and short-term financing. By considering your borrowing needs and repayment ability, you can determine whether a HELOC, credit card, or both would best provide the financing you seek.

SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $350,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.

FAQ

What is the difference between a HELOC and a credit card?

A HELOC is secured by your home and involves a draw period and a repayment period. It typically has lower interest rates and a longer approval process than a credit card. A credit card is often unsecured and you can get approved instantly, but it will likely come with higher interest rates. You can keep borrowing and paying off your balance for as long as your account is open. HELOC borrowers can sometimes get a card to use to pay bills from their credit line. This HELOC credit card is usually called a HELOC card or an equity card.

Is a HELOC better than a credit card for large expenses?

A HELOC may be better than a credit card for large expenses, since it could offer higher credit limits and lower interest rates. It can be riskier than a credit card, though, since your home acts as collateral.

Can I use a HELOC like a credit card?

Similar to a credit card, a HELOC is a revolving line of credit that you can draw from as needed. Some lenders even provide borrowers with a sort of HELOC credit card they can use to access their account. However, when the draw period on the HELOC ends, you can no longer take out funds. Over-using your HELOC is risky since it’s secured by your home.

What are the risks of using a HELOC instead of a credit card?

The main risk of using a HELOC instead of a credit card is losing your home to foreclosure if you can’t pay it back. You also may face rising, unpredictable costs if your HELOC has a variable interest rate.

Does a HELOC affect your credit score the same way a credit card does?

Your payments on a HELOC can affect your credit score the same way a credit card does — on-time payments can improve it, while late payments can drag it down. Unlike a credit card, however, your HELOC balance may not impact your FICO® score.

Photo credit: iStock/Photografeus

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.

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.

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.

SOHE-Q226-076

Homeowners can leverage their home equity to borrow money, whether to finance a large purchase or consolidate high-interest debt. A home equity loan (HELOAN) gives borrowers a lump sum that’s secured with their home as collateral.

Read on for an in-depth look at home equity loans, including how they work, potential risks, and how they compare to other financing options.

What Is a HELOAN?

What is a HELOAN? A home equity loan, or HELOAN, lets you borrow against the equity in your home. Put simply, home equity is the difference between the current value of your home and how much you owe on your mortgage.

More facts about what a home equity loan is: With a HELOAN, you receive funding upfront as a lump sum. The loan usually comes with a fixed interest rate and a repayment term of five to 30 years.

HELOAN Meaning and Definition

A HELOAN (home equity loan) lets you borrow a lump sum of money using your home’s equity as collateral. Technically, because you are borrowing against your home equity, a HELOAN is a second mortgage. It typically features a fixed interest rate and predictable monthly payments, making it ideal for large expenses like debt consolidation or home improvements

Recommended: Second Mortgage vs. Home Equity Loan

How a HELOAN Works

A HELOAN is a financing option that can be used for a variety of expenses. The total amount you can borrow depends on the total equity you have in your home.

Lenders typically calculate home equity as the difference between a home’s fair market value and the remaining mortgage balance. For example, if your home is worth $600,000 and you still owe $450,000 on your mortgage, you’d have $150,000 in home equity (or 25% home equity).

The amount you can borrow with a HELOAN is not equal to your total home equity. Generally, lenders let borrowers access a maximum of 80% equity, though it’s possible to get up to 90% in some circumstances.

HELOAN repayment typically begins soon after funds are disbursed with loan terms ranging from five to 30 years depending on the loan amount and borrower preferences. Fixed interest rate HELOANs are most common, so borrowers can expect predictable monthly payments. If used for home renovation costs, keep in mind that interest paid on HELOANs could qualify for a tax deduction.

As noted above, HELOANs use your property as collateral, meaning that a lender can foreclose on your home if you are unable to make payments.

Key Features of a HELOAN

A HELOAN has several key features that distinguish it from other types of home equity loans.

•  Borrow what you need: Loan amounts could be higher than other financing options and you can request only what you need.

•  Fixed interest rates: You’ll know the cost of borrowing upfront for the entire loan term.

•  Predictable monthly payments: Like a mortgage, you’ll have a set monthly payment that includes the principal and interest.

•  Potential tax benefits: HELOAN interest pays could be eligible for tax deductions if the funds are used for home renovations or improvements.

Recommended: Mortgage Interest Deduction Explained

HELOAN vs. HELOC: What’s the Difference?

A HELOAN isn’t your only option for home equity financing. You might consider a home equity line of credit (HELOC) and how a HELOC vs. home equity loan compares in meeting your financial goals.

Both HELOANs and HELOCs use your home as collateral and let you borrow around 80% to 90% of your home equity. However, they differ in how funding is allocated.

Whereas a HELOAN gives you a lump sum amount upfront, a HELOC works as a revolving line of credit that you can borrow from continuously (up to a fixed amount). With a HELOC, you typically have a draw period of five to 10 years during which funds can be taken out as needed.

Another key difference in the HELOC vs. home equity loan comparison is repayment structure. Required monthly payments on a HELOC are typically limited to interest on the amount withdrawn to date during the draw period. Afterward, the HELOC enters the repayment period and borrowers must begin repaying both the principal and interest over the loan term (often 10-20 years).

Keep in mind that HELOCs are available with both fixed and variable interest rates. Also note that there is one other equity-based borrowing option: a cash-out refinance. In this scenario, you take out a new mortgage for more than you currently owe on your home loan. You get the extra amount in cash to use as you wish. This is generally only a good idea if you can improve on your mortgage rate with a refi and lower your payments.

Common Uses for a HELOAN

A HELOAN can be used for a variety of expenses, making it a popular financing option for its flexibility. Below are some common uses for a HELOAN.

•  Debt consolidation: Paying down high-interest debt like credit cards with a HELOAN could save on interest and reduce monthly expenses.

•  Home renovations: Upgrading your home can increase your property value and interest paid on the HELOAN may be tax deductible if funds are used to improve your property.

•  Education costs: Tapping into home equity can help fund higher education expenses if interest rates are lower than student loan rates.

•  Emergency expenses: Unlocking home equity is an option to cover unforeseen expenses like medical bills or a roof repair.

Risks to Consider Before Getting a HELOAN

What’s a HELOAN without a few cautionary notes? There are some potential financial risks to consider.

While the upfront cash offered by a HELOAN could get you out of a financial jam, It’s important to assess your ability to repay a HELOAN alongside your primary mortgage. Failing to make payments on either loan could risk losing your home in foreclosure.

When budgeting for a HELOAN, it’s also a good idea to factor in closing costs, which typically range from 2% to 5% of the loan amount.

Using your home equity could also increase your vulnerability to an underwater mortgage if local real estate values decrease. Also known as an upside-down mortgage, an underwater mortgage occurs when the money you owe on your HELOAN and mortgage exceed the fair market value of the home.

How to Qualify for a HELOAN

Borrower qualifications vary by lender but your credit score, payment history, and existing home equity are key factors to determine the total amount you qualify for. Lenders may also require proof of homeowners insurance for a HELOAN.

Lenders often cap the maximum home equity you can borrow at 80%. This is calculated using your loan-to-value (LTV) ratio, which compares the combined total of the primary mortgage and HELOAN against your property value. Again, lenders often require a LTV ratio of 80% or less to qualify for a HELOAN.

Let’s use the example above of a homeowner with a $600,000 property and $450,000 mortgage balance. They’d be able to borrow up to $30,000 with a HELOAN to keep their LTV ratio at 80% or less.

The Takeaway

A HELOAN gives homeowners flexible financing to pay for a range of expenses. Generally, you’ll need to have at least 20% home equity to qualify. But using your home as collateral risks foreclosure if you fail to make payments, so it’s important to consider how much you can afford to borrow as well as other financing options.

SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $350,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.

FAQ

What is the difference between a HELOAN and a home equity loan?

A HELOAN and home equity loan (HELOAN) are two names for the same financing option. They let you turn your home equity into cash that can be used for a variety of purposes.

How much can you borrow with a HELOAN?

How much you can borrow with a HELOAN depends on your home value and existing home equity. Borrowers usually set a maximum loan-to-value ratio of 80%, meaning that what you owe on a mortgage and HELOAN combined is capped at 80% of the property value.

What credit score do you need for a HELOAN?

While it’s possible to qualify for a HELOAN with poor credit, you may need a credit score of at least 680. Lenders also consider your debt-to-income ratio, payment history, and other factors.

Can you pay off a HELOAN early?

It’s possible to pay off a HELOAN early to save on interest, but it’s important to check if you’ll have to pay early termination fees for doing so.

Is a HELOAN tax deductible?

The interest paid on a HELOAN could be tax deductible if used for certain uses. Namely, home improvements and renovations meet the tax deduction requirements. Like mortgages, there are limitations on how much interest can be deducted.

Photo credit: iStock/ArLawKa AungTun

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.

SOHE-Q226-073

Cosigning a mortgage is a tremendous thing to do for a loved one. Your income and credit history can help someone whose finances aren’t on solid footing still get the house they want (or need). But being a cosigner can also be disastrous for your finances: Any missteps by the borrower could impact your credit score and ultimately leave you on the hook for paying the mortgage.

So once the paperwork is signed and the borrower is making progress on repayment, can the cosigner be removed from the mortgage? The path isn’t easy, but there are ways of doing it. Below, you’ll walk through how to remove a cosigner from a mortgage in a few different ways.

Ways to Remove a Cosigner From a Mortgage

It’s a common scenario: At one point in time, you cosigned a mortgage but no longer wish to be on it. Maybe you helped out a loved one who was a first-time homebuyer and who needed assistance getting a loan. And now, perhaps to more easily secure a loan for yourself or maybe just for financial peace of mind, you want to be relieved of your responsibilities. Here’s how to remove yourself as a cosigner from a mortgage — but fair warning, it’s not easy. (Before following any of these steps, make sure you are in fact a cosigner vs. a guarantor — the two are somewhat different.)

1. Mortgage Refinancing

The easiest way to remove a cosigner from a mortgage is to have the primary borrower refinance it. As the cosigner, you can’t force this. The borrower is the only one who can choose to refinance, and they have to meet mortgage refinancing eligibility requirements to do so.

When can a cosigner be removed from a mortgage? The timing is right if the borrower:

•   Needs a strong enough credit score to qualify on their own

•   Needs a steady enough (and high enough) income to qualify on their own

•   Is willing to refinance — including paying mortgage refinance fees, such as closing costs (usually 2%-5%)

If the borrower is unable or unwilling to get a mortgage refinance, you won’t be able to remove yourself as cosigner using this strategy.

Recommended: Cosigner Responsibilities on a Loan

2. Mortgage Loan Assumption

How to get a cosigner off a mortgage loan without refinancing? If a mortgage is assumable, it means you can sign it over to another qualified borrower with the same terms and interest rates. This is a potential tactic when selling your home during times of high mortgage interest rates. If you have a low interest rate, you can make your home more attractive to buyers by letting them assume the loan rather than get a new loan at a higher rate. (The buyer will also likely have to take out a separate loan to pay the difference between the remaining mortgage balance and the sale price.)

But assumable mortgages can also be a handy tool for mortgages with co-borrowers and cosigners. For instance, spouses or domestic partners who plan to separate but are co-borrowers on a loan might be able to use an assumable mortgage to simply put the mortgage fully in one person’s name. If the borrower on a cosigned loan is willing, this could also be a way to get the cosigner off a mortgage.

Not all mortgages are assumable, but government-backed loans, such as FHA loans or VA loans, generally are. Even so, the lender has to approve the mortgage assumption, and the borrower for whom you cosigned has to be on board, so it’s not a done deal.

3. Requesting a Mortgage Cosigner Release

In some instances, a loan may have language in the agreement about a “cosigner release,” which simply means the cosigner can ask to be removed if certain conditions are met (though the lender can still say no). This is more common for other types of loans, such as student loans, but you can absolutely ask the mortgage lender if they’d include a cosigner release in the contract before signing on the dotted line.

Even if there’s nothing in the mortgage agreement about cosigner release, you can always reach out to the mortgage lender and ask to be removed. While it’s a long shot (there’s really no benefit to the lender), it could work if the borrower has strong credit, few debts, and a lot of income.

4. Selling the House

Finally, at any point, the borrower can sell the home. The proceeds from the sale first go toward the existing mortgage to pay it off before they can pocket any profit. And as soon as that mortgage is paid off, you’re home free (or home-loan free, rather).

How to Remove Yourself as a Cosigner on a Mortgage

No matter which tactic you take — refinancing, loan assumption, cosigner release, or selling the house — you as the cosigner have little control over the process. Instead, the borrower has to take action, and in most cases, the lender has to agree.

Here are some tips if you want to be removed from a mortgage you cosigned:

•   Help the borrower improve their credit score. You could help the borrower make a budget and set up automatic payments so they can stay on top of on-time payments for all their bills.

•   Help the borrower increase their income. Tailor your help to where the borrower is on their career journey. If the borrower is fresh out of college, help them improve their resume or make connections that could lead to a job. If the borrower is already established in a career, provide coaching for how they might negotiate a raise or help them find a side hustle or part-time job.

•   Have a frank discussion. Because the borrower essentially holds all the power, make sure they understand why you want to be removed from the loan. Help them understand the financial pressures you may be facing. If your relationship is solid, the borrower should hopefully want to do what they can to remove you from the loan.

Recommended: Does Being a Cosigner Show Up on Your Credit Report

Factors to Consider Before Removing a Cosigner From a Mortgage

Before you attempt to remove yourself as a cosigner from the mortgage, consider a few factors:

•   The borrower’s situation: As much as you may want to take your name off the mortgage, you won’t get very far if the borrower doesn’t have a good credit score and steady income. In addition, if the borrower has no interest in removing the cosigner, there’s very little you can do.

•   Lender policies: Some mortgage lenders may not allow cosigner release. While it doesn’t hurt to ask, this is not a common practice among lenders.

•   Assumable mortgages: Not all mortgages are assumable. While a government-backed loan is typically assumable, most conventional mortgages are not.

•   Costs: If the primary borrower could theoretically refinance the mortgage on their own (and is willing), keep in mind there will be closing costs. You may need to step in and help the borrower cover these costs if that’s the only thing preventing them from moving forward.

The Takeaway

Cosigning a mortgage is a generous act for a loved one, but it also puts your finances in jeopardy. Luckily, there are ways to remove yourself, as long as the borrower is willing and able. And if you’re a homeowner wondering can you remove a cosigner from a mortgage, the answer is yes. The easiest path forward is refinancing the mortgage, but you can also explore strategies such as cosigner release, mortgage assumption, and, when all else fails, sale of the house.

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

FAQ

What is a cosigner release on a mortgage?

A cosigner release is an option in the mortgage agreement that allows a cosigner to request to be removed from the mortgage, usually once the borrower has improved their credit score, increased their income, and made a series of on-time payments. Cosigner releases are uncommon for mortgages. It’s more likely to find a cosigner release on a student loan.

Is it easy to remove a cosigner from a mortgage?

Releasing a cosigner from a mortgage is not easy, as the borrower must be willing to take action, and they’ll need to have strong credit and steady income. Even then, not all lenders will allow for the cosigner to be released or the mortgage to be assumed by the primary borrower. The easiest path forward is for the primary borrower to refinance the mortgage if they can qualify on their own.

Can a cosigner be removed from a mortgage without refinancing?

Yes, a cosigner can be removed from a mortgage without refinancing, though refinancing is the easiest path forward. Alternate options include asking for a cosigner release, having the primary borrower assume the mortgage, and selling the house to pay off the mortgage.

When can a cosigner be removed from a mortgage loan?

A cosigner can be removed from a mortgage loan when the borrower meets all the requirements to qualify on their own. Even if a borrower can qualify, however, lenders can reject requests for cosigner release and mortgage assumption. Borrowers and cosigners may have more luck by having the borrower refinance on their own.

Are there any fees associated with removing a cosigner from a mortgage?

There may be fees associated with removing a cosigner from a mortgage, depending on the route you take. The easiest way to remove a cosigner is to refinance the mortgage without them, but there are mortgage refinance costs to consider. These may include closing costs, which are usually 2%-5% of the new mortgage amount, loan application fees, a title search, a home appraisal, or a one-time funding fee if you assume the mortgage.

Photo credit: iStock/RealPeopleGroup

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

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

SOHL-Q326-074

A jumbo loan is a mortgage that is larger than the loan-servicing limits set by the Federal Housing Finance Agency (FHFA). If you know you need a large loan to cover a higher home mortgage loan, you might be wondering how to qualify for a jumbo loan.

Jumbo loan qualifications are more stringent than conforming conventional loans. Because a jumbo loan is a nonconforming loan, banks take on more risk, as they are not able to sell the loan to government-sponsored enterprises Fannie Mae and Freddie Mac. Since the loans are not guaranteed by the government, lenders are more cautious about the type of borrowers they do business with.

What this means for your money: You need conditions to be pretty optimal to qualify for a jumbo loan. But it can be done. Learn more here, including:

•   How to qualify for a jumbo loan

•   What factors lenders consider when authorizing jumbo loans

•   The jumbo loan qualification process

•   How to decide if a jumbo loan is right for you

Jumbo Mortgage Requirements

The current limits for jumbo loans are defined as exceeding $832,750 for single-family homes, except in Alaska, Hawaii, and some federally designated markets that are considered high cost. In those areas, the limit that’s exceeded is $1,249,125, since these locations tend to have pricier housing markets.

Jumbo mortgage requirements are similar to conventional conforming loan requirements, but there are some key differences that make them harder to qualify for.

A High Credit Score

Lenders generally prefer a credit score of 700 or above for jumbo loan borrowers. A higher credit score when buying a house is indicative of a borrower’s behavior with credit and how likely they are to repay the loan. A higher credit score is needed for the higher loan amounts of a jumbo loan. That lofty score can help the lender feel more secure that you’ll pay back the amount you borrow.

Cash Reserves

A cash reserve is how much liquid money you have at your disposal. What counts as liquid money can vary from lender to lender. For example, some will allow a percentage of vested 401(k) funds to count toward the reserve requirement. Others do not.

Because jumbo loans are so large, lenders look for cash reserves in your account to guard against default. For the best jumbo loan terms, lenders can require as much as 12 months of reserves.

A Low Debt-to-Income Ratio

A debt-to-income ratio is the amount of income you make relative to the amount of debt obligations you have. If you have what is considered too much debt, the lender will not offer you a loan. With jumbo loans, a healthy DTI ratio is essential to qualify for the mortgage. A DTI ratio below 43% is recommended.

What Does the Jumbo Qualification Process Include?

When you’re looking at jumbo loan requirements and the qualification process, there are some things you should keep in mind. Here’s what’s needed to get a mortgage:

Documents Required for Jumbo Loan

When you apply for a jumbo loan, the lender will look to verify the information you provided. Some documents you may be required to provide include:

•   Two years of tax returns

•   Profit and Loss (P&L) statement if you’re a business owner

•   Pay stubs

•   Bank statements

•   Documentation for other income

Loan-to-Value Ratio Evaluation

In addition to your application, the jumbo loan will require an appraisal of your property to ensure they’re not lending too much on the home (that is, more than it’s worth). This appraisal will ensure the home’s price is not too high and determine that the loan-to-value ratio (LTV) is within its guidelines.

Evaluating How Jumbo Down Payments Will Impact You

How much you put down on the home of your dreams will impact what loan you qualify for. If you’re able to put down enough, you may be able to forgo the jumbo loan requirements and get into a conforming conventional loan.

Is a Jumbo Mortgage Right for You? Questions to Ask

When it comes to making a decision on a jumbo loan, it’s helpful to ask yourself some questions that can help determine if a jumbo loan will work for you.

Do I Have Good Credit?

Ask yourself if your credit is strong enough to qualify for a jumbo loan. These mortgages do come with higher loan amounts and higher payments, and a good credit score range (700 or higher, typically) can help you get the best terms possible to qualify for a jumbo loan.

Do I Have a Low DTI and High Cash Reserves?

It’s important to have a low debt-to-income ratio and ample reserves to qualify for a jumbo mortgage, as discussed above. While some lenders may go up to as high as a 43% DTI ratio, others will want to see a lower number.

Can I Prove I’m in Good Financial Health?

Qualifying for a jumbo mortgage goes beyond the numbers. Can you demonstrate to the lender that you’re able to continue making payments? Do you have a consistent job history? Are all the other financial factors in your life lined up so you can afford the mortgage?

Is the Property Value High Enough for a Jumbo Loan?

The jumbo loan value minimum (and conforming loan limits) is $832,750 for most areas in the U.S. If your mortgage is below this amount, you’ll want to look at financing with a conforming conventional loan instead. In some high-cost areas, the home would have to hold a value of more than $1,249,125.

Do I Have Enough Money Saved?

A down payment on a property that merits a jumbo loan will often be a significant amount of cash (typically 10% but can be as high as 30%). And while some closing costs are a flat fee that won’t go up, many are labor-intensive or percentage-based (2%-6% of the loan amount), so your jumbo loan closing costs are larger than for a conventional, conforming loan.

Recommended: 18 Mortgage Questions for Your Lender

The Takeaway

If you are in the market for a high-value home, a jumbo mortgage can help you make it your own. However, you will need to meet the loan requirements, which may be somewhat more demanding than those for a conforming loan. By focusing on optimizing your credentials and financial profile, you can work to secure the mortgage that makes your home-ownership dreams come true.

When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.

FAQ

Is it harder to qualify for a jumbo loan?

Yes, jumbo loans are harder to qualify for. You will need a larger down payment than you would with a conforming loan, a higher credit score, a low debt-to-income ratio, more cash reserves, and a tighter loan-to-value ratio.

What credit score do you need for a jumbo loan?

For a jumbo loan, you may want to aim for a credit score above 700. Some lenders require 740.

Do jumbo loans require a 20% down payment?

Sometimes they do. But it is possible to obtain a jumbo loan with a down payment as low as 10% or possibly even lower.

Photo credit: iStock/lovenimo

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

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

SOHL-Q326-072