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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.

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SOHL-Q425-056

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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

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.

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

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-Q425-192

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While it is possible to take out a Federal Housing Authority (FHA) loan to purchase a second home, it’s only allowed in a handful of specific scenarios. Many first-time homebuyers choose an FHA loan because of its lower credit score and down payment requirements, so when they need to purchase a second home the natural instinct is to look at financing with a second FHA loan. Read on for more details on how FHA loans work and the few exceptions that allow borrowers to qualify for more than one at a time.

What Is an FHA Loan?

An FHA loan is a type of mortgage that’s insured by the federal government and issued by a lender. FHA loans were created in 1934 at the height of the Great Depression to make homeownership more accessible. Since the FHA assumes the risk in case of default, lenders are able to offer more favorable loan terms to borrowers who might not otherwise qualify for conventional home mortgage loans.

With an FHA loan, borrowers with credit scores of 580 or more may qualify for a down payment of 3.5% of the home purchase price. (Borrowers with credit scores between 500 and 579 will be required to put 10% down.) These FHA loan requirements are helpful for first-time homebuyers who haven’t built up their credit or borrowers with less savings to put toward a down payment. FHA loans are one of several options for low-income home loans, so consider all your options, whether you are thinking about taking out a first or second FHA loan.

Borrowers must also get mortgage insurance with an FHA loan. FHA mortgage insurance involves an upfront premium and an annual payment that’s added to monthly mortgage payments. The upfront premium is equivalent to 1.75% of the loan, while the annual payment is calculated based on the loan-to-value ratio and loan terms.

Besides the purchase of a home, FHA-insured loans are also available for home renovations and refinancing an existing FHA loan.

Recommended: How Do FHA 203(k) Loans Work?

How You Can Get an FHA Loan for a Second Home?

It’s possible to get an FHA loan more than once. For instance, if you’ve sold a prior home and haven’t owned a home for three or more years, you’d qualify as a first-time homebuyer and be eligible for an FHA loan. (And if you have a conventional mortgage on your first home, you may be able to get an FHA loan for a second home provided your credit score is adequate and your budget can handle the cost of a second mortgage; you would also have to occupy the second home as your primary residence.)

Meanwhile, qualifying for a second FHA loan is more complicated. For one, the purchased property must become the primary residence for at least one borrower. This includes a requirement to occupy the property within 60 days and have it be their primary residence for at least one year. These occupancy requirements mean that an FHA loan can’t be used to buy vacation homes or rental properties.

Here are details on the exceptions that permit borrowers to get an FHA loan on a second home:

•   Relocation: If moving for employment-related reasons, borrowers who financed their current home with an FHA loan may qualify for a second FHA loan on a new home before or without selling their first property. However, to qualify, the job must be performed on-site and the new home must be located at least 100 miles away from the primary residence that was previously purchased with FHA-backed financing.

•   Increase in Family Size: Borrowers may qualify for a second FHA loan to purchase a larger home to accommodate their growing family. This is evaluated on a case-by-case basis but typically requires proof of an increase in legal dependents and having at least 25% equity in the home.

•   Vacating a Jointly Owned Property: Borrowers who are getting divorced or permanently vacating a home they inhabited with a co-borrower may qualify for a second FHA loan.

•   Cosigning: A borrower who cosigned an FHA loan but didn’t live in the property could qualify for another FHA loan to buy their own home.

Recommended: FHA Loan Mortgage Calculator

FHA Second-Home Requirements

For borrowers who can satisfy one of the exceptions outlined above, the next step is meeting financial eligibility requirements for a second FHA loan. With any loan, and especially a second mortgage, lenders will consider the borrower’s ability to afford monthly payments when determining if they qualify. FHA loans can allow a debt-to-income (DTI) ratio of up to 50%, meaning that half of a borrower’s income is going to debt payments. Lenders, however, may look for a lower DTI of 43%, accounting for the cost of both mortgages, to approve a second FHA loan.

Borrowers will need to meet FHA loan credit score criteria to determine whether they’ll need to put 3.5% or 10% down. Besides the down payment, lenders also factor in savings for covering closing costs and monthly payments.

Pros and Cons of Multiple FHA Loans

There are advantages and drawbacks to having FHA loans for borrowers to keep in mind.

Tips if You’re Considering Multiple FHA Loans

Consider these tips to be prepared to apply for a second FHA loan: To lower your DTI ratio, you’ll either need to increase your income or lower your debt. Using your first home for rental income can demonstrate to lenders that you can afford having two mortgages. When evaluating debt, remember that established credit that’s in good standing is viewed more favorably than newer credit accounts.

Building more equity in the home you currently own is another option to help qualify for a second FHA loan. If possible, aim for at least 25% equity before applying for a second FHA loan, as this is the minimum required if you are citing an increase in family size as the exception.

The Takeaway

Can you get an FHA loan if you already have an FHA loan? Yes, but there are specific exceptions you’ll need to meet in order to qualify, and the new property must be used as a primary residence for at least one year. Not able to take out two FHA loans at once? Don’t worry. There are other options for borrowing that may suit your needs.

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

What will disqualify you from an FHA loan?

Borrowers could be disqualified from an FHA loan based on a high debt-to-income ratio, poor credit, or insufficient funds to cover the down payment, closing costs, and monthly mortgage payment.

Can you qualify for FHA twice?

Yes, you can get a second FHA loan if you are relocating for a new job and need to move at least 100 miles away, have an increase in family size, or vacate a jointly owned property. Borrowers who previously co-signed on someone else’s FHA loan may also qualify for FHA twice.

What is the 100-mile rule for FHA loans?

The 100-mile rule allows borrowers to get a second FHA loan without having to sell an existing property with a FHA-backed mortgage if they’re moving for employment-related reasons to a location that’s at least 100 miles away.

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Photo credit: iStock/nazar_ab

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.

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

^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.

SOHL-Q425-165

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Owning your own home is typically a foundation of the American Dream, and many people are saving for a down payment right this minute. But when you are already paying rent, it can be a challenge to put aside money for a down payment on a house, especially if you live in an area with a high cost of living or are dealing with the impact of inflation.

But that doesn’t mean it can’t be done. You can save up for your home purchase by following some wise financial advice and simplifying the process of socking away your cash. If buying a home is a priority for you, read on. You’ll learn how to grow your down payment savings while still paying rent.

5 Tips to Save for a Home While You’re Still Renting

Rent can take a big bite out of your take-home pay, but it doesn’t rule out saving for a down payment on a house. Here’s some smart budgeting advice to help you set aside money for your future homeownership.

💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

1. Pay Down Your Debt First

In order to save for a house, it’s wise to figure out a plan to pay down your existing debt. This will free up more money for you to save for that down payment. Also, when you do apply for a mortgage, you will likely have a lower debt-to-income ratio, or DTI ratio. Reducing your DTI ratio can help your application get approved.

Student loan debt is a common kind of debt to have; the average American right now has $39,375 in loans. If you’re a full-time employee, reach out to your company’s HR department to learn more about student debt repayment assistance. A recent survey by the International Foundation of Employee Benefit Plans found that 14% of companies in the U.S. currently have this type of assistance, so it’s worth a try.

As a more drastic measure, you could always think about going into a profession that offers partial or total student loan forgiveness (such as teaching in certain public schools) or moving to a state that will help pay off your student loan debt just for moving there (currently Kansas, Maine, and Maryland).

For an easier fix, you could consider student loan refinancing options, which might lower your rate. By dropping your interest rates, you could significantly reduce both your payments and the length of time you’ll be making them.

However, a couple of points to note. If you extend your term to lower the payment, you will pay more interest over the life of the loan. Also, do be aware that, when refinancing federal loans to private ones, you may then no longer be eligible for federal benefits and protections. However, by getting a lower interest rate, you may accelerate your path to saving for your down payment and getting keys to your very own home.

Credit card debt can also play a role in preventing you from saving for a down payment. This is typically high-interest debt, with rates currently hovering just below 20%. “One go-to way to pay off debt is the snowball method,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “You pay off your smallest balance first, while keeping up with minimum payments on other debt. The benefit is seeing some of your debt paid off sooner.” There are other ways to pay down debt, including the debt avalanche method, which has you focus on your highest-interest debt first, and the debt fireball method, a combination of the avalanche and snowball techniques. If none of these methods seems right for you, you might look into getting a balance transfer credit card, which will give you a period of zero interest in which you may pay down debt. Or you might take out a personal loan to pay off the credit card debt and then potentially have a lower interest loan to manage.

2. Create a Budget That Will Help You Spend Less and Save More

Another way to free up funds for that down payment is to budget well. Creating and sticking to a realistic budget can help you spend less while saving for a house. While budgeting can sound like a no-fun, punitive exercise, that really doesn’t have to be the case. A budget is actually a helpful tool that allows you to manage your income, spending, and saving optimally.

To get there, you can pick from the different budgeting methods. Most involve these simple steps.

Gather your data: Figure out how much you’re earning each month (after taxes), along with how much you’re currently spending. Add it all up including cell phone bills, insurance, grocery bills, rent, utilities, your coffee habit, the dog walker, gym membership, etc. Don’t miss a dime.

List your current savings: Are you currently putting money into an IRA, 401(k), or other savings plan? List it, so you can see what you’ve already got in the bank.

Really dig into and optimize your spending: Can you cut back anywhere? You might trim some spending by bundling your renters and car insurance with one provider. Perhaps you can save on streaming services by dropping a platform or two. And how’s your takeout habit? If you really want to save for a house, you may need to learn to cook. You might even consider taking in a roommate or moving to a less expensive place to turbocharge your savings for your down payment while renting.

Making cuts, admittedly, can be the toughest step in the budgeting process, but it’s crucial to be honest with yourself about your spending. Remember: However much you cut back can help you get a new home that much sooner.

Finally, check in on your budget every so often and adjust as needed. For example, if you land a new job, get a promotion, or are given an annual raise, perhaps you can add that money to your savings account or put it toward paying off your loans. Whichever one feels more important to you is OK, so long as that extra cash isn’t vanishing on impulse buys.

Recommended: The Best Affordable Places in the U.S.

3. Investigate How Big a Down Payment You Actually Need

Many prospective homebuyers think they must have 20% down to buy a house, but that is not always the case. That is how much you need to avoid paying for private mortgage insurance (PMI) with a conventional conforming loan. Private mortgage insurance typically ranges from 0.5% to 2% of the loan amount, and it’s automatically canceled when your equity reaches 78% of the home’s original value.

Here are some valuable facts: You may be able to take out a conforming loan with as little as 3% down, plus PMI. Certainly, that’s a sum that can be easier to wrangle than 20%, though your mortgage principal will be higher. According to National Association of Realtors® data, the median down payment for a first-time homebuyer is 9%.

In addition, you might qualify for government loans that don’t require any down payment at all, such as VA and USDA loans.

You might also look into regional first-time homebuyer programs that can provide favorable terms and help you own a property sooner.

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

4. Grow Your Savings

If you’ve paid off your debt, set realistic budgeting goals, and are raking in some dough to add to a savings account, you’re already on the right track. A good next move is to put your money to work for you. Among your options:

•   Open a high-interest savings account. These can pay multiples of the average interest rate earned by a standard savings account. You will frequently find these accounts at online vs. traditional banks. Since they don’t have brick-and-mortar branches, online financial institutions can save on operating costs and can pass that along to consumers. Just be sure to look into such points as any account fees, as well as opening balance and monthly balance requirements. (Features such as round-up savings can also help you save more quickly.)

You can also look into certificates of deposit (CDs) and see what interest rates you might get there. These products typically require you to keep your funds on deposit for a set period of time with the interest rate known in advance.

•   If you have a fairly long timeline, you might consider opening an investment account to grow your savings. The market has a historical 10% rate of return, though past performance isn’t a guarantee of future returns. You could try using a robo advisor, or you could work with a financial advisor. Just be aware that investments are insured against insolvency of the broker-dealer but not against loss.

Recommended: First-time Homebuyer Guide

5. Automate as Much of Your Finances as Possible

This is a lot of information to process, but once you get through all the work upfront, you can start automating as much as possible. For example, have a portion of your paycheck automatically go into your savings account each month to plump up that down payment fund.

You might set up the direct deposit of your paycheck to send most of your pay to your checking account and a portion to a savings account earmarked for your down payment. You can check with your HR or Benefits department to see if this is possible.

Another way to automate your savings is to have your bank set up a recurring transfer from your checking account, as close to payday as possible. That can route some funds to your down payment savings without any effort on your part. Nor will you see the cash sitting in your checking account, tempting you to spend it.

The Takeaway

While saving for a down payment isn’t exactly a piece of cake, it doesn’t have to feel overwhelming. By trying five effective strategies, which can include budgeting, paying down debt, and automating your savings, you can accumulate enough money to start on your path to homeownership.

Once you have the down payment taken care of, you’ll be ready to shop for a home mortgage that suits you.

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 much should I save before buying a house?

How much you should save before buying a house will depend on the price of the house and what your monthly mortgage payment would be after the purchase. You could use a home affordability calculator to determine what price house you could afford based on your income and debts. Then use a mortgage calculator to see how much of a down payment you would need to put down in order to get to a monthly mortgage payment you can afford.

Can I save enough to buy a house in two years?

Whether or not you can save enough money to buy a home in two years depends on your current income, your monthly expenses, and the cost of the home you might want to buy. For a general sense of whether it’s possible, you might look up the median price of a home in the area where you would like to live, then multiply that number by .4 to get a rough idea of how much money you would need for a minimum down payment with a small cushion for closing costs. How long would it take you to save that much money based on your current rate of saving?

What is the 30 percent rule in real estate?

The 30 percent rule is a longstanding guideline that says no more than 30% of your gross income should go to housing costs.

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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.

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.

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.
SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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