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If you’re thinking about purchasing a home, you’ve probably heard that an FHA loan (backed by the Federal Housing Administration) is worth exploring. These government-backed loans are especially popular with first-time homebuyers, because they have lower down payment requirements than many conventional loans and less stringent borrowing criteria.

But did you know there are several different types of FHA loans and programs designed to make homeownership accessible to more Americans? The FHA offers a wide variety of options, from traditional home mortgages to loans meant to help homeowners refinance; repair and renovate; improve their home’s energy efficiency; or tap their home equity for retirement income.

Read on for a look at some of the many available options.

What Is an FHA Loan?

FHA loans are mortgages that are provided by private lenders but are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). This means that if a borrower defaults on an FHA loan, the FHA will reimburse the lender for the loan’s unpaid principal balance.

Because lenders are taking on less risk when they fund an FHA loan, they can offer different types of FHA loans to borrowers who might otherwise struggle to qualify due to low credit scores or because they can’t save enough for a big down payment. Borrowers also may be eligible for lower closing costs or other benefits.

If you’re considering an FHA loan, here are some helpful basics to know:

FHA Loan Eligibility

FHA loan requirements can vary by lender and by the type of FHA loan, but generally you can expect underwriters to look for a 580 credit score with a minimum down payment of 3.5%. Some lenders prefer a minimum score of 600. If you can make a larger down payment — at least 10% — you may be able to qualify with a lower credit score (in the 500 to 579 range), but your interest rate and other terms you’re offered may be less favorable. The FHA allows your down payment to be a gift from a family member, friend, charity or other source, but the money will need to be documented with a gift letter.

There isn’t a set income requirement to qualify for an FHA mortgage, but lenders will ask for documentation of your income sources. They also will consider your debt-to-income (DTI) ratio, which compares your monthly debt payments with your monthly gross income. FHA guidelines generally allow a DTI ratio up to 43%, but if you have a strong credit score and meet other requirements, some lenders may accept a DTI ratio of up to 50% on an FHA loan.

FHA loans have occupancy rules regarding the size of the residence and how it is used. And FHA borrowers must pay mortgage insurance — both an upfront premium and an ongoing annual premium.

FHA Loan Limits

The FHA sets new guidelines each year for the maximum amount you can borrow based on housing costs and the cost of living in your region. The value of the property you plan to purchase (as determined by your appraisal) must fall within these specific limits.

HUD maintains a searchable database on its website where you can look up loan limits for specific areas. The following are the 2025 limits in most areas of the U.S.:

•   Single-unit property: $524,225

•   Two-unit property: $671,200

•   Three-unit property: $811,275

•   Four-unit property: $1,008,300

Limits in higher-cost areas can range from $1,209,750 (for a single-unit property) to $2,326,875 (for a four-unit property). In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, limits range from $1,814,625 to $3,490,300.

Types of FHA Mortgage Loans

The FHA insures several different types of loans, including the popular Section 203(b) Basic Home Mortgage Loan that many homebuyers use to purchase their primary residence. Here’s a list of loan options you may want to consider:

FHA 203(b) Loan: Standard Home Purchase

This is the FHA’s main home loan program, and it’s similar to a conventional mortgage. Borrowers can choose among different loan terms, up to a 30-year term, and must also decide whether they prefer a fixed or adjustable interest rate. To qualify, the home must pass strict HUD appraisal standards.

FHA 203(k) Loan: Rehab and Renovation

By now, you’ve probably seen enough renovation TV shows to know that you can often find a more affordable home if you’re willing to make some improvements. The FHA’s standard and limited 203(k) rehabilitation mortgages can be used to help homebuyers and current homeowners finance those repairs and improvements. The renovation expense with an FHA 203(k) loan must be a minimum of $5,000, and the home must be at least a year old.

Recommended: FHA 203(b) Loans vs. FHA 203(k) Loans

FHA Streamline Refinance

An FHA streamline refinance is a refinancing option that’s available only to borrowers with an existing FHA loan. It’s referred to as “streamlined” because the underwriting process is limited compared to a standard mortgage refinance. (A home appraisal usually isn’t required, for example.) Eligibility requirements may be stricter, however, if the refinance will lower the borrower’s mortgage payment by more than 20%.

FHA Cash-Out Refinance

With an FHA cash-out refinance, eligible homeowners can get a new, larger mortgage that’s insured by the FHA, use it to pay off their existing mortgage, and receive the balance that’s left over as a lump sum of cash.

You can use money from a cash-out refinance for just about any purpose, including to pay down debt or to fund a remodel. With an FHA cash-out refinance, you may be able to borrow up to 80% of the property’s appraised value. And unlike the streamline refinance, you can do an FHA cash-out refinance no matter what type of mortgage you currently have.

FHA Energy Efficient Mortgage (EEM)

With the EEM program, a borrower can use an FHA-insured mortgage to purchase or refinance a principal residence plus get help covering energy efficient improvements that could help lower the home’s utility bills. In the past, there were tax credits that helped homeowners fund the energy-efficiency improvements, but these credits end on December 31, 2025, However, the EEM program continues.

The FHA loan can be used to cover materials, labor, inspections, and a home energy assessment by a qualified energy assessor. But there are restrictions on how much you can borrow for the updates, and the improvements to be made must be approved by a qualified assessor or home energy rater.

FHA Reverse Mortgage (HECM)

An FHA home equity conversion mortgage (HECM) is an FHA-insured reverse mortgage that allows borrowers 62 and older to tap into a portion of their home equity to get tax-free income. The monthly payments borrowers receive through a reverse mortgage can then be used to help cover medical bills, home maintenance, or other general living expenses.

The amount available for withdrawal is based on:

•   The age of the youngest borrower or eligible nonborrowing spouse;

•   The current interest rate; and

•   The appraised value, the HECM FHA mortgage limit, or the sales price — whichever amount is lowest.

When the borrower moves out, sells the home, or passes away, the loan must be repaid.

How to Choose the Right FHA Loan

If you aren’t sure which type of FHA mortgage loan loan would be best for your needs, it may be helpful to speak with a HUD-approved housing counselor. You can use the search tool on the HUD website to find a participating housing counseling agency near you.

A qualified mortgage professional with an FHA-approved lender (like SoFi) can also provide you with information about the various types of FHA mortgage loans, as well as the pros and cons. And you can go online to further research the type of loan you want and the lenders who offer those programs or products.

The Takeaway

An FHA mortgage has long been a popular option for first-time homebuyers who are looking for a basic home loan. But homeowners who want to refinance their current mortgage, improve their property, or turn their equity into income may also benefit from different types of FHA mortgage loans. Working with a trusted lender, you can find an FHA loan that makes the most sense for your budget and financial goals.

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 put down as little as 3.5%, making an FHA loan a great option for first-time homebuyers.

Another perk: FHA loans are assumable mortgages!

FAQ

What is the most common FHA loan?

The most commonly used FHA loan is the FHA 203(b) loan, which could make it possible to purchase a primary residence even if your credit is so-so or you don’t have a large down payment saved up.

Can I use an FHA loan for home improvements?

Yes. An FHA 203(k) loan can be used by homeowners and homebuyers who want to make major renovations to a property. But depending on your specific circumstances, you might also consider other FHA loans (a 203(b) mortgage, a reverse mortgage, or a refinancing option) to help pay for improvements.

What’s the difference between FHA 203(b) and FHA 203(k) loans?

The FHA 203(k) rehabilitation mortgage insurance program was created to assist homebuyers and homeowners who have a property that’s in need of substantial renovation or remodeling, while the 203(b) loan is typically used to purchase a move-in ready home or one that may not require such significant repairs.

Who qualifies for an FHA streamline refinance?

To qualify for an FHA streamline refinance, the existing mortgage must be FHA insured and it can’t be delinquent. The term “streamline” refers to the amount of documentation required and level of underwriting the lender must perform, which is usually minimal compared to some other loans.

Are there income limits for FHA loans?

FHA loans do not have maximum or minimum income limits. Still, you can expect lenders to request documentation of your income sources.

How do FHA reverse mortgages work?

An FHA-insured reverse mortgage allows borrowers 62 and older to tap into a portion of their home equity to get tax-free income. The loan must be repaid when the borrower sells the home, moves out, or passes away.

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Photo credit: iStock/ferrantraite

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

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

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

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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Even if you have a fixed-rate home loan, your mortgage payment may go up over time. It’s no fun when it happens, especially if you carefully built your budget around the monthly payment you were counting on. But there are several reasons why your payment could go up (and keep increasing) unexpectedly. And no, it doesn’t mean you did something wrong.

Read on for a look at some of the factors that could affect your payment and ways you can deal with an unplanned hike to your monthly housing costs.

Common Reasons for Mortgage Payment Increases

If your monthly payment changes, it may not have anything to do with your mortgage principal or your interest rate. Some common reasons why a mortgage payment can go up include:

1. Escrow Account Adjustments

As part of the home loan process, it’s likely your lender set up an escrow account to collect money for costs like property taxes, homeowners insurance, and when necessary, private mortgage insurance (PMI) and flood insurance. Lenders typically perform an annual escrow analysis, and if any of those costs have gone up year over year, you can expect to see an increase in your payment.

2. Property Tax Change

There are a few different factors that can cause your property taxes to rise. If your home is worth more (because you made significant improvements, for example, or houses in your area have been selling for higher prices), your local government may reassess your property’s value, which results in a larger property tax bill. You also might see a tax increase if your city or county needs more money to build a school or to fund its yearly budget. And you could end up paying more if you lost a property tax exemption.

If your property taxes are included in your mortgage payment, your escrow contribution will likely reflect any increase.

3. Homeowners Insurance Premium Increase

If you make a change that adds to the cost of your homeowners insurance policy — or if your insurance company raises its rates — you can anticipate that your lender will collect more from you each month to cover that increase.

4. Private Mortgage Insurance Change

Borrowers who purchase a home with less than 20% down usually must pay for private mortgage insurance (PMI) until they build up more equity. The cost of your PMI should not go up over the course of your loan. In fact, it should decline as your principal balance declines, and when you reach 20% equity in your home, you can request that PMI be removed. If you see a PMI increase on your monthly bill, check in with your lender to ascertain whether an error is to blame.

5. Interest Rate Adjustment

If you have a fixed rate mortgage, your interest rate should stay the same for the length of your loan. But if you have an adjustable-rate mortgage (ARM) and your loan’s introductory period has ended, your interest rate may start going up or down based on current market rates. Each time your loan hits an adjustment period — typically every six months or once a year — your lender will recalculate your payment. (The length of your adjustment period should be included in your loan documents.)

6. Interest-Only Period Ended

Some lenders offer interest-only mortgages that allow borrowers to postpone making principal payments for a predetermined period (usually from three to 10 years). During that time, homeowners pay only the interest that’s accumulating on the amount they borrowed — no money is going toward the amount actually owed on the home. If you have this type of loan, and the interest-only period has ended, your monthly payment amount will increase to include the portion of the payment that will go toward the principal.

7. Loan Terms Changed

It’s also possible that a change in your loan terms pushed up your payment. If you’re a service member, for example, and your active-duty status ended one year ago, your mortgage rate may no longer be protected under the Servicemembers Civil Relief Act (SCRA), which caps rates at 6.00%. Instead, your loan will revert to the original higher rate you agreed to when you took out your mortgage, causing your payments to rise.

8. Missed Payment or Late Fee

Did you make a late or partial payment, or did you miss a payment? If so, your lender may have tacked a penalty fee onto your current bill or included the unpaid balance. (If it’s your first time paying late, you may be able to get the fee reduced or eliminated.) It’s a good idea to keep in touch with your loan servicer when you make a late payment or fall behind. You may be able to negotiate a payment plan so you can make sure you get back on track.

If you’re experiencing unexpected financial troubles, your loan servicer may agree to temporarily lower or pause your mortgage payments through a process called mortgage forbearance. Forbearance can help you avoid foreclosure, but when the forbearance period ends, the loan servicer will expect repayment — sometimes with a lump sum, or by adding the amount owed to the end of the loan term, or through monthly installments that can increase the cost of your payments for a while.

Recommended: Average Monthly Expenses for One Person

How to Avoid Unexpected Mortgage Payment Increases

Because there are so many factors that can cause the amount of your monthly mortgage payment to fluctuate, it can be important to keep an eye out for any changes. (Especially if your payments are automatically withdrawn from your bank account.)

Mortgage servicers are generally required to provide a mortgage statement for each billing cycle, and that statement should include:

•   The amount you owe and when it’s due

•   A breakdown of how the payment will be applied to principal, interest, and escrow, as well as any fees or amounts that are past due

•   Account details, like your interest rate and outstanding principal balance

•   Contact information for your loan servicer

Your statement will likely have the answers to any questions or concerns you have. But if you need more help, you can call the company you make your monthly payment to. It’s possible they simply made an error, or that you missed a notification about a recent change to your payment amount.

What to Do If Your Mortgage Payment Goes Up

If a higher mortgage bill is pushing you out of your comfort zone, there are a few steps you might consider to help get your payment back in line with your budget, including:

Shopping for a Lower Homeowners Insurance Premium

Homeowners insurance can get expensive, and the cost continues to rise, so it can make sense to shop around for a lower rate once in a while. You could call around for information on what various carriers have to offer or work with an insurance broker. Or you may prefer the convenience of using an online comparison site. (SoFi’s platform, for example, lets you compare quotes from up to 30 top insurers using Experian Insurance Services.) Remember that bundling your home and auto policies may help you find a lower rate, and you might be eligible for other discounts, as well.

If you decide to make a change, be sure to let your mortgage servicer know.

Appealing Your Property Tax Assessment

If your property taxes have gone up, your new assessment should include instructions on how to file an appeal. If not, you can call your property appraiser’s office for information and to voice your concerns. You might also benefit from researching any exemptions for which you may be eligible. Before requesting an assessment, try to research property tax assessments of other properties similar to yours in your area, to make sure other assessments really are lower than your own. Inviting further scrutiny of your property by assessors can sometimes backfire and result in higher taxes.

Removing Your Private Mortgage Insurance

Your mortgage servicer should automatically cancel your PMI payments when you reach 22% equity in your home or the midpoint of your loan term (whichever comes first). But once you know you’ve reached 20% equity, you can reach out to your mortgage servicer and request that they cancel your PMI to lower your payment.

Refinancing to a More Manageable Mortgage Payment

A mortgage refinance means replacing your current mortgage with a new one that has terms that better suit your current needs. You might be able to qualify for a lower interest rate, for example, or you could look at changing your loan length to lower your monthly payment. “It’s important to understand that not every mortgage refinance will save you money on interest. For example, if you extend the repayment term, you may have smaller monthly payments, but you’ll end up paying more money over the course of the loan,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.

Refinancing typically comes with some fees, as well, so you’ll want to be sure to run the numbers when considering this move. But if refinancing will enable you to stay current on your monthly payments instead of falling behind, it may be a wise move for your mortgage (and your credit score).

Recommended: How to Lower Your Mortgage Payment

The Takeaway

The amount of your mortgage payment may fluctuate from time to time — but that doesn’t mean you should ignore it when it happens. If you’re unsure about why your payment changed, you can check your monthly statement or talk to your mortgage servicer for information. And if you want to lower your payment, you can explore getting rid of PMI or refinancing your mortgage.

SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.

A mortgage refinance could be a game changer for your finances.

FAQ

Why would my mortgage payment go up even though my interest rate is fixed?

A fixed interest rate doesn’t mean your monthly mortgage payment won’t ever change. If your mortgage servicer is paying for your property tax, homeowners insurance, or private mortgage insurance (PMI) from an escrow account, and one or more of those costs go up, you can expect your monthly payment to reflect the increase.

Can property taxes increase every year?

There aren’t any federal laws that cap property tax increases; it’s up to state and local governments to put limitations in place. You can look for information relevant to your area on your property appraiser’s or tax assessor’s website.

What can I do if I can’t afford my new mortgage payment?

You can talk to your lender about your concerns and ask for options that could help. And you may want to look into refinancing to a new loan with terms that better fit your needs.

Will my mortgage payment go back down?

It’s possible your payment could go back down, if the costs driving it up can be reduced. But in the meantime, you may want to take some proactive steps to be sure the new payment is based on current and correct information. If the new payment is accurate, you can research options that could lower your payments, such as trimming your insurance costs or refinancing.

How often does escrow get recalculated?

Lenders typically perform an escrow analysis on an annual basis.

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Photo credit: iStock/zamrznutitonovi

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

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

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

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

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

^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.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOHL-Q425-058

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Being your own boss, making your own schedule, charting your own path, building something from scratch — being self-employed feels like freedom. But that freedom comes at a cost, especially if you’re applying for a mortgage. When you’re self-employed and apply for a mortgage, you won’t be able to provide any W-2s; instead, lenders will have to rely on less traditional information to determine if you qualify for a loan and for how much.

Below, we’ll cover everything you need to know about mortgage financing for self-employed borrowers, including what lenders are looking for, the types of loans available to you, the hurdles you’ll likely face, and some tips to make getting a self-employed mortgage much easier.

Can Self-Employed People Get a Mortgage Loan?

Yes, you can qualify for a mortgage if you’re self-employed. Whether you’re a freelancer, independent contractor, gig worker, or small business owner, you aren’t condemned to a life of renting (or getting a home loan in your partner’s name). The difference is that lenders will scrutinize your income and financial stability more heavily, and you’ll face stricter documentation requirements than a borrower with traditional W-2 income.

What changes is how lenders check your ability to repay your home loan. Rather than pay stubs, W-2 forms, and employer verification, self-employed borrowers typically must supply tax returns, profit and loss statements, and bank records. Some lenders may also have programs tailored to nontraditional income, such as bank statement loans and nonqualified mortgage loans (non-QM loans). So while the path to homeownership is a little longer — and has a few more potential roadblocks — you can absolutely get approved for a mortgage with self-employed income.

Recommended: Getting a Mortgage Without a Regular Income

What Lenders Look For in Self-Employed Mortgage Applications

When you apply as a self-employed borrower, underwriters need to answer a few core questions to ensure you can actually repay the loan:

•   Is your income stable, reliable, and sufficient?

•   Are your business finances legitimate and well-documented?

•   Are you creditworthy and low-risk?

•   Do you have the right amount of cash reserves and assets, and what other debt responsibilities do you currently have?

Here are the details a lender will examine to get to the bottom of its questions about your finances:

Proof of Income and Financial Stability

For starters, lenders need evidence that your business — whether you deliver food or walk dogs through an app, freelance from a home office for several clients, or own a brick-and-mortar small business with employees — generates consistent revenue over time, not just during seasonal spikes or from one-off windfalls.

Consistent income is crucial. Lenders will look for patterns and sustainability and may even review your client contracts or industry trends and forecasts to determine whether your income is likely to continue.

Two Years of Tax Returns

One of the most common benchmarks for self-employment mortgage loans is your two most recent personal and business tax returns. This gives the lender insight into your declared income and how tax deductions have affected it.

Many conventional lenders expect this level of history to assess trends and eliminate surprises; if you’ve been self-employed for less time, it may be harder to get a mortgage. That said, there are some exceptions. If you only have one year of self-employment history but can prove multiple years in that line of work, a lender may be more flexible.

Profit and Loss Statements

A year-to-date profit and loss (P&L) statement, often prepared by your accountant, helps paint a current picture of your business. A P&L statement shows your revenue, expenses, and net profit. Lenders may compare your P&L to your tax returns and ask for an explanation if there’s a big discrepancy.

Bank Statements and Business Licenses

Lenders may also request one to two years of personal and/or business bank account statements to understand cash flow (deposits in and withdrawals out). This helps underwriters get a feel for how your business really operates.

If relevant, you may also need to supply any business licenses, registrations, or proof of client contracts to help confirm your business is legitimate. This replaces the more traditional employment verification lenders may do for other borrowers.

Debt-to-Income Ratio

Whether you’re self-employed or have traditional employment, a lender will review your debt-to-income ratio (DTI) to ensure you aren’t juggling too many monthly debt payments already for your level of income. The threshold varies by lender, but many require a DTI below 43%. That is, your monthly debts shouldn’t exceed 43% of your gross monthly income. Nontraditional loan programs may allow for a higher ratio, but this can vary.

Credit Score

Similarly, a lender will review your credit score to ensure you’re a responsible borrower. A strong credit score signals that you pay bills reliably; this is especially important for self-employed borrowers whose income may be less consistent. Mortgage credit score requirements vary by type of loan and by lender.

Self-Employed Mortgage Qualifications

When determining if you qualify for a mortgage during the underwriting process, the lender will review the following:

Credit Check

First things first, be prepared for a hard credit inquiry. The lender will pull your credit report (so make sure yours are unfrozen with all three major credit bureaus) to get a better idea of whether you’re creditworthy enough to qualify.

Assets

To get a better understanding of your financial situation, lenders will want to review all of your assets. This includes cash in your bank account, but also any investments, retirement accounts, real estate equity, or business assets.

Cash Reserves

Lenders may also want self-employed borrowers to have significant cash reserves — funds you can rely on to pay for several months of mortgage payments, even if you had no income. This cushion helps offset the risk of fluctuating income.

How Lenders Evaluate Self-Employment Income

Lenders evaluate self-employment income even more carefully than they do for traditional employees. Using your tax returns and P&L statements, they’ll review your gross income, your business expenses, and your resulting net income. They may also review industry trends to understand how your income is likely to change over the course of your loan repayment.

Types of Mortgages for Self-Employed Borrowers

Self-employed borrowers can qualify for many of the same types of mortgages as more traditional borrowers, but there are specialized mortgages, such as bank statement loans, that might be even easier to get if you’re self-employed.

Conventional Loans

Conventional loans are “standard” mortgages that aren’t insured or backed by the government. They offer a lot of variety and competitive rates, but they’re also harder to qualify for. If you’re self-employed, meeting the stringent requirements can be tough. If you have a spouse with traditional income, you may be able to qualify more easily.

FHA Loans

FHA loans, backed by the Federal Housing Administration, have more lenient requirements on credit score and down payment, which means self-employed borrowers can qualify more easily. Even so, FHA lenders still typically expect two years of tax returns from self-employed borrowers, and they’ll examine your business history and documentation carefully.

Bank Statement Loans

A bank statement mortgage, often called a self-employed mortgage, is one of the easier paths to homeownership for self-employed borrowers. As the name suggests, one of the largest factors lenders consider for a bank statement loan is your bank statements (either for a personal or business account, depending on how you manage your finances).

You may be able to qualify for a bank statement loan without any tax returns, but these mortgages also tend to have larger down payment requirements and higher mortgage interest rates. Not every lender offers this type of loan, either.

Non-QM Loans

A nonqualified mortgage is any type of mortgage that doesn’t meet the requirements for a traditional qualified mortgage. These requirements were established by the Consumer Financial Protection Bureau (CFPB) and include rules such as:

•   A DTI ratio cap of 43%

•   Loan terms limited to 30 years

•   No “risky” features such as balloon payments, interest-only payments, or negative amortization

Non-QM loans can have looser requirements and allow lenders to verify ability to repay with less traditional processes, which may be ideal for freelancers, independent contractors, and small business owners.

It’s important to note that non-QM loans are not the same as the subprime loans of the Great Recession. These still require enough documentation (often tax returns, 1099s, bank statements, and P&L statements) for a lender to fully vet a borrower and ensure their ability to repay. Much like bank statement loans, non-QM loans may have larger down payment requirements and higher interest rates.

Common Challenges with Mortgage Financing for Self-Employed

Clearly, getting a mortgage as a self-employed worker is possible, but there are a lot more hoops to jump through when you go this route. Here are some of the biggest challenges you may face.

Inconsistent Income

Lenders typically want to know you have consistent income — and enough to cover your bills each month. Variability in income can make it harder for lenders to rely on your numbers. Underwriters tend to favor smoother, predictable income patterns. If you have seasonal highs and lows, it’s important to demonstrate significant cash reserves to cover the slower times.

High Tax Deductions

When you file taxes as a self-employed individual, tax deductions are your best friend. Because self-employed workers generally pay a higher percentage of their income in taxes, reducing your taxable income by deducting as many business expenses as possible is key. However, that can come back to bite you when applying for a mortgage. Your tax returns will show a lower adjusted gross income, which can make it harder to qualify for a more expensive home.

If you know you’ll be buying a home down the road, think about reducing your small business tax deductions in the years leading up to your home purchase. It may hurt to pay a little more in taxes now, but doing so may help you get approved for a mortgage — and at a more competitive rate.

Limited Documentation

If you’re a sole proprietor or gig worker who doesn’t have a formalized business structure, you may struggle to come up with all the documentation needed to support your cause. Work with an accountant to develop a profit and loss statement that paints a complete picture of your finances.

Recently Self-Employed

Typically, mortgage lenders want to see two years of tax returns from self-employed borrowers. If you’ve just made the leap to self-employment, you may not be able to qualify for a mortgage on your own right away.

Tips to Improve Your Odds of Application Approval

Being self-employed and getting a mortgage may feel like an endless uphill battle, but there are ways to tip the scales in your favor. Here are some tips to improve your odds of getting your mortgage application approved as a self-employed borrower:

Reduce Personal and Business Debt

Lower your debt-to-income ratio by paying down credit cards, auto loans, and any business debts. Avoid taking out new loans ahead of your mortgage application.

Improve Your Credit Score

It may take several months, but if you can build your credit score, you can greatly improve your chances of getting approved for a mortgage. “Working to build your credit score before applying for a home loan could save a borrower a lot of money in interest over time. Lower interest rates can keep monthly payments down or help you pay back the loan faster,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. You can bolster your credit score by:

•   Paying your bills on time and in full every month

•   Reducing how much you spend with your credit card and paying down outstanding debt

•   Reviewing your credit report for errors and disputing them with the credit bureaus

•   Not opening any new credit accounts in the year leading up to your application

•   Keeping up with your progress using free credit score monitoring

Make a Larger Down Payment

Some of the more nontraditional mortgage options for freelancers and independent contractors require a larger down payment, such as non-QM loans and bank statement loans. Even if you’re going the traditional-mortgage route, making a large down payment is a good show of faith to the lender that you are financially responsible.

Separate Personal and Business Finances

Maintain clear, separate bank accounts and bookkeeping for business and personal finances. This clarity helps underwriters trace cash flows and strengthens your case when you apply.

The Takeaway

If you’re self-employed, you don’t have to rule out homeownership. Freelancers, small business owners, and even gig economy workers can and do get mortgages to purchase their dream home. It just requires more thorough documentation and a solid history of doing good business. A solid credit score and some cash reserves won’t hurt, either.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How many years do I need to be self-employed to get a mortgage?

Typically, lenders want to see at least two years of tax returns with your self-employed income to consider you for a mortgage. However, you may be able to get a mortgage with less time as an independent contractor or small business owner if you have prior experience in a related W-2 role or if you use a less traditional mortgage option, such as a bank statement loan or nonqualified mortgage loan.

Do I need to show both personal and business tax returns?

If you file personal and business taxes separately, you’ll need to provide both sets of tax returns to the lender. This lets underwriters assess your net income, growth, and deductions. Sole proprietors who only file a personal income tax return may need to offer additional documentation, such as a profit and loss statement.

Can I use 1099 income to qualify?

Yes, independent contractors and gig workers who rely on 1099 income can use that income to qualify for a mortgage. The 1099s are included with tax returns, but underwriters will likely still want to review other documentation, such as bank statements and profit and loss statements.

What if my income fluctuates year to year?

Many freelancers and small business owners deal with fluctuating income from year to year (or even quarter to quarter, or month to month). Lenders know this and can accommodate it. While lenders would ideally love to see consistent income (or income that only grows over time), they are able to take a two-year average when calculating your qualifying income. However, you should be ready to explain the inconsistencies. Your accountant can help you organize your finances and help you make the strongest case to a lender.

What are the risks of self-employed mortgages?

The biggest risk in getting a self-employed mortgage is that your income could be considered more volatile. A downturn in your business could make it harder for you to make your monthly mortgage payment. And because you’re seen as a higher risk, you may have a higher interest rate on your mortgage, which makes your monthly payment more expensive.

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Photo credit: iStock/miodrag ignjatovic

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.

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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A mortgage recast lets you make a lump-sum payment toward your mortgage balance and request that your mortgage lender recalculate your loan payments to reduce the amount you will pay going forward. This is an especially useful strategy if you sell your old home shortly after closing on your new home, or if you come into a large sum of money, such as with an inheritance. Below, we’ll walk you through what mortgage recasting is and how it works, how it differs from refinancing, some mortgage recast pros and cons, and alternatives to consider.

What Is Mortgage Recasting?

Mortgage recasting is a strategy in which you make a lump-sum payment toward your mortgage principal to reduce how much you owe; you then ask your lender to re-amortize your loan so that your remaining monthly payments are smaller. Your interest rate and repayment term remain the same.

Mortgage recasts are a popular strategy for homeowners who purchase a new home before selling their old home. Once you’ve sold your old home and receive a large chunk of money, you can request a loan recast, rather than refinancing the recently established mortgage, to reduce your monthly payments.

How Recasting a Mortgage Works

Lenders that offer mortgage recasting may have a specific process to follow, but in general, here’s how to recast a mortgage:

1.    Confirm eligibility: Your first step is to check with your lender to ensure that it offers mortgage recasting. If you are purchasing a new home and know you’ll want to use this option after you sell your current home, limit your loan search to lenders that allow you to recast your mortgage.

2.    Make your lump-sum payment: You can likely use your mortgage company’s online platform to schedule a one-time lump-sum payment toward the principal. Work closely with your point of contact from your lender to ensure you follow their protocol for making a large payment. You’ll likely also pay a mortgage recast fee of a few hundred dollars.

3.    Ask for re-amortization: Lenders that allow recasting will then calculate your remaining principal balance and number of monthly payments remaining, a process called mortgage amortization. Using your current interest rate, the lender will create a new amortization schedule with a lower monthly payment. If you were paying private mortgage insurance (PMI) and this lump-sum payment helps you achieve enough equity to eliminate PMI, make sure you ask your lender to remove the insurance charge from your loan to further reduce your payment.

4.    Update your autopay: Now that you have a new monthly payment, check your automatic payment schedule to ensure you’re paying the new, lower amount.

5.    Be smart with your monthly savings: Now that your monthly mortgage payment is smaller, figure out the best way to use those funds. You could make additional payments toward your loan principal to help pay off your mortgage faster, but if you have a low mortgage rate, it may be wiser to either pay down higher-interest debt (like credit cards or student loans) or invest in a diversified stock portfolio or even a high-yield savings account.

Mortgage Recast Requirements

Not every mortgage — and not every mortgage lender — allows mortgage recasting. For instance, FHA loans, VA loans, and USDA loans are ineligible for mortgage recasts; some lenders may exclude jumbo loans from mortgage recasting as well.

Here are the general requirements for a recast, but remember these may vary depending on your lender:

•   You must have a loan that is eligible for recasting.

•   You must be current on your mortgage payments.

•   The lump-sum payment must be large enough to merit a recast and the associated fee you’ll pay. Your lender may have a minimum lump-sum payment requirement.

•   You’ll likely need to pay a recasting fee of a few hundred dollars.

Always check with your mortgage lender to understand the specific recasting requirements. Again, if you know you’ll want to recast your mortgage soon after closing (pending the sale of your old home), choose a lender whose recasting process and requirements you find favorable.

Recasting vs. Refinancing a Mortgage

If you want to lower your monthly mortgage payment, you’re likely deciding between recasting and refinancing a mortgage. Though they may seem similar on the surface, the mechanics and implications are notably different.

Cost

One of the biggest differences lies between the cost of a mortgage refinance and a mortgage recast:

•   Refinance: You’ll pay closing costs when refinancing a mortgage, usually between 2% and 5% but sometimes up to 6% of the new mortgage amount. On a $200,000 mortgage, this could be anywhere from $4,000 to $12,000.

•   Recast: Mortgage recasting, by comparison, is much more affordable. Lenders may only charge a few hundred dollars for the service.

Interest Rates

Another key difference between refinancing and recasting a mortgage is how mortgage rates work:

•   Refinance: With a mortgage refinance, you’ll get a new mortgage rate. Many people refinance solely because they want to lock in a lower interest rate that will save them money in the long run, even after the higher upfront costs of refinancing.

•   Recast: When you recast, your interest rate will stay the same. This isn’t a huge deal since most borrowers recast shortly after closing; rates aren’t likely to have changed much. If you come into money from an inheritance years after you closed on your home, however, interest rates may look a lot different — and you may want to consider refinancing instead of recasting, if rates have dropped significantly.

Underwriting Process

Underwriting processes vary by lender, but in general, you can expect a faster, easier process with recasting:

•   Refinance: A core part of how mortgage refinancing works is the underwriting process. A mortgage refinance is treated much like getting a mortgage on a new house, with a detailed loan application and mortgage underwriting process, and then closing costs.

•   Recast: A recast is much faster and typically doesn’t require an underwriting process (or even another credit check) since you’re staying on the same loan with the same lender.

Loan Term and Monthly Payments

Refinancing a mortgage results in a completely new loan while a recast keeps you in your same loan.

•   Refinance: Expect completely new loan terms (for instance, if you’re five years into a 30-year mortgage, you may start a new 30-year mortgage when you refinance). Your monthly payments will likely be lower because of a lower mortgage rate and because your payments are likely spread out over a longer loan period.

•   Recast: Your loan terms don’t change, so your target payoff date remains the same. Only your monthly payment goes down, because it’s based on the new, lower balance after re-amortization.

When to Recast vs. Refinance

So how do you know if you should refinance or recast? Here’s a helpful guide:

Consider a refinance if:

•   You want a lower mortgage rate.

•   You want a longer repayment term.

•   You want to switch to a different lender.

•   You want to take out some extra money (this would be a cash-out refinance).

Consider a recast if:

•   Your mortgage rate is lower than current rates, and you want to retain it.

•   You have the money to make a large lump-sum payment and want to do so to lower your monthly mortgage payment.

•   You want a fast process with little paperwork.

Pros and Cons of Mortgage Recasting

Mortgage recasting offers a number of benefits, but there are some drawbacks to consider as well.

Advantages

•   A lower payment: You’ll reduce the amount of your monthly mortgage payment.

•   Freed-up funds: Beyond the sigh of relief upon owing less each month, you’ll also benefit from the ability to use more of your income to pay down debts or invest.

•   Fees: Fees are more affordable than refinancing.

•   Fast process: Recasting is a simple process compared to refinancing.

•   Low stress: Knowing you can recast, you can more confidently buy a new house using a lower down payment — and then make another large payment after you sell your old house.

Disdvantages

•   Recasting fee: Though negligible in the grand scheme of things, it’s still something to budget for.

•   No rate change: There’s no opportunity for a lower rate; this is really only a problem if your lump-sum payment is from a windfall that occurs long after you closed on your home — and only if interest rates are lower than when you closed.

•   Minimums: Some lenders may have a minimum lump-sum requirement (often $10,000). Give serious thought to whether it makes more sense to pay off your mortgage or invest. It’s possible that the lump sum could serve you better if used to pay down higher-interest debt or invest in something that might deliver higher returns than your mortgage interest rate.

•   Eligibility requirements: Fewer loan products are eligible for recasting than are for refinancing.

How to Recast a Mortgage

One of the main advantages of recasting a mortgage over refinancing it is that the process is quick and easy.

Contacting Your Loan Servicer

Start by getting in touch with your loan servicer to see if 1) it offers recasting, and 2) your loan is eligible. If you’re shopping for a new house now and plan to sell your old home after you’ve moved, only consider lenders and loan types that allow recasting.

While speaking with your loan servicer, ask for some details, such as:

•   What is the minimum lump-sum payment required?

•   How much does it cost to recast a mortgage?

•   How long will it take for the new payment to go into effect?

•   Are there limits to how often I can recast?

Required Documents and Process

Speak with your loan servicer to understand what documentation will be required. There likely isn’t much, since you’re not applying for a new loan; instead, you may simply need to fill out a form.

The process is straightforward, too:

•   Once approved for the recast, pay the recast fee.

•   Make the lump-sum payment.

•   Receive the new mortgage amortization schedule.

•   Set up your automatic monthly payment at the new amount.

Alternatives to Mortgage Recasting

Mortgage recasting can make a lot of sense if you sell your home, receive an inheritance, or earn a sizable bonus at work. But it’s not your only option. Here are some mortgage recasting alternatives to consider:

Mortgage Refinancing

As we’ve discussed above, mortgage refinancing is another great way to lower your mortgage payment by locking in a lower interest rate, extending your repayment term, or both. Just make sure the cost to refinance will be worth it in the long run. That is, make sure you stay in your home long enough to reach the break-even point where the cumulative monthly savings equal the money spent to refinance.

Extra Mortgage Payments

Rather than formally recasting your mortgage, you can simply make extra payments toward the principal. This reduces your balance faster, saves you interest over time, and can help you pay off your mortgage early. Plus, you can keep the lump sum of money in a high-yield savings account that you simply draw from each month to make a large payment toward the mortgage.

Loan Modification

Loan modifications are an option for homeowners facing financial hardships. If you’re struggling to make your monthly payment, speak with your loan servicer about lowering your monthly mortgage payment via a loan modification. Just keep in mind that a loan modification can have a negative impact on your credit score, although if it helps you prevent foreclosure and keeps you in your home, it may be a net positive.

Investing

If you have a low mortgage rate, your money might be better spent by investing in something that pays out a higher return than that mortgage rate. The average stock market return is about 10% a year (6% to 7% after inflation), minus any fees, expenses, and taxes. Because your mortgage rate is likely lower than this, it may make more sense to invest than to recast. However, investing is never a sure thing; you have to be prepared for years when you might lose money or experience slow growth.

Alternatively, if you have high-interest debt elsewhere, like credit cards, consider using the money to pay down those debts first. If you don’t yet have an emergency fund, that lump sum of money could also be a good place to start.

The Takeaway

A mortgage recast is a smart way to lower your monthly mortgage payment if you’ve recently come into money. This is especially popular for homeowners who sell their old home shortly after buying their new home, but recasting may also make sense if you receive an inheritance or earn a sizable bonus at work. If you’re buying a home and looking into a mortgage, ask prospective lenders about their recast policy.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

When can you recast a mortgage?

Most servicers require that you have an existing conventional loan in good standing in order to recast. You must make the lump-sum payment upfront and pay a fee before the lender can re-amortize. Outside of that, your lender may have additional requirements regarding the timing of a mortgage recast; ask your loan servicer for specific details.

How many times can you recast a mortgage?

Theoretically, there is likely not a limit to how many times you can recast a mortgage, but this is up to the discretion of your loan servicer. Keep in mind, you’ll likely have to pay a fee each time you recast, and you’ll need to have a lump sum of cash large enough to meet any lender requirements.

How much does it cost to recast a mortgage?

Mortgage recasting fees vary by loan servicer, but in general, you should expect to pay only a few hundred dollars. Ask lenders how much recasting costs when shopping for a mortgage.

Is recasting a mortgage a good idea?

Recasting a mortgage can be a great idea if you receive a large lump sum of money and would like to reduce your monthly mortgage payment. Just make sure you consider alternative ways to use that money, like establishing an emergency fund, paying down higher-interest debts, or investing in a diversified portfolio.

Is it better to pay down the principal or recast?

Paying down the principal of your mortgage and recasting your mortgage are both smart strategies. Paying down the principal can reduce how much you spend in interest over the life of the loan and also help you pay off your loan early. Recasting the mortgage can significantly reduce your monthly payment, which frees up cash to invest or help you cover other monthly expenses more easily.

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Photo credit: iStock/timnewman

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.

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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Embarking on a home renovation to transform your living space is an exciting endeavor. Home improvements are also an investment that can significantly increase the value of your property, so it’s important to track expenses to be prepared for capital gains tax when you sell your home. Tracking home improvement costs can also help homeowners stick to a budget and ensure a greater return on investment.

Let’s take a closer look at how to track home improvement costs, which upgrades qualify for tax purposes, and options for financing a home renovation.

Why Track Home Improvement Costs?

Amid all the work and logistics that goes into renovations, tracking home improvement costs might not feel like a high priority. However, having documented home improvement costs can help reduce potential capital gains tax when it’s time to sell your home.

The IRS allows qualifying home improvement costs to be added to the original purchase price of the property, known as the cost basis, when calculating capital gains on a home sale. The basis is subtracted from the home sale price to determine if you’ve realized a gain and subsequently owe tax. But by adding home improvement expenses to your cost basis, the profit from the sale that’s subject to taxes decreases — lowering or even potentially exempting you from property gains tax.

Besides home improvements, other factors that affect property value, like location and the current housing market, could make a property sale subject to capital gains tax.

Here’s an example of how capital gains tax on a home sale works: A married couple who purchased a home for $200,000 in 2001 and sold it for $750,000 in 2025 would have a $550,000 realized gain. Assuming that the sellers made this home their main residence for two of the last five years, they’d be able to exclude $500,000 of the gain from taxes. The remaining $50,000 would be taxed at 0%, 15%, or 20% based on the sellers’ income and how long they owned the property.

However, the sellers spent $70,000 on home improvements during their 23 years of homeownership, so the capital gains calculation would be revised to: $750,000 – ($200,000 + $70,000) = $480,000. Tracking home improvement costs in this example exempted the sellers from needing to pay capital gains taxes.

Note that single filers may exclude only the first $250,000 of realized gains from the sale of their home. Eligibility for the exclusion also requires living in the home for at least two years out of the last five years leading up to the date of sale. Those who own vacation homes should note that the IRS has very specific rules about what constitutes a main residence.

💡 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.

Qualifying vs. Nonqualifying Improvements

The IRS sets guidelines that determine what home improvements can be added to your cost basis for calculating capital gains tax. Thus, not every dollar spent on sprucing up your home’s curb appeal or living space needs to be tracked for tax purposes. Generally, tracking costs is a good idea for any home improvements that increase your home’s value and fall outside general repair and upkeep to maintain the property’s condition.

Qualifying Improvements

According to the IRS, improvements that add value to the home, prolong its useful life, or adapt it to new uses can qualify. This includes the following categories and home improvements:

•   Home additions: Bedroom, bathroom, deck, garage, porch, or patio

•   Home systems: HVAC systems, central humidifier, central vacuum, air/water filtration systems, wiring, security systems, law and sprinkler systems.

•   Lawn & grounds: Landscaping, driveway improvements, fencing, walkways, retaining walls, and pools

•   Exterior: Storm windows, roofing, doors, siding

•   Interior: Built-in appliances, kitchen upgrades, flooring, wall-to-wall carpeting, fireplaces

•   Insulation: Attic, walls, floors, pipes, and ductwork

•   Plumbing: Septic system, water heater, soft water system, filtration system

It’s also important to track any tax credits or subsidies received for energy-related home improvements, such as solar panels or a heat pump system, since these incentives must be subtracted from the cost basis.

Recommended: How to Find a Contractor for Home Renovations and Remodeling

Nonqualifying Expenses

Owning a home requires routine maintenance and occasional repairs — think fixing a leaky pipe or mowing the lawn. And the longer you own your home, the greater the chance you reapproach past home improvements with a fresh design or modern technologies. The IRS considers regular maintenance and any home improvement that’s been later replaced as nonqualifying costs.

For instance, a homeowner could have installed wall-to-wall carpet and later swapped it out for hardwood floors. In this case, the hardwood floors would qualify, but not the carpeting.

Recommended: The Costs of Owning a Home

How to Track Your Costs

Developing a system for tracking home improvement costs depends in part on where you are in the process. Here’s how to get track home improvement costs before, during, and after a renovation project.

Before You Renovate

The average cost to renovate a house can vary from $20,000 to $80,000 based on the size of the home and type of improvements. Given this range in cost expectations, it’s helpful to create an itemized budget that estimates the cost for each improvement. It’s hardly uncommon for renovations to take more time and money than expected, so consider budgeting an extra 10% to 20% for the unexpected. “One strategy to approaching home improvements is to create your dream list but have alternates in mind in case your budget or material availability creates a need to alter the project down the road. For example, you may love the look of marble flooring, but its price point might be higher than you initially estimated. Having a cost-efficient back-up plan can keep your budget in check,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.

Your itemized budget can be leveraged for tracking home improvement costs once the project starts. Simply plug in the completion date, cost, and description for each improvement, and keep receipts, to itemize the expense as it’s incurred.

Recommended: How to Make a Budget in 5 Steps

Keep Detailed Records

Tracking home improvement costs goes beyond crunching the numbers. The IRS requires documentation to adjust the cost basis on a property. As improvements are made, catalog contractor and store receipts and take pictures before and after the work is done to document the improvements for your records. Store these records digitally in a secure and accessible location; the IRS recommends keeping records for three years after the tax return for the year in which you sell your home.

Catch Up After the Fact

Tracking home improvement costs after the work has been completed is doable, but it requires more effort. If your renovations required any building permits, your municipality should have records on file.

For other projects, start by searching your email for receipts and records. This can help you find a paper trail and track down documentation. Reach out to contractors you worked with for copies of missing receipts or invoices. If you paid with a check or credit card, you can browse through your previous statements or contact the bank for assistance.

Consult a Tax Pro

Taxes are complicated. If you have any doubts about what improvements qualify, consult a tax professional for assistance. Homeowners who used their property as a home office or rented it for any duration could especially benefit from a tax pro. Any property depreciation that was claimed in previous tax years may need to be recaptured if the home sale price exceeds the cost basis.

Home Improvement Financing Options

Renovations and upgrades to your home can be expensive. Many homeowners use a combination of savings and financing to pay for home improvements.

•   HELOC: A home equity line of credit lets homeowners tap into their existing equity to fund a variety of expenses, such as home improvements. With a HELOC, you can take out what you need as you need it, rather than the full amount you’re approved for, which could be up to 90% of your equity. You only pay interest on the amount you draw.

•   Cash-out refinance: Some owners take out a new home loan that allows them to pay off their old mortgage but also provides them with a lump sum of cash that they can use for home repairs (or other expenses). How much you might be able to borrow using this cash-out refi process will depend on the amount of equity you have in your home. (Your equity is the home’s market value minus whatever you owe on your home loan.)

•   Personal loan: An unsecured personal loan could be a good option for quick funding that doesn’t require using your home as collateral. The interest rate and whether you qualify are largely based on your credit score.

•   Credit card: Financing a home improvement with a credit card can help earn cash back or rewards on your investment. However, these perks should be weighed against the risk of higher interest rates. If using a 0% interest credit card, crunch the numbers to ensure you can pay off the balance before the introductory offer expires.

The Takeaway

Tracking home improvement costs from the start can help stick to your project budget and lead to significant tax savings when it comes time to sell your property. A HELOC is one way to fund home improvements, and may be especially useful to borrowers who aren’t sure how much money they will need for home projects. If you’re unsure whether a home improvement qualifies under the IRS rules around capital gains tax on home sales, consult a tax professional.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Does the IRS require receipts for home improvements?

Although you aren’t required to provide receipts to the IRS when filing your taxes, you should have them as proof of the money you spent on home improvements in the event that you are audited. Keep all receipts for significant renovations for as long as you own the home and three years after the tax year in which you sell the property.

Will my property taxes increase if I remodel?

If your renovation requires pulling a building permit, there is a good chance your taxes will increase on your next home assessment because tax assessors can access building department records.

If I sell my home at a loss is the loss tax deductible?

Selling your home at a loss does not provide you with a tax deduction. In this instance, the IRS treats the loss differently than it does a loss resulting from an investment in, say, the stock market.

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Photo credit: iStock/Cucurudza

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

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

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

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, 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 a minimum loan amount. 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. Information current as of 06/27/24.
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