What We Can Learn from Historical Mortgage Interest Rate Fluctuations

In the years since the Great Recession, mortgage interest rates have fallen to historic lows. In November of 2012, the average 30-year fixed mortgage rate hit the historic low of 3.31% —making it that much more affordable to finance the purchase of a new home.

Historically speaking, mortgage rates have remained relatively low since the great recession, with some fluctuation at times due to market conditions. As a result, we’ve become pretty accustomed to low mortgage interest rates.

In 2015, the Federal Reserve started a series of increases to the federal funds rate that continued through July 2019. In that month, the Fed decreased rates for the first time in a decade and twice more, for a total of 3 rate reductions in 2019.

When the federal funds rate was on its way up, some expected 30-year fixed mortgage interest rates to get back up to 5% or 6% in the not-so-distant future. If you’ve only been keeping an eye on mortgage rates over the last few years, these rates might seem a bit high.

After all, 30-year fixed mortgage rates have mostly stayed below 5% since 2011. Following the Fed’s recent actions, average 30-year fixed mortgage rates are expected to stay in close trading range with current levels through 2020.

But even if (and when) rates eventually do increase, from a historical perspective, a 6% interest rate range would bring us back to around 2006 levels and what has been a more average rate range for 30 year fixed mortgages over time.

So what makes mortgage rates change over time, and what events trigger those changes? Let’s take a look at the history of mortgages and mortgage rates over time to help shed some light on the changes that may be occurring now.

The History of Mortgage Rates

In the mid to late 1800’s farm mortgage banking developed that helped with expansion in the great plains. Farm mortgage banking moved from private to public with the passage of the Federal Farm Land Bank Act of 1916 which helped create 12 Federal Land Banks and the Farm Credit System to provide funding to farmers and ranchers using long term financing at low interest rates.

Mortgage banking moved from private to public for urban areas with the National Housing Act of 1934 was passed to help improve housing and make home loans more accessible and affordable. This also led to the creation of the Federal Housing Administration (FHA) mortgage loan insurance (MIP) program.

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The 1930s

Although language around mortgages (a loan secured by a property) can be found in English Law as far back as the late 1100’s, modern mortgages as we know them today weren’t really developed in the United States until the 1930s, when the National Housing Act was passed in 1934.

Before this time, borrowers mostly used private funding from insurance companies who didn’t expect to make money off of the interest rates at the time. Instead, they expected to be able to turn a profit by seizing properties when borrowers couldn’t keep up with their payments.

Still, borrowers were expected to be able to put down around 50% of the purchase price in order to secure a mortgage. And because of that, for most people, homeownership was still out of reach.

The housing market was needing intervention when in 1932 as many as one thousand homeowners defaulted on their mortgages every day and by 1933 half of all mortgages in the U.S. were in arrears. In 1934, the FHA decided to use mortgages as another way to help pull the country out of the Great Depression.

The FHA created a new type of mortgage that looks a lot more like the ones we have today, in which borrowers were able to get mortgages with much lower down payments. By initiating the program, the FHA pushed banks and other lenders to offer similar mortgages. At that time, interest rates were hovering around 6%.

The 1940s

Despite World War II, home ownership increased from 1940 to1945. This was attributed to war time rent control which covered over 80% of the U.S. rental housing stock.

Thus, in the first half of the 1940’s greater reductions in rent costs resulted in greater homeownership for owner occupants. When the war ended, however, we saw both the baby boom and a home-buying boom.

The Veteran’s Administration assisted veterans with mortgages that required no down payment and, in general, the demand for mortgages accelerated. However, it is good to note that U.S. homeownership rose by 10% between 1940 and 1945.

The 1950s and 1960s

The post-war housing boom continued into the 1950s and 1960s—an era known for the creation of the American suburb. Housing developments were springing up outside of cities nationwide. As a result, interest rates continued to steadily increase over this time from approximately the high 4% rate to the low 8% range.

The 1970s

In the early 1970s, mortgage rates began to rise even faster moving from the 7% range into the 13% range. This was largely due to the Arab oil embargo, which significantly reduced the oil supply and sent the U.S. into a recession with high inflation.

As a result, Federal Reserve Chairman Paul Volcker made a bold change in monetary policy to combat inflation. The policy changes were difficult but they set the stage for longer economic expansions of the 1980s and 1990s.

The 1980s

Rates hit their all-time high in October 1981 when the rates hit 18.63%. This made homeownership out of reach for many who otherwise may have bought homes around this time. The economy recovered and by the end of the 1980’s inflation was under control and rates moved down into the 10% range.

The 1990s and 2000s

In 1989 a recession began to form and the national recession of 1990 to 1991 reduced demand for both goods and services. As demand for homes increased in the late ‘90s and early ‘00s, the internet era began to change the way people buy homes and shop for mortgages.

Lenders also changed their lending practices and began to originate increasingly risky mortgage options (known as subprime mortgages) to draw in more borrowers. These loans were generally favored by borrowers with less-than-stellar credit or other alternative characteristics such as self employed for documentation relief.

Layering the risk of an overheated housing market combined with subprime loan programs lead to the poor performance of mortgages and loss of investor confidence.

In August 2007 the Federal Reserve began to address these issues through policy, but in December 2007 the Great Recession began for 18 months ending in June 2009. Mortgage rates dropped back down to below 6% and continued to decrease.

The 2010s

Mortgage rates steadily decreased, staying below 5% for the most part, but between 2007 and 2010 U.S. housing prices fell around 30%. It was during this time that the SEC began to take action against some lenders who were considered villains in the subprime scandal.

Countrywide Lending for instance, agreed to pay $67.5 million dollars in penalties and reparations to investors. A sharp drop in home purchases occurred in 2010 due to the expiration of the Federal First Time Homebuyer Tax Credit Program. By years end the housing market was only down around 4.1%, projecting an increase into 2011 depending upon things like unemployment and foreclosure activity.

Why Do Mortgage Rates Change?

As we can see from looking at interest rate fluctuations, major economic events can have a big impact on mortgage rates both in the short and long term. But how do these changes actually happen? That has to do primarily with the Federal Reserve. In December 2015, the Federal Reserve ended seven years of near zero rate policy and began a series of rate increases that ended in 2019 with 3 rate cuts.

Federal Reserve actions influence nearly all interest rates, including mortgages through the prime rate, long term treasury yields, and mortgage backed securities. The Federal Reserve sets the federal funds benchmark rate, which is normally the overnight rate at which banks lend money to each other.

This rate impacts the prime rate, which is the rate banks use to lend money to borrowers with good credit. Most adjustable short term rate loans and mortgages use the prime rate to set the base interest rates they can offer to borrowers. So, after the Federal Reserve raises or lowers rates, adjustable short term mortgage loan rates are likely to follow suit.

Longer term mortgage rates have also risen and fallen alongside economic and political events with movement in long term treasury bond yields. In the short term a Fed Rate change can affect mortgage markets as money moves between stocks and bonds which can have an effect on mortgage rates. Longer term mortgage rates are influenced by Fed rate changes but don’t have as direct an effect as with short term rates.

Can Changing Rates Affect Your Existing Mortgage?

Maybe—the answer depends on what type of mortgage you have. If you took out a fixed-rate mortgage, your original interest rate is locked in for the entire time you have the home loan, even if it takes you 30 years to pay it off. That’s not necessarily the case if you have a mortgage with a variable interest rate, often called an adjustable-rate mortgage.

With this type of home loan, you may have started off with an interest rate that was lower than many fixed-rate mortgages. That introductory rate is often locked in for an initial period of several months or years.

After that, your interest rate is subject to change—how high and how often depends on the terms of your loan and interest rate fluctuations. These changes are generally tied to the movement of interest rates as a whole, but more specifically which index your adjustable rate mortgage is tied to, which can be affected by the Fed’s actions.

However, most adjustable-rate mortgages have annual and lifetime rate caps that limit how high your interest rate and payments can change.

Tracking Changes in Mortgage Interest Rates

There are many factors to consider when buying a home. While some buyers may want to take advantage of historically low interest rates for a mortgage, understanding your budget and home affordability before taking the plunge is recommended.

Frequent suggestions include paying off higher-interest debt (which often means credit cards) and saving an emergency fund worth three to six months of living expenses.

After assessing your budget and affordability, you may want to give yourself time to save up for a larger down payment. Buyers who put down less than 20% may end up paying private mortgage insurance, which typically costs between 0.3% and 1.5% of your loan amount annually.

Finally, you may want to take time to review your credit history for any errors that may need addressing. The federal government offers a free annual credit report that will show your payment history and balances, but not your credit score.

Putting your best financial foot forward when applying for a loan could help you obtain better loan terms. All of these factors may be worth considering before applying for a home loan, regardless of where interest rates are.

If you already have a mortgage, keeping an eye on interest rates may help you decide whether it’s a good time to refinance your mortgage. If rates are trending downward compared to the rate on your existing home loan, you may benefit from a lower interest rate than you’re currently paying.

Your ability to get a better rate depends not only on how rates are trending, but also on your credit history, financial profile, and other factors. But if interest rates have generally fallen quite a bit compared to when you closed on your current loan, refinancing could be worth looking into.

If you’re interested in taking out a mortgage before interest rates increase (or refinancing while interest rates are still reasonable), check out SoFi Home Loans today.


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Rent to Own Homes: A Smart Move for Home Buyers?

There’s no question about it, buying a home takes research and work. Especially if it’s your first home and you need financing. You start saving for a down payment and closing costs, then spend your free time trolling realty websites for that perfect Dutch Colonial with quartz countertops until your eyes glaze over. Instead of swiping left on potential dating partners, you’re swiping left on any house with hardwood floors.

Once you find the one, the perfect house, you may have to figure out if you can actually buy it if you have not yet gone through the Pre-approval process with a lender. And the real work begins—from deciding if you are eligible for zero or low down payment loan options to exploring if you want to go with a larger down payment in exchange for a lower monthly payment to comparing interest rates from various mortgage lenders.

How Do Rent to Own Agreements Generally Work?

Some of the options you may come across during this process are “rent to own” or “lease with option to buy” , these options vary but in general they come in with two forms, a home rental lease and a contract to buy or for an option to buy.

With this type of agreement, the renter commits to renting the property for a specific period of time (typically the length of the rental term) with the option (or obligation) to buy anytime before the lease period expires depending upon the contract you settle on.

In many cases the renter places a deposit upfront (option fee) to lock in the option to buy later, which is usually 1% of the agreed upon price and then makes higher than market monthly rent payments that include both the regular rent payment and the additional amount agreed upon to go towards the down payment at the time that the option is exercised.

At first glance, a rent to own property may seem like a great way to get into your dream house before you’re totally ready to buy. But these contracts can get complicated, so it is recommended that you do your research and consider retaining a lawyer to review the contract terms before signing.

Maybe you’re still cleaning up a past credit problem that’s keeping you from qualifying for a mortgage. If this is the case, proceed with caution and utilize this time to clear up any credit issues, because you want to be as sure as you can that when the rent period is over, you can qualify for the mortgage and purchase the property without losing any of the money you placed into the option.

It’s considered a good idea to talk with a lender before executing this type of contract in order to confirm the contract is properly written so that the additional funds set aside from the rent to own agreement are eligible to be used towards the down payment and to identify a home loan program you will likely qualify for and that best suits your needs when the lease period ends.

With these rent to own or lease with option to buy contracts, you can either decide on the purchase price upfront or agree that the sale will be contingent upon an appraisal at the time of purchase. It is generally recommended to get an appraisal and home inspection upfront before entering into a contract.

The appraisal can set the market value of the home and can also give a rent schedule showing rents paid in the area for the same type of home. The rent schedule confirms the base rent charged is reasonable before the option to buy lease amount is added on top.

Mortgage LoanMortgage Loan

Some Problems with Rent to Own Agreements

Renting to own isn’t new, but it has evolved in the way the contracts work and the landlords who typically offer these types of properties may have changed in recent years. Before the financial crisis of 2007-08 created the biggest disruption to the U.S. housing market since the Great Depression, rent to own properties were usually offered by individual homeowners.

According to the online real estate database Zillow, that business model changed when real estate investors began buying up distressed properties after the crisis and marketed them to tenants with the idea that an additional portion of their monthly payments eventually would go toward a down payment.

That’s a plan that may hold a lot of promise for prospective homeowners who hate the idea of throwing away their money on rent payments. Rent to own listings may also offer an attractive alternative for some to a traditional home purchase for those who do not yet have a down payment saved.

But the rent to own path could have some serious downsides. Before you sign on the dotted line, it’s important to make sure that a rent to own path is right for you. Here are some points to consider:

1. Selection May be Limited

If you have your heart set on a certain neighborhood or home design, you might be out of luck. Unless you can find a seller in your target neighborhood who’s willing to do a rent to own or lease arrangement, you’ll likely have to stick with what’s available through real estate companies who offer these types of contracts. This can seriously limit your selection and might mean you end up in a home that isn’t the right fit for you.

2. You’ll Likely Pay Higher Than Market Value Rent

With these agreements, it’s typical for individuals to pay above market rent amount because part of the payment is going toward what will eventually be considered in the down payment on the home. (For example, you might pay $2,000 to the landlord, and $300 of that will be set aside for your down payment.

If you have a three-year purchase agreement, that will amount to $10,800 paid toward the down payment fund on the house, plus any other money you put down upfront.)

3. You Might Lose the Money you Thought was Going Toward Your Down Payment

Saving for a down payment while paying your rent may sound like a good deal, and sometimes it is. However, you may want to consider that if you eventually choose not to purchase the property, you could lose your deposit or option fee and possibly any other money you have paid toward the option or purchase. Ouch.

4. The Home’s Value May Decrease

We all know how the real estate market cycles through periods of booms and busts. If you sign a rent to own contract, you may have chosen to agree to a purchase price in advance.

You might agree to a certain price if you buy within three years, for example, and then, potentially, a higher price if you buy within five years, and so on.

The price you agreed to pay upfront will likely fluctuate with time and if the value of homes in the neighborhood depreciates during that period, you could be stuck with a purchase price way above the current market value for the house.

You may decide to back out of the buy because the house won’t appraise for the previously set purchase price, but you’ll likely forfeit the money you’ve paid toward the purchase. (See above.) One good idea is to try placing an appraisal contingency within the contract.

5. The Option to Buy Doesn’t Guarantee You’ll Qualify For Financing

If you’re considering a rent to own or lease with option to buy contract because you’re worried
you may not currently qualify for a mortgage, the arrangement might not be as helpful as you think. Although a lease with option to buy contract can get you into a house that you’ll later have the option to purchase, it doesn’t guarantee you’ll automatically qualify for a mortgage on that home when the buy or option is due.

And depending upon your credit profile, you may not be able to count on your timely rent payments as a way to improve your credit profile, however evidence of timely rent payments may be requested by your chosen lender

So you may want to check the contract to make sure the rental company or landlord plans to report your rental payments to the credit bureaus.

6. You Can’t Control What The Landlord Does

If the owner stops making payments and the property goes into foreclosure, you may be out of luck. And you may not have much say if the property isn’t maintained to your standards. (It may seem like a cost-saving measure to sign a contract that requires the tenant to do the upkeep, but the cost of maintaining the home could mean a further loss if you decide not to buy the home.)

Again, these are details that should be clearly outlined in the rent to own or lease with option to buy agreements. And you may wish to have a real estate attorney go over that contract before you sign.

Do These Contracts Compare to Qualifying for A Mortgage?

If you’re serious about becoming a homeowner, a traditional home purchase along with a mortgage may offer a wider array of options. With a traditional mortgage, you take out a loan to cover the purchase price of your new home minus your down payment. A mortgage loan allows you to immediately purchase your home, as opposed to renting first.

Then you make payments to the lender until the home is paid off or you decide to sell and pay what you still owe. If you find you find yourself short on the down payment amount, consider asking a relative for a gift or if you are a first time home buyer, try looking for down payment assistance programs you might be eligible for in your area.

The loan process can be challenging, but if you choose to get pre-approved, you will discover how much house you can truly afford—so there won’t be any surprises or the disappointment of losing a home you can’t qualify to buy after months or years of paying on the option.

And things like appraisals, home inspections, and title checks—although added time and expense—have been put in place to protect the homeowner as well as the lender.

There may also be some tax benefits to owning that you don’t get when you rent. If you have any questions it is recommended you check with your tax advisor. And if you’re the DIY type, renting a house that you can’t renovate or perhaps even decorate to your taste might feel a little stifling.

If you purchase a home, you can dig in and do almost anything you like—and those improvements (new roof, new A/C, new quartz countertops and hardwood floors, new landscaping for curb appeal) could potentially add to the value of your home.

So if you decide after some years to move on, you can sell and perhaps get something back for your efforts. (It’s important to note that if you live in a condo, co-op, or other HOA type property, you may have to get permission to do renovations from your HOA board.)

Finding the right mortgage may help you buy your dream home without being subject to the restrictions and risks of a rent to own type contracts. If your income and credit are solid but you’ve been holding back on buying because you’re worried about coming up with a down payment, you might be surprised at how little some programs allow for a down payment. Of course, the smaller the down payment, the more loan interest you will be financing.

And lenders like SoFi offer several different loan types and loan terms. Pre-qualifying to see what you can potentially borrow is also fairly pain-free and may be accomplished in just minutes online.

If you think you’re ready for homeownership, you may want to take a break from clicking on realty sites and check out what it takes to get approved for a mortgage loan. Then armed with that knowledge, you can decide how much of a commitment you’re really willing to make.

Learn more about how SoFi can help you become a homeowner with loan programs offering as little as 10% down.


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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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

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How to Really Know if You’re Ready to Buy a Home

You remember how psyched you were when you got to sign the lease for your current apartment. Especially in a huge city where finding a place that meets your specifications can be like searching for the holy grail, once you find that perfect spot, you hold on tight.

That makes sense. But even if you’re happy paying rent for your place now and have been for the last several years, you might have moved up in your career since then, or you’re thinking about having a kid and need a place that’s nearer to school districts than bars. Plus, depending on marketing conditions, putting that rent money toward owning a place would likely become a great investment.

In that goal, you’re not alone, According to a 2018 Homebuyer Insights Report , 72% of millennials say that owning a home is a top priority.

It’s an exciting time, for sure, but a major financial decision like buying a home can be daunting—or even terrifying, especially if you have student loans to worry about.

Since you don’t want to be hasty or over-buy and hinder your efforts to reach financial wellness, here a few ways to help you know if you’re ready to take the leap to homeownership.

You’ve Saved for a Down Payment & Homeownership Costs

This is one of the most important steps in the home buying process. According to a 2018 report report from the National Association of Realtors (NAR), of the buyers who took out a mortgage, 5% of them made a downpayment worth 6% or less of their home value. So, the traditional 20% down isn’t as common as believed. But, 6% down is still a chunk of change. And, the down payment is just one of the costs associated with buying a home.

It is important to consider other costs such as mortgage payment, closing costs, insurance, taxes, and more. So, when you are thinking about buying a home you should factor in all of these potential costs and make sure you have that saved or a plan of action to pay for these costs.

You’re a Good Candidate for a Mortgage Loan

Not surprisingly, mortgage lenders pay close attention to job continuity and consistent income.

Another biggie is your debt-to-income ratio, which will give lenders insight into whether you can truly afford mortgage payments (seeing whether or not you have too much debt to buy a house). To determine your ratio, it is a good idea to get prequalified for a mortgage loan to see what you would qualify for.

Then, you would take that estimated housing payment which would include principal, interest, taxes, insurance, and HOA (if applicable, along with ongoing monthly debt payments to help you understand what your DTI is.

If you’re at that threshold, but haven’t saved enough for a huge down payment, don’t worry. Some lenders are prepared to help—SoFi, for example, offers flexible down payment options starting at as little as 10% on loans up to $3 million, with competitive rates and no hidden fees.

Remember, there’s a lot of competition among lenders, so shop around to choose the one that offers terms to suit your needs.

Ready to buy a home? See how SoFi can
help make your dream home a reality.


You’re Ready to be Your Own Landlord

Are you ready to handle home repairs? If something breaks it is all on you.

A condo can be a good choice if you travel a lot or if you don’t want the responsibility of maintaining a yard. Condos can be a good stepping stone to owning a house as the property is less time consuming because you don’t have any exterior or lawn maintenance to handle.

But you’ll still need to be prepared to make small repairs yourself, hire a pro, and replace big-ticket items, such as major appliances, now and then. So make sure there’s enough money in your reserve fund to cover the routine stuff and the surprises.

A good rule of thumb is to set aside about 1-3% of the home’s value each year. Some years, you might not need to pay that much. But, if you live in your home long enough, you’ll likely shell out for hefty repairs in other years. Once you buy your home you can use SoFi’s Home Improvement Cost Calculator to get an idea of how much your renovation projects will cost.

You’re Ready to Settle Down

It is harder to move cities once you buy a home. You can’t just pick up and leave as you can if you are renting. Buying a home is a big decision, so it is important to make sure you are ready to settle down in that location for a while.

You Know Location is Everything

Ernst and Young’s The Millennial Economy 2018 study reported that 62% of Millennials live outside of the city either in the suburbs, small towns, or in rural areas. The location of your home—whether it’s a big city or on the outskirts—could impact your budget and overall enjoyment as a homeowner.

If you’re serious about buying your first home, you’ve already taken the time to scope out neighborhoods and to understand how to choose a location best fits your lifestyle. You know that the overall feel of a neighborhood, the quality of life it offers, and its proximity to your job matters—a lot.

Preparing to Take the Next Big Step

If you’re definitely ready for homeownership, you’ll need to get your financial ducks in a row. Here are a few tips to get you started:

Getting Out of the Student Loan Debt Shadow

Don’t fret if your student loans aren’t paid off yet. You can Look into refinancing your student loans, which may lower your monthly payments, and/or decrease the loan term, and allow you to save faster for a home down payment.

Hitting the Homebuyer Books

Download The SoFi Guide to First Time Home Buying to learn some essential steps to take, the types of mortgages available, and common real estate terms.

Keeping Track of Your Credit Blemishes

Your credit score is one factor that will help a lender determine if you qualify for the loan; if it’s high enough, you could possibly snag better terms on your mortgage loan.

Follow a step-by-step plan for paying down debt so you can work toward boosting your credit rating. Buying a home with a significant other or a spouse is a huge personal accomplishment and major financial milestone.

Talk to a SoFi Home Loans member specialists to discover convenient loan options to help you continue on the path to homeownership.


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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

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

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

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Buying a Home: Mortgage Pre-qualification vs. Pre-approval

Buying a home can be an exciting and nerve-wracking time, especially for first-time homebuyers. There are many steps to understand and manage in the process of buying a new home. However, it’s likely a lot less stressful when you utilize our home buying guide and work with a trusted lender.

Many hopeful homebuyers believe the process begins with finding the perfect house, but diving directly into a home search skips two important steps that could end up putting buyers at a disadvantage.

Before starting to house hunt, it can be helpful to utilize a home affordability calculator to figure out how much home you can afford and then to contact a mortgage lender to discuss getting pre-qualified and pre-approved for a mortgage loan.

What does it mean to be pre-qualified and/or pre-approved for a mortgage? The two terms are often used interchangeably, but they aren’t the same thing and don’t carry the same weight when a hopeful homeowner is ready to buy.

Below is a look at how these two steps vary, how each can play a significant part in any home-buying strategy, and how they can help increase the chances of getting a home purchase offer accepted.

The Pre-qualification Process

Getting pre-qualified is a relatively quick and easy process in which mortgage applicants provide a few financial details to a lender, and the lender uses this unverified information, usually along with a soft credit pull, to let the applicants know approximately how much they may be able to borrow and at what terms.

Because pre-qualification is an estimate of what the lender thinks the applicant can probably afford based on their data input, lenders may ask some clarifying questions around income, assets, employment, and debt. Buyers likely won’t be asked to provide any paperwork that proves the information they stated is accurate at this point, so it’s pretty painless.

A pre-qualification can give an applicant a general idea of what loan programs and loan amounts they may be eligible for, but because the information provided is not verified as true and correct, this also means there’s no guarantee the mortgage loan program or amount shown at this stage will actually be approved in the future, when a hard credit pull and verification of information are completed. Not all income sources are eligible to be used for home loan qualifying.

That doesn’t make this step irrelevant, though. Pre-qualification can help buyers in a few ways. It can give them an idea of how much house they likely can afford, what loan programs they may be eligible for, and what their potential monthly payment might look like when they do get approved for a mortgage.

It might be tempting to blow through this step by providing incomplete or embellished financial information to lenders—or to skip the pre-qualification process entirely. But who wants to fall in love with a house they can’t potentially afford? And who wouldn’t want to weed out any mortgage programs or lenders that don’t suit their needs?

Mortgage LoanMortgage Loan

The Pre-approval Process

Once buyers decide on a mortgage lender or lenders, they can begin the pre-approval process. Pre-approval typically takes longer and requires a much more in-depth exchange of information than pre-qualification. The process is more formal, and at this point, lenders will do a thorough investigation of the buyer or buyers’ income sources, employment history, assets, credit history, and other financial commitments and debts.

Verification of this information, along with a hard credit pull from all three credit bureaus, allows the lender to complete a full approval of the borrower side of the loan before the borrower goes house shopping for an eligible property. Going through the pre-approval process prior to house shopping could possibly take some stress out of the loan process by breaking up the borrower and property underwriting portions of the loan. This can help the borrower focus on one aspect of the loan approval process at a time.

While a pre-qualification is usually based on self-reported and often unverified information, a pre-approval is not. Besides filling out an application, buyers may be asked to submit the following to a lender for verification:

•   Social Security number(s), birthdate(s), some other form of identification
•   Pay stubs for the past 30 days
•   W2 statements for the past two years (this is the Wage and Tax Statement employers send to employees and the IRS at the end of the year)
•   Federal tax returns from the past two years
•   60 days’ worth of documentation (or a quarterly statement) of the activity in any asset accounts, including checking, savings, and investment accounts
•   Residential addresses from the past two years, including contact information for rental companies or landlords if applicable

The lender also may require backup documentation for certain types of income. For example, those who own rental properties may be asked to show lease agreements. And freelancers may be asked to provide things like 1099’s, a profit and loss statement, a client list or work contracts.

Buyers also can expect to provide an explanation about negative information that might show up during a credit check. (To avoid any surprises or problems, proactive buyers can get an annual free credit report from freeannualcreditreport.com . This free annual report shows all balances, payments, and derogatory information but does not give credit scores. It may help potential borrowers identify and amend errors before applying for a loan.)

Those who have filed for bankruptcy in the past may have to show documentation that it has been discharged. It’s good to note that there are waiting periods and other guidelines that may need to be followed depending on the loan product and lender after a discharged bankruptcy and before you are eligible for new loan approval.

The lender will need to verify things like the amount and sources of the down payment the buyer plans to provide. If a borrower’s parents are kicking in some cash, for example, the lender will ask for a gift letter that confirms the money is a gift and not a loan, along with other supporting documentation.

Some loan programs may require that the borrower contribute a certain amount of their own money (sometimes 5%); into the loan before an outside gift can be applied. Generally, investment properties are not eligible for gift funds.

Those taking a loan or withdrawal from a 401(k) also typically will have to show the paperwork. And any sudden changes in finances may have to be explained—so it’s important to have a paper trail.

Sounds like a lot of work, right? Pre-approval lets buyers know the specific amount they are qualified to borrow from the lender, instead of just an estimate. Buyers can purchase a house for less than the approved amount—and, based on their personal budget and goals, they may want to set their own limit before they start their home search. But getting pre-approved for a larger loan can provide greater flexibility.

What can make the pre-approval process especially valuable is that it helps show sellers that buyers are serious because they are pre-approved to obtain the financing they’ll need. The lender can provide a pre-approval letter showing that an applicant has been pre-approved for a certain type of mortgage loan and a specific loan amount.

Depending on the real estate market, sellers might receive offers from multiple buyers. Having a pre-approval letter could help improve the chances that a buyer’s offer will be selected, especially if other offers are lacking a pre-approval letter.

A pre-approval letter usually expires in 90 days because of a general lending policy that the borrowers pay stubs, bank statements, etc., are considered too dated after 90 days and needs to be updated and re-verified. Then the pre-approval letter can be re-issued with a new expiration date. Buyers who run out of time might be expected to provide updated info if they want to keep looking. The expiration date typically appears on the pre-approval letter.

As with pre-qualification, a buyer isn’t required to have pre-approval to begin shopping for a home. Many real estate professionals might agree to show properties and submit offers without a pre-approval letter.

But serious buyers could benefit from knowing just how much they’re qualified to borrow and from showing sellers that their credit, income, and assets have been reviewed and approved by a lender to move forward. This letter tells the seller that certain borrower criteria are reviewed and approved and that if the property is eligible, the loan should close with no borrower issues (credit, income, downpayment) coming up as a surprise to derail the purchase.

After all, the sellers might have a timeline of their own. They might be relocating for a job. They might want to downsize for retirement. And they could already have a purchase in the works that’s contingent on selling their current home.

Borrowers seeking pre-approval may benefit from doing their mortgage rate shopping within a focused period, such as within 30 days. According to the myFICO website, “Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from rate shopping for things like auto, mortgage, or student loan lenders within a short period of time.”

Typically, these “rate shopper inquiries” are treated as a single inquiry and will have little impact on your credit scores. Scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which the inquiries occur.”

Finalizing the Mortgage Application

After a buyer finds the house they would like to purchase and the seller has accepted the offer, the next step is to finalize the mortgage application and move toward final loan approval. A borrower doesn’t have to choose a mortgage from the same place they received the pre-approval letter and could shop around for the best loan program and rate.

Once the remaining elements are received by the lender, such as the property appraisal, title report, and any inspections needed, a loan underwriter reviews the data and issues a loan commitment letter or final approval. This means that the loan has been fully approved and a closing date can be scheduled.

Buyers might want to keep in mind that even though borrowers may be pre-approved, lenders may perform another credit check right before a loan closes.

Changes to a buyer’s financial situation before loan closing could impact a loan approval. Applying for any new credit cards, auto loans, or making large credit purchases during the home-buying process could affect final mortgage approval.

Some borrowers choose to “lock in” the interest rate offered by the lender once they find a home they want to buy. This freezes the mortgage rate for a predetermined period, so the borrower doesn’t have to worry if rates rise between their accepted offer and when they actually close on the home.

It might be expensive to extend a rate lock, so one good idea would be to verify the time period to make sure it’s in effect through the escrow closing date. Review the fully executed purchase contract with the lender for closing and loan contingency timelines to be sure contract dates can be met.

Finally, even if a buyer passes the loan approval process with flying colors, the home being purchased might not. The lender will likely order an appraisal or other home valuation to be sure the selling price is accurate and that the property type (single family home, farm, etc.) or condition (dry rot, termites, etc.) are eligible for home loan financing.

The sales price might be lower than the appraised value, but if it’s higher, buyers may have to go back to the negotiating table, walk away from the deal, or come up with more cash themselves to make up the difference.

What If Buyers Don’t Qualify for Pre-approval?

Being turned down for a mortgage—or not being able to borrow as much as expected—can be disappointing. But it doesn’t have to put a complete stop to any home-buying hopes. A potential borrower might want to try to understand why they were not eligible.

Is there another loan product or lender where they might meet the lending criteria? If not, there may ways to improve certain factors that lenders look at when they’re considering who meets the lending guidelines of any given loan program.

Depending on the reasons a potential borrower isn’t meeting their chosen lenders guidelines, borrowers could possibly work on improving certain aspects that can affect home loan qualification. Borrowers might be pre-approved for a lower loan amount than expected, requiring them to downsize their expectations and find a home that’s better suited to their budget.

Which takes us back to why it might be a good idea to involve a mortgage lender at the start of the home search process. The last thing a borrower wants is to find the perfect house only to discover that they either don’t qualify for a mortgage loan or that the seller accepted another offer because they were pre-approved.

Getting pre-qualified and pre-approved are smart ways to ensure that your house hunting will lead to future homeownership.


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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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

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Home Buying 101: Knowing How Much House You Can Afford

When the idea of buying a home becomes a real possibility, figuring out what you can actually afford (or what loan amount you can qualify for to borrow) can be a little tricky.

You may have a general idea in terms of what you want your mortgage loan amount and monthly payment to be, but that number may get a little hazy during late night sessions of online house shopping.

It’s easy to start gravitating toward those professionally lit photographs of expansive, renovated kitchens and manicured gardens. You might start to think: What’s another $100,000, right?

Or maybe you really do need an extra bedroom, additional garage space, or a pool with a swim-up bar. Why not?

You can see with these examples how a person’s initial home-buying budget can quickly balloon out of control. Fortunately, we created a home affordability calculator that might help give you a sense of a suitable home-buying budget.

Additionally, there are a few simple first-time home buyer guidelines that can help you figure out your budget based on your financial profile. Taking the time to consider these factors can help you understand the realities of your budget, as well as the potential costs associated with buying a house.

How Much Am I Eligible to Borrow for a New Home?

Unless you’re planning to buy a home with your significant other or spouse in cash, you’ll need to figure out how much you can qualify for. Basically, this means learning what prospective lenders are willing to lend you.

Mortgage lenders use a few simple guidelines to help estimate how large of a mortgage you can afford. Lender guidelines are generally not set in stone; however, they just might be worth having in the back of your mind to help inform your home-buying process.

How much home can you afford? Use our
Home Affordability Calculator to
get an estimate.


How Do I Figure Out What I Can Borrow?

Regardless of the estimates mortgage calculators give you, you will need to identify the loan program and chosen lender in order to review the qualifying criteria.

Different loan programs can have varying eligibility criteria and these can even vary from lender to lender for the same loan program.

When reviewing mortgage program eligibility, the lender will consider factors such as your credit score, income, and debts, assets including the down payment as well as the type and market value of the house you want to buy.

For a conventional mortgage, such as a Fannie Mae or Freddie Mac, lenders are typically looking for a debt-to-income ratio (DTI) no higher than 50% , which is the maximum allowable DTI under these programs with automated underwriting approval.

You can come up with this ratio by adding up all your monthly ongoing debt payments and dividing them by your gross (or pre-tax) W2 monthly income. When it comes to a credit score, however, although the Fannie Mae minimum FICO score is 620, the actual minimum score requirement may vary from lender to lender.

So how do you determine how large of a loan a lender might extend to you once you identify which loan program you would like to qualify for such as conventional, jumbo, FHA, etc.?

Getting Prequalified

To get prequalified for a mortgage, you would need to enter details about your finances, such as your income, assets, and debt. In most cases, you don’t need to supply any backup documents at this stage—the lender gives you an initial figure based on your input.

If you qualify for a mortgage, the lender can give you a prequal letter conditionally confirming your ability to buy a home up to a certain price. Although that number isn’t final, it can be a good way to get a ballpark idea of what you can afford as you shop for homes.

Getting prequalified at several different lenders can give you a sense of your options as far as loan amounts, terms, and rates. Getting prequalified or preapproved at several lenders may result in multiple credit inquiries which may or may not affect your credit score.

Soft credit pulls usually performed at the prequalification stage normally do not affect your credit score, whereas a hard credit pull normally completed at the preapproval stage usually does result in a credit inquiry which may affect your score.

Getting Preapproved

When you apply for a mortgage preapproval the information you entered at the prequalification stage is verified as true and correct. At this stage you’ll need to give the lender records that prove your employment history, income, assets, and liabilities that aren’t on the credit report.

The lender will likely do a hard credit pull at this stage to verify your qualifying credit score and check for any history of late payments or other negative financial events. A preapproval letter can give you a more accurate picture of what size loan amount you are eligible to borrow and provide a stronger foundation when bidding on a home.

Keep in mind that, even if you are preapproved, it’s unlikely that you’ll lock in an interest rate until your bid is accepted and you are actively in contract to close because some lenders require a property address in order to lock in an interest rate.

How Big Are Down Payments Typically?

Typically, homebuyers are encouraged to put down as much as they feel they can reasonably afford. The more you put down, the less you’ll be borrowing, which means you’ll have a lower monthly mortgage payment.

And because you’re borrowing less, you’re paying less interest over the course of loan amortization

Traditionally, the down payment for a home purchase was 20%. But with the increase in home prices, this is not always realistic.

In fact, first-time homebuyers put down an average of 5%, according to the National Association of Realtors ®. However, if you put down less than 20%, you may end up having to pay PMI, which typically costs between 0.3% and 1.5% of your loan amount annually.

Note that this type of insurance protects the lender, not you, in case you have trouble repaying the loan. There are exceptions: When you borrow with SoFi, you may be able to avoid PMI by putting as little as 10% down (on jumbo loans only).

Deciding what to put down depends a lot on your financial situation. Making a large down payment may be wise, but you may want to consider having enough savings left over to cover all home buying fees, like closing costs.

One potential cost to factor into a home-buying budget is the amount you may need to have in reserve—sometimes required by loan programs.

Although this may not be necessary for conforming primary residences, for secondary, Jumbo, and income properties, you may need to have liquid assets (as in easily accessible money) that will cover at least two months and sometimes more of your total mortgage payment.

Additionally, although this won’t factor into a borrower’s mortgage budget when buying a home, it may be helpful to consider future renovations they may want to make to their home, and factor in those potential costs—even if they won’t need the money immediately.

Making sure you have enough in your coffers to cover the wants and the unexpected—and maintain your current lifestyle—is crucial. Most experts recommend having an emergency fund worth at least three to six months of living expenses to avoid having to take on additional debt if unforeseen costs come up.

Sometimes this means waiting a little longer so you can save for a larger home, or maybe setting your sights on a more affordable home that you can enjoy stress-free.

You can check out our mortgage calculator to get a quick and easy look at different financing scenarios.

If you’re ready to start making your homeownership dreams a reality, take two minutes to find your rate for a SoFi mortgage loan.


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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

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