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Paying off your mortgage ahead of time might sound like an incredibly savvy thing to do — and in some cases, it is. But it’s not the right money move for everyone. And paying off a mortgage in just five years? It’s an aggressive strategy that may or may not be the smartest choice.

Benefits and Risks of Paying Off a Mortgage Early

Achieving homeownership is, well, an achievement. And since you’re here reading an article about paying a mortgage off early, you’re clearly an overachiever.

Paying off any kind of debt early usually seems advisable. But for most of us, our home is the single largest purchase we’ll ever make — and paying off a six-figure loan in only a few years could wreak havoc on the rest of your finances.

In addition, some mortgages come with a prepayment penalty, which means you could be on the line for additional fees that might eclipse whatever you’d stand to save in interest payments over time. (Mortgages tend to have lower interest rates than many other common types of debt anyway.)

That said, if you have the cash, paying off your home early can lead to substantial savings, not to mention helping you build home equity as quickly as possible.

Let’s take a closer look at the risks and benefits of paying off a mortgage early.

Benefits of Paying Off a Mortgage Early

The main benefit of paying off a mortgage early is getting out of debt. Even minimal interest is an expense it can be nice to avoid.

Additionally, paying off your home early means you’ll have 100% equity in your home, meaning you own its whole value, which can be a major boon to your net worth.


💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.

Risks of Paying Off a Mortgage Early

Paying off a mortgage early may come with risks, and not just prepayment penalties (which we’ll touch on again in a moment). In many instances, it can be a plain old bad financial move.

Depending on what your cash flow situation looks like, and what the interest rate on your mortgage is, you might stand to out-earn early payoff savings if you funnel the extra cash to your investment or retirement accounts instead. (You can use this mortgage calculator to see how much interest you stand to pay over the lifetime of your home loan — and then compare that to how much you might earn if you invested that money instead.)

Additionally, if you have other forms of high-interest debt, like revolving credit card balances, it’s almost always a better idea to focus your financial efforts on those pay-down projects instead.

And if you have historically taken the home mortgage interest deduction on your taxes, it’s also worth talking with your tax advisor about what impact paying off your mortgage early will have on your deductions. (For 2023, the standard deduction is $27,700 for married couples filing jointly and $13,850 for single people and married people filing separately. For 2024, the standard deduction for married couples filing jointly rises to $29,200. For single taxpayers and married people filing separately, the standard deduction rises to $14,600.)

To recap:

Benefits of Paying Off a Mortgage Early	Risks of Paying Off a Mortgage Early
Saving money on interest over time	Possible repayment penalty; possible loss of tax deduction
Building home equity quickly	Lost opportunity for investment growth, which could outweigh interest savings
No longer having to make a mortgage payment every month	Less money for other important goals, such as paying down credit card debt

Watching Out for Prepayment Fees

One of the biggest risks of paying off a mortgage before its full term is up is the potential to run into prepayment penalties. Some mortgage lenders charge large fees to make up for the interest they’ll be missing out on.

Fortunately, avoiding prepayment penalties on home loans written after 2014 is easier: Legislation was passed to restrict lenders’ ability to charge those fees. But if your mortgage was written in 2013 or earlier — and even if not — it’s a good idea to read the fine print before you hit “submit” on your lump-sum payment, and ideally before you accept the contract at all.

Steps to Paying Off a Mortgage Early

You’ve assessed the risks and benefits and decided that paying off the mortgage early is the right move for you. Nice!

Now let’s take a look at how to get it done.

Pregame: Considering Repayment Goals When House Shopping

This option won’t work if you’ve already found and moved into a home, but if you’re still in the home-shopping portion of the journey, looking at inexpensive homes can be a great first step toward paying off your mortgage fast.

After all, if the home has a lower price tag, it’ll be easier to reach that goal in a shorter amount of time. Ideally, you want its value to appreciate, so you’ll still want to shop around before just choosing the lowest-priced house on the block.

Maybe you signed your home contract years ago and are just now considering getting serious about early mortgage repayment. Take heart! There are some easy steps to follow to make your mortgage disappear in five years or so.

1. Setting a Target Date

The first step: figuring out exactly when you want the mortgage paid off. Choosing your target date will make it easier to figure out how much additional money you need to send to your lender each month.

Five years is a pretty tight timeline for this kind of debt repayment process, but it could be doable depending on your earnings and commitment.

2. Making a Higher Down Payment

The higher your down payment, the less loan balance you’ll have to pay down, so if you can manage it, offer as much as you can right at the start. There are many assistance programs for down payments that might boost your offer and put you on track for paying down your mortgage early.

Also, realize that first-time homebuyers — who can be anyone who has not owned a principal residence in the past three years, and some others — often have access to down payment assistance.

3. Choosing a Shorter Home Loan Term

Obviously, if you want to pay your mortgage off in a shorter amount of time, you can consider choosing a shorter home loan term; most conventional mortgages are paid off over 30 years, though it’s possible to find loans with 15- or even 10-year terms.

However, your interest rate might be higher on those loans in order to make the deal worthwhile to the lender, so for many borrowers, choosing a longer home loan term and making aggressive additional payments is a better option.

4. Making Larger or More Frequent Payments

One of the most achievable ways for most borrowers to pay off a home loan early is to pay more than the monthly minimum, either by adding extra toward the principal in the monthly payment or by paying more than once per month.

Unless you’re due for a six-figure windfall, chipping away at the debt this way might be the smartest option. But how does one come up with the additional money to funnel toward that goal?

5. Spending Less on Other Things

As with most debt repayment strategies, chances are you’ll need to find other ways to cut back on spending in order to set aside more money to put toward the mortgage. This could be as small as ditching the daily latte or as serious as choosing to give up a car.

6. Increasing Income

Another option, if there’s just nothing left to cut? Finding ways to increase your income, perhaps by starting a side hustle or asking for that long-overdue raise.


💡 Quick Tip: A Home Equity Line of Credit (HELOC) brokered by SoFi lets you access up to $500,000 of your home’s equity (up to 90%) to pay for, well, just about anything. It could be a smart way to consolidate debts or find the funds for a big home project.

The Takeaway

Pay off a mortgage in five years? While paying off your home loan early could help you save money on interest, sometimes the money is better spent on other financial goals and projects. So it pays to take a close look at the numbers, just as you did when you got your mortgage in the first place.

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

SoFi Mortgages: simple, smart, and so affordable.

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Photo credit: iStock/fizkes

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 for more information.

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

^²

To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).

All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.

You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and loan amount. Minimum loan amount is $75,000. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria.

SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.

In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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

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

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When you close on a home, one of the most important documents you’ll review and sign is your mortgage note. It’s an agreement between you and the lender that outlines the terms and conditions of the mortgage. The document tells you how much and when to pay, and spells out the consequences if you don’t.

What Is a Mortgage Note?

A mortgage note, often referred to as a promissory note, is what you sign when you agree to take on the responsibility of a mortgage. The note outlines:

•   Your interest rate

•   The amount you owe

•   When the payments are due

•   The amount of time it will take to repay the loan

•   How to remit payment

•   Consequences for missed payments

It’s one of the key documents you’ll sign at closing.

Promissory notes also may be used in owner-financed home sales. The buyer and seller sign the document, which contains the loan terms. When a borrower pays the seller directly, the promissory note gives the lender the ability to enforce their rights through a mortgage lien, foreclosure, or eviction.


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

What Is Included in a Mortgage Note?

The mortgage note outlines the conditions and responsibilities of the buyer. You’ll see sections like these in a mortgage note:

•   Borrower’s promise to pay. This section includes the total amount of money you’re borrowing and the name of the lender to whom you will remit payment.

•   Interest. The interest rate charged on the unpaid principal is listed here.

•   Payments. Borrowers agree to pay a monthly amount before or on a specific date. The place where borrowers can remit payment is also listed.

•   Borrower’s right to prepay. This section specifies a borrower’s ability to pay toward the mortgage principal without penalty. (Some lenders charge a fee if you pay off some or all of the principal early. Make sure you understand whether you have the right to prepay without a penalty before you get to the closing table.)

•   Loan charges. All charges by the lender must be legal. Any amounts over the legal limit will be refunded to the buyer or applied to the principal.

•   Borrower’s failure to pay as required. Default is clearly defined for the buyer, as are late charges and what happens in the event of default.

•   Giving of notices. Borrower and lender will have the details of how to contact each other for legal purposes.

•   Obligations of persons under this note. All people listed on the mortgage note are equally responsible for repayment of the loan.

•   Uniform secured note. Buyers are advised that a security instrument is signed in addition to the note that protects the note holder from potential losses by giving them the ability to foreclose in case of default.

How Does a Mortgage Note Work?

A mortgage or promissory note is drawn up by the lender when preparing your mortgage for closing during the underwriting process. This document is what makes the terms and conditions of the mortgage legally binding.

Borrowers will see the mortgage note at closing, though the terms and conditions will be outlined in a closing disclosure provided at least three business days before the closing date. The closing disclosure document can be compared with the loan estimate that was provided at the beginning of the mortgage application process. (This help center for mortgages is useful if you want to understand the entire mortgage process.)

A mortgage note is accompanied by another document, called the mortgage, security instrument, or deed of trust. It restates the terms of the mortgage note and outlines the rights and responsibilities you have as a borrower. As a security instrument, the document specifically gives the lender the right to foreclose on your property if you fail to make payments. Having this right reduces the risk to the lender, which can offer more competitive terms to the borrower in return.

Who Holds the Mortgage Note?

A mortgage note isn’t usually held by the lending institution that originated your loan. Mortgage notes are often sold, and it’s not easy to tell who holds your mortgage note. This is because the loan servicer (the company that sends your mortgage statements and handles day-to-day management of the loan) is usually different from the note holder.

Selling a Mortgage Note

You’ll see in your closing documents a provision that allows the lender to sell the mortgage note. This is common and legal in home contracts and typically occurs soon after the property closes. Lenders sell mortgages on the secondary mortgage market, usually to one of the large federally backed mortgage companies, Fannie Mae or Freddie Mac. When the mortgages are sold, the lender doesn’t have to keep the mortgage on their balance sheet, which, in turn, allows them to originate more mortgages for other borrowers.

Fannie Mae and Freddie Mac then bundle mortgages into what is called a mortgage-backed security. Investors around the world (think pension funds, mutual funds, insurance companies, and banks) can buy shares of mortgage-backed securities. The investors will receive steady returns as the mortgages are repaid by individual borrowers.

The loan servicer (which may be your original lender or a separate company) typically continues to service your loan, meaning you’ll send your payment to them. They’ll keep a small portion of your mortgage to cover their costs for servicing your loan while sending the rest to the buyer of your note.

When your mortgage note is sold, the terms of your mortgage won’t change. Your payment, interest rate, and due date will remain the same. If your servicer changes for any reason, you’ll be notified of the new servicer and the new way to remit your mortgage payment.

Different Kinds of Mortgage Notes

There are different types of mortgage loans and different kinds of mortgage notes to accompany them.

Secured Loans

With a secured mortgage note, the mortgage uses collateral to secure the property. The collateral is usually the property itself. A secured loan is usually accompanied by better terms, such as a lower interest rate and a longer repayment period.

Private Loans

Private mortgage notes are secured by private lenders. A seller may own the property outright and act as a private lender, setting their own terms for mortgage loans.

Institutional Loans

Institutional notes are mortgage notes issued by traditional lenders, such as financial institutions or banks. They’re highly regulated. Buyers must meet specific criteria, and the loans must have standard interest rates and repayment terms.


💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

The Takeaway

Understanding your mortgage note and how it works is a critical step in buying and financing a home. You should review the terms of your mortgage well before you arrive at the closing, and it may be helpful to review the details of the mortgage note with a professional, as the note can protect the buyer just as much as the seller.

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

SoFi Mortgages: simple, smart, and so affordable.

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Photo credit: iStock/Chinnapong

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 for more information.

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

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

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

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Homebuyers choose the number of years they’d like their mortgage to last. The 30-year fixed-rate mortgage is by far the most popular, followed by the 15-year fixed-rate mortgage, but terms of 10, 20, 25, and even 40 years are available. The term that will work best for each borrower largely depends on the monthly mortgage payment they can handle and how long they plan to keep the property.

What Is a Mortgage Term?

The term is the number of years it will take to pay off a home loan if the minimum payment is made each month. Knowing how long you plan to stay in your home can affect the type of home loan that fits your situation when you shop for a mortgage — not only short or long term, but also fixed or adjustable interest rate.

Of course, every borrower’s situation is unique. But according to the National Association of Realtors®, the average homeowner tenure was 13.2 years in 2021. And in 2023, people who were selling homes had typically lived in the property for a decade.


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

How Mortgage Terms Work

For fixed-rate home loans, payments consist of principal and interest, with a fixed interest rate for the life of the loan. With mortgage amortization, the amount going toward the principal starts out small and grows each month, while the amount going toward interest declines each month.

A shorter term, conventional loan generally translates to higher monthly payments but less total interest paid, and a longer term, vice versa. A shorter-term loan also will have a lower interest rate.

This mortgage calculator tool includes an amortization chart that shows how payments break down over a fixed-rate loan term, as well as the total amount of interest paid, which in a fixed-rate loan is predictable.

Most adjustable-rate mortgages (ARMs) also have a 30-year term. You can’t know in advance how much total interest you will pay because the interest rate changes.

How Long Can a Mortgage Term Be?

A few lenders out there offer 40-year mortgages. Qualifying is more difficult, and the rates are the highest among fixed-rate loans, while ARMs can be unpredictable.

The long term means a borrower will make the lowest possible monthly payments but pay more over the life of the loan than any other.


💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

Fixed-Rate Mortgages vs Adjustable-Rate Mortgages

When you’re first choosing mortgage terms or looking at different types of mortgages, start with one of the basics.

A fixed-rate mortgage is exactly what it sounds like. You lock in an interest rate for the entire term. If market rates rise, yours will not.

An adjustable-rate mortgage is much more complicated. An ARM usually will have a lower initial rate than a comparable fixed-rate mortgage, and a borrower may be able to save significant cash over the first years of the loan.

Recommended: Adjustable Rate Mortgage (ARM) vs. Fixed Rate Mortgage

But a rate adjustment can bring a spike in mortgage payments that could be hard or impossible to bear. With the most common variable-rate loan, the 5/1 ARM, the rate stays the same for the first five years, then changes once a year.

An interest-only ARM has an upside and downside. You’ll pay only the interest for a specified number of years, when payments will be small, but you will not be paying anything toward your mortgage loan balance.

An ARM may suit those who are confident that they can afford increases in monthly payments, even to the maximum amount, or those who plan to sell their home within a short period of time.

ARM seekers may want to prequalify for more than one loan and compare loan estimates. It’s a good idea to know the answers to these questions:

•   How high can the interest rates and my payment go?

•   How high can my interest rate go?

•   How long are my initial payments guaranteed?

•   How often do the rate and payment adjust?

•   What index is used and where is it published?

•   Will I be able to convert the ARM to a fixed-rate mortgage in the future, and are there any fees to do so?

•   Can I afford the highest payment possible if I can’t sell the home, or refinance, before the increase?

Comparing 15-Year and 30-Year Mortgages

Clearly, paying off a mortgage in 15 years rather than 30 sounds great. You’ll get a lower rate, pay much less total interest, and be done with house payments in half the time. The catch? Higher monthly payments. Here’s an example of how a 30- and 15-year fixed-rate mortgage might shake out, not including property taxes and insurance and any homeowners association (HOA) fees.

30-Year vs. 15-Year Fixed-Rate Mortgage

Type	Loan Specs	Rate	Payments	Total Interest Paid
30-year	Appraised value: $375,000 Down payment: $75,000 Loan size: $300,000	4%	Mortgage payment: $1,432	$215,607
15-year	Appraised value: $375,000 Down payment: $75,000 Loan size: $300,000	3.2%	Mortgage payment: $2,101	$78,130

There’s a reason that the 30-year fixed-rate mortgage reigns supreme: manageable payments that ideally leave enough money for emergencies and retirement savings. Borrowers making lower payments can always pay more toward the principal if they want to pay off the mortgage early.

Then again, borrowers with stable finances who can afford the higher payments of a 15-year home loan may find it quite appealing.

The Takeaway

How to pick a mortgage term? Look at your budget, think about how long you plan to stay in the home, and weigh your financial goals and priorities. Consider getting prequalified so you can see what your options are.

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

SoFi Mortgages: simple, smart, and so affordable.

---

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 for more information.

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

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

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

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.

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There are many steps to the homebuying process. If you’re taking out an FHA loan (a loan backed by the Federal Housing Authority) to buy a property, you’ll most likely need to get an appraisal to verify the value and condition of the home. Let’s take a closer look at how FHA appraisals work, what to expect, and how to prepare as a homebuyer.

Understanding FHA Appraisals

An FHA loan appraisal is an in-person assessment performed by an accredited appraiser. The purpose of the appraisal is to evaluate how much a house is worth and determine if it meets minimum safety and livability standards. The appraisal is sent to the lender for further evaluation before a FHA loan can be approved. FHA appraisals are typically required whether the borrower is buying or refinancing a home with an FHA loan.


💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.1

Differences Between FHA and Conventional Appraisal

Whether a borrower is seeking an FHA loan or a conventional loan, an appraisal estimates the fair market value of a home based on the property condition and nearby home values. But FHA loans must meet the minimum standards set by the U.S. Department of Housing and Urban Development (HUD). This means that FHA appraisals also consider the health and safety of the property, while conventional appraisals focus on the property’s value and condition. FHA lenders may require that any health and safety hazards be addressed before approving the mortgage.

Role of FHA Appraiser and Their Requirements

FHA appraisers follow HUD guidelines for minimum property standards. During the appraisal, they analyze and report a property’s physical and economic characteristics to provide an opinion of its value. HUD requires FHA appraisers to have state certification and meet the minimum certification criteria issued by the Appraiser Qualification Board.

How Do FHA Appraisals Work?

An FHA loan appraisal involves two steps. The appraiser will complete a site visit to inspect the property condition and perform market research for comparable homes in the area to estimate the market value of the home.

The appraiser will inspect the home’s interior and exterior to determine the property’s safety and soundness. The appraiser’s findings, plus information on the home like square footage and the year it was built, are cataloged in HUD’s Uniform Residential Appraisal Report.

To estimate the property’s value, the appraiser evaluates the selling prices for comparable homes in the same area that were recently sold. This information, combined with the property’s condition and characteristics, is used to estimate the market value.

Recommended: The Ultimate Home Inspection Checklist

What’s the Purpose of an FHA Appraisal?

FHA appraisals are required by lenders to ensure that the loan amount doesn’t exceed the market value of the property. The appraisal process is also used to determine that a property meets FHA standards for health and safety.

Differences Between Appraisal vs. Home Inspection

The appraiser only factors in readily observable conditions. A home inspection, by comparison, is much more in-depth in its assessment of a property’s need for repairs.

Besides the property value, the criteria evaluated during an FHA appraisal include the safety, security, and soundness of a home. In other words, the home should be safe for occupants to inhabit, protect the security of the property, and not have physical deficiencies or conditions impacting the structural integrity and ability to market it for future sale.

Appraisers are required to describe the property conditions, including any renovations, necessary repairs, or deterioration. Minor issues, such as missing handrails, cracked windows, or worn countertops, do not require automatic repair.

Safety and Structural Standards

In terms of occupant health and safety, the FHA appraisal looks out for exposure to hazardous materials, such as lead paint and asbestos. Mold, radon gas, and poor insulation are other potential safety risks that would be flagged in an appraisal. The overall property structure needs to be in sufficient condition to keep occupants safe. This means that damage to the foundation, structural decay, or anything that impacts the long-term integrity of the home would not meet FHA requirements.

Compliance with Minimum Property Standards (MPS)

FHA appraisals follow the Minimum Property Standards (MPS) set by HUD. The MPS establishes baseline conditions to cover aspects of a property that aren’t met by model building codes. For example, the MPS covers doors, gutters, and wall coverings to ensure the property value is not impacted by the quality of these components.

What to Expect from an FHA Appraisal

Being prepared for an FHA appraisal can help streamline the loan application and homebuying process. Here’s what to expect from an FHA appraisal:

Appraisal Timeline and Duration

The duration of an FHA appraisal site visit varies by property size and condition, but plan for it to take between one and several hours to complete. The full appraisal report is usually complete within a week.

Common Issues That Can Affect the Appraisal Outcome

There are a number of issues and property conditions that the FHA requires to be remedied for loan approval. Some common issues include:

•   Roof condition or damage

•   Exposed wires

•   Water heater temperature and pressure relief valve

•   Damaged foundation

•   Peeling paint (for homes built before 1978)

Conditions That Won’t Pass FHA Inspection

It’s important to know what won’t pass the FHA inspection. Any property conditions that impact the safety and health of occupants could need to be addressed in order to get FHA loan approval. Besides the common issues outlined above, hazards, nuisances, and obstructions to property access could fail to pass FHA inspection. For example, the level of traffic or proximity to a hazardous waste site could violate FHA standards.

Factors That Can Affect Property Valuation

Property valuation accounts for the home condition, square footage, any renovations, and the number of bedrooms and bathrooms. The appraiser must observe neighborhood characteristics and surrounding properties to make determinations that will be incorporated into the valuation of the property.

FHA Inspection Checklist and Tips

Sellers can plan ahead and fix what won’t pass FHA inspection to avoid delays and improve the marketability of their home. Here’s how to address some common issues that could cause a property to fail an FHA appraisal.

•   Roof repair: Fix leaks and consider a new roof if life expectancy is less than three years.

•   Chipped or peeling paint: Scrape and repaint peeling surfaces if property was built prior to 1979.

•   Water heater: Ensure the water heater has a pressure and temperature relief valve and sufficient piping.

•   Plumbing: Repair all toilets, showers, and sinks that aren’t in working order as leaky plumbing won’t pass FHA inspection.

Both the inspection and the home’s appraised value are critical to FHA loan approval. Sellers and their real estate agents are permitted to communicate with an appraiser to offer additional property information that can contribute to the valuation of the home. Gathering documentation beforehand on any home improvements can ensure the appraiser has everything needed for an accurate valuation.

Recommended: What Are the Most Common Home Repair Costs?

What Happens After an FHA Appraisal?

The FHA appraisal report will provide the estimated market value and outline any required repairs or alterations that need to be completed for FHA loan approval.

What to Do if the Home Sale Appraisal Comes Back Low

If an FHA appraisal comes back low, there are several possible scenarios. The seller can lower the sale price to accommodate the appraised value. Alternatively, the buyer can renegotiate to lower the price and potentially contribute a larger down payment to cover the portion of the home price that is not covered by the FHA loan. As a last resort, a buyer would be permitted to walk away from the deal if the FHA lender’s requirements can’t be met.

What to Do if the Refinance Appraisal Comes Back Low

If refinancing with a FHA loan and the appraisal comes back low, there are a few courses of action available to borrowers. First, review the appraisal report to see if an appraiser missed anything important. If so, providing the correct information to get another appraisal could result in a higher appraised value.

If disputing the appraisal isn’t an option or successful, borrowers can consider restructuring the loan to take less cash out. Finally, the loan can be denied if the terms are not beneficial to the borrower.

What to Do if the Appraiser Requests Further Repairs

The appraisal may identify repairs that need to be completed to close on the loan. Unless otherwise outlined in the purchase and sale agreement, sellers are typically on the hook for repairs. The sellers have up to 120 days to make necessary repairs and meet FHA standards if required by a lender.

Alternatively, buyers can pay for the repairs themselves. If the issues impact the health, safety, and livability of the property, they’ll need to be completed prior to closing. Other non-safety repairs can be completed after closing. Note that delayed repairs may require an extra escrow holdback for the estimated costs.

Once repairs and issues have been addressed, the property can be reassessed. Borrowers can consider a FHA 203(k) loan to finance both the purchase and rehabilitation costs through a single loan if the repairs are an obstacle to closing. Buyers might consider renegotiating their offer to reflect the repair costs being financed.

If appraisal-related issues are delaying closing, buyers can consider a mortgage rate lock to secure their interest rate for a set period. This can help buy more time for repairs to be made without losing out on favorable loan terms.

What to Do if the Appraisal Comes Back at or Higher Than the Expected Amount

The loan simply moves forward if the appraisal comes back at or higher than the expected amount, barring any request for further repairs.

How Long Is an FHA Appraisal Good For?

FHA appraisals are valid for 180 days unless it’s updated. If updated, an appraisal can be good for up to one year.

Recommended: 2024 FHA Loan Closing Cost Calculator

Impact of FHA Appraisal on Loan Approval

The FHA appraisal influences loan approval in two key ways. First, the appraisal evaluates the property condition and identifies if any repairs or further inspections are required for loan approval. Second, the appraised value determines the total loan amount a buyer is approved for. If the appraised value is lower than the purchase price on the contract, either a price reduction or larger down payment could fill the gap to get loan approval.

How Long Do You Have After Appraisal to Close an FHA Loan?

Repairs aside, how long can you wait after the appraisal to close on an FHA loan? It helps to understand how long an FHA appraisal is good for. Once the borrower and lender receive a copy of the FHA appraisal, it’s valid for 120 days. However, borrowers can request a 30-day extension to allow more time to close on a FHA loan.

A conditional approval from the lender will outline the required repairs to be made in order to close. After the appraisal is approved in underwriting, the loan will most likely be cleared to close. Prior to closing, borrowers will receive a mortgage closing disclosure which outlines the total funds needed to close.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

The Takeaway

FHA appraisals estimate a property’s value and assess its condition to determine if it meets safety and livability standards set by HUD. Understanding the conditions and issues that won’t pass FHA inspection is important for buyers and sellers alike.

SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can down as little as 3.5%. Plus, the Biden-Harris Administration has reduced monthly mortgage insurance premiums for new homebuyers to help offset higher interest rates.

Another perk: FHA loans are assumable mortgages!

FAQ

How does the appraised value affect the loan amount?

With FHA loans, the appraised value of the property determines the loan amount a borrower can qualify for.

Can you contest an FHA appraisal?

Yes, you can contest an FHA appraisal and provide additional information to inform the property valuation. However, there’s no guarantee that the appraiser will change the valuation.

What happens if the property doesn’t meet FHA requirements?

If a property doesn’t meet FHA requirements, buyers can ask the seller to make the necessary repairs. Alternatively, buyers can consider other types of home loans, such as a conventional mortgage.

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Photo credit: iStock/valentinrussanov

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 for more information.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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

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A home that’s for sale by owner opens the door for you to buy the property without a middleman — though you may choose to use your own real estate agent to facilitate the transaction. A for-sale-by-owner deal can differ from a typical real estate transaction in a few important ways, so study this guide before you start perusing listings.

Buying a House for Sale by Owner

When homeowners choose the FSBO (“fizz-bo”) route, they take on all of the responsibilities real estate agents would typically shoulder in the homebuying process, from listing the house and showing it to negotiating and closing the deal.

The main motivation for doing so is often cash. Sellers who go it alone can save money on the real estate commission fee. If neither side uses an agent, the deal sidesteps the typical 5% to 6% the seller would typically pay in commissions.

On the buyer’s side there can be a number of benefits of buying a house for sale by owner. First of all, the lack of a listing agent means you have more direct contact with the seller, which might give you more negotiating power. The seller will also likely have detailed knowledge of the house and neighborhood, which can be a bonus as you decide whether or not you want the property.

However, you may run into some pitfalls with FSBO properties. A seller may love her home and overprice it, potentially complicating matters when you get an appraisal.


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

Using a Buyer’s Real Estate Agent

The home’s seller may not want to use a listing agent, but you can still engage the services of a buyer’s agent. You may already be working with an agent who can contact a FSBO seller for you. Or you may need to look for an agent who is willing to take on the job.

In some cases, buyer’s agents may be hesitant to work on a FSBO property. They may be wary of taking on extra liability, or extra work for which they will not necessarily be compensated.

That said, a buyer’s agent can negotiate the sale on your behalf and walk you through the complicated paperwork. If the seller is putting the contract together, your agent can also check the work to make sure you don’t run into any problems.

Sellers typically pay the agent commission. Just be sure the seller agrees to pay the buyer’s agent commission in the purchase agreement or be prepared to factor it into your own expenses.

Here’s what to expect in the FSBO buying process.

Shopping for a Mortgage

Before making an offer on a home, it’s a good idea to shop for a mortgage to get an idea of the terms different lenders offer and how much you are likely to pay each month.

A mortgage calculator can help you understand how down payments of various sizes will affect the numbers. And you may consider getting preapproved for a mortgage to see exactly how much you can afford to spend.

In an FSBO situation, homeowners may have no experience with the home financing process, and getting prequalified or preapproved for a home loan may remove some roadblocks on your path to making a purchase.

Viewing the Home

Your agent can contact the seller and set up an appointment to view the home. When you visit, be on the lookout for sagging floors or cracks in walls that might indicate structural issues. Test windows. Look for water damage on ceilings or walls that may be a sign of a leaky roof.

Since the seller will most likely be showing the house, take this opportunity to get as much detail about the home’s history as possible. What repairs have been made recently, and which ones haven’t been made in a while? It’s smart to ask about any warranties, and to be sure they will remain after a sale.

Recommended: What to Look for When Buying a House

Getting an Inspection

When buying a home for sale by owner, it’s not in your best interests to skip an inspection. Home inspectors go over the house with a fine-toothed comb, looking at structure, plumbing, electricity, and appliances to see whether they need repair now or in the near future. (This home inspection checklist shows you what should be covered.)

If the inspector finds any problems, you can ask the seller to fix them, credit you the cost of repairs, or reduce the sales price. If you’ve already signed a purchase agreement, severe problems found during an inspection can be a reason to pull out of the contract.

Negotiating a Sale Yourself

If you decide not to use a buyer’s agent, you and the seller will have to negotiate the sale and write up the purchase contract yourself. You may also choose to hire a transactional agent or attorney who can help you write the contract and ensure it is done legally and in a way that protects your rights. If you do decide to go it alone, below are a few things to keep in mind.

Recommended: How to Buy a House Without a Realtor

Making an Offer

Before making an offer on a house, check comparable properties in the neighborhood and see if the listing price is reasonable. Doing so can help you pin down what a reasonable offer is.

Consider offering less than the listing price. The seller may ask you to come up in the asking price, but if you start too high, it’s difficult to negotiate down again. You can use the neighborhood comps you’ve researched as a negotiating tool.

Including Contingencies

Contingencies are certain conditions that must be met in order to close the deal. Some common contingencies are a satisfactory home inspection and property valuation, also known as an appraisal. If a home is appraised at less than the agreed-upon price, a lender may be unwilling to loan the buyer the money. In that case, the appraisal contingency can be an opportunity to negotiate the sales price.

A clear title is another common contingency. The title is a document that shows who has owned and now owns the home. The title company will make sure there are no liens or disputes associated with the property. If there are unresolvable issues, the clear-title contingency gives the buyer a way out of the contract.

Negotiating Fees

It can’t hurt to ask for seller concessions, closing costs that the seller agrees to pay. A seller may agree to help pay for property taxes, attorney fees, appraisal inspections, and the like. Even in a seller’s market, if the property has been sitting, possibly because the price was too high, a seller may offer a financial incentive to move the home.

Putting Earnest Money in Escrow

Your earnest money deposit is the money you submit with your offer to demonstrate your serious intent to buy.

The listing agent would usually put this money into escrow. But if you’re going it alone, it’s a good idea to engage a title company or escrow company to hold the money for you until the sale goes through.

If you give the money directly to the seller, they may refuse to give it back to you if a contingency causes the deal to fall through, which could mean suing to retrieve your cash.

Determining When You’ll Get Possession

Be sure your purchase agreement specifies when you will take possession of the new house and receive the keys. Possession may take place immediately after closing, or the contract may give the seller time to move.


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

The Takeaway

Buying a house for sale by owner can come with challenges and opportunities. It may make sense to engage a professional real estate attorney to help you negotiate and deal with the documents. Another option is to engage a buyer’s real estate agent who can help safeguard your interests.

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

SoFi Mortgages: simple, smart, and so affordable.

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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 for more information.

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

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

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

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