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In housing markets teeming with buyer demand, it’s not uncommon to put an offer on a home only to be outdone by a competing offer. If two or more potential buyers want a property badly enough, they may find themselves locked in a bidding war.

The tea leaves indicate that 2023 will throw cold water on many bidding wars, but certain markets in the country could remain competitive.

Here’s how to increase your chances of winning a bidding war so you don’t have to bid adieu to a home you really want.

1. Know How a Bidding War Works

Bidding wars usually take place in a seller’s market, when demand outpaces housing inventory. They also typically occur when there are multiple interested parties and when there is some sort of constraint, like timing.

When a seller’s agent receives offers for a property that has attracted a lot of buzz, the agent may set a date by which would-be buyers should make their “highest and best” offer. Sellers can accept the best offer, counter one offer while putting the others to the side while awaiting a decision, or counter one offer and reject the others.

This brings up a salient point: It’s true that you can buy a house without a Realtor® or real estate agent, but an experienced agent can guide you through offers and counteroffers, contingency snags, and more.

2. Line Up Your Financing

One of the best things you can do to be prepared for a potential bidding war — or really any time — is to get your finances, and financing, in order.

Be sure to know how much house you can afford, including a down payment and monthly payments.

Determine if you qualify for a mortgage and familiarize yourself with the types of home loans that are available: government-backed loan or conventional loan, fixed rate or adjustable rate.

Getting preapproved for a mortgage will give you a specific amount that a lender is tentatively willing to let you borrow.

And a preapproval letter shows sellers that you are a serious candidate to buy a home. Many experts recommend getting at least three preapproval letters from three lenders.

3. Lessen or Drop Contingencies

Contingencies are certain conditions that must be met before a real estate deal becomes binding. Potential buyers can back out of a deal without penalty if the contingencies aren’t met.

A clean offer, one with as few contingencies as possible, is attractive to sellers in a competitive market.

In a typical real estate market, a common contingency is the mortgage contingency, or financing contingency, which allows homebuyers to exit the deal and have their earnest money returned if they cannot secure financing by the agreed-upon deadline.

Another is the inspection contingency. Based on the findings of a professional inspection, the buyer may be able to negotiate repairs or the price, which are known as seller concessions if the sellers are agreeable, or cancel the contract.

Waiving contingencies shows your eagerness to triumph, but it comes with risk. The biggest is losing your earnest money deposit if you hit a snag.

4. Be Quick About These Contingencies

Sellers want to avoid spending a lot of time with a potential buyer only to have the deal fall through. If you’re including appraisal and inspection contingencies, do what you can to expedite them.

The real estate purchase contract includes any contingencies, the sales price, the closing date, and the date of the title transfer and possession. The contract is considered a working document until both parties agree on the terms.

5. Use an Escalation Clause

Unsurprisingly, one of the best ways to win a bidding war is by offering more money.

You may want to include an escalation clause in the contract if you assume there will be multiple offers.

The clause asserts that if another buyer makes a competing offer, your bid will automatically increase by a certain amount, up to a limit, to exceed the offer.

Say you put a $400,000 offer on a home, with an escalation amount of $10,000 and a ceiling of $430,000. If someone else bids $410,000, you will automatically bid $420,000, up to your ceiling.

6. Stay Flexible

A willingness to be flexible can give you a leg up in the eyes of a seller.

For example, a seller might be moving across the country for work and need to close by a specific date. So if you can get the appraisal and inspection done swiftly, that could be a huge plus.

Alternatively, sellers may need to stay in the house for a while. Working with them on their specific needs could give you an edge.

7. Pay With Cash

If you are able to do it, buying a house with cash can be very attractive to sellers. The process is typically much faster than going through a lender, and sellers don’t want to worry about financing issues that might hold up the deal or cause it to fall through.

It’s even possible that a seller would choose a cash offer over a slightly higher offer backed by a mortgage.

8. Increase Your Deposit

There are timeless standards for how to make an offer on a house. One is determining the size of your earnest money deposit.

The deposit, held in escrow by the title company, secures the real estate contract. It tells the seller that you are serious about buying the house.

Earnest money is typically 1% to 3% of the purchase price but can be more in a competitive market. If you close on the home, the deposit will be applied to your closing costs.

9. Write a Personal Letter

When sellers are choosing a buyer during a bidding war, they’re often just looking at numbers on a page. Consider writing a real estate offer letter, aka love letter, to humanize the transaction.

You might want to make a case for why you’re the ideal candidate to buy the home, and note commonalities: You’re a ceramicist and noticed an artist’s studio in the backyard. You have dogs; they have a dog. That big elm reminds you of the one at your childhood home.

Be complimentary about the things you like about the house and how it has been maintained. And be concise.

The Takeaway

Whether you’re buying in a time of burgeoning bidding wars or not, it’s good to know how they work. The tactics help homebuyers understand the lay of the real estate land: contingencies, earnest money, escalation clauses, love letters.

If you’re gearing up for a bidding war or a peaceful purchase, see what SoFi Mortgages are all about. The rates are competitive. A number of repayment terms are offered. And qualifying first-time homebuyers can put as little as 3% down.

Getting prequalified is the first step.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility 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.

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

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Congratulations; You’ve found a house you love and want to buy. You may even be in the final stages of closing on this dream home. But sometimes, you may need to access what’s known as an escrow holdback: a way of setting aside funds at the closing for repairs that are most definitely needed as you take ownership.

For example, what happens if a blizzard hits the week before your scheduled closing, revealing a leaky roof that needs major (pricey) repairs?

This wasn’t something that showed up in the initial inspection report. Or, maybe it did show up in the inspection report, but the issue is suddenly much more pressing in light of said snowstorm. Either way, these repairs can’t be made at this particular time because it’s winter and, well, it’s snowing outside.

What’s a buyer to do? In this scenario, an escrow holdback could be a path to funding the necessary repairs without blowing your closing date. Here, you’ll learn more about escrow holdbacks, including:

•   What is an escrow holdback?

•   How does an escrow holdback work?

•   What qualifies for an escrow holdback?

•   What if your situation doesn’t qualify for a holdback?

Escrow Holdbacks Defined

Before defining escrow holdbacks, here’s what escrow is: Typically, it’s money held by a third party as assets (such as real estate) are being transferred.

An escrow holdback agreement, however, occurs when money is set aside at the closing of a home to complete repairs. Generally, this is done at the seller’s expense, though not always.

Money is held in an escrow account until the repairs are completed. The funds can then be released. Another name for an escrow holdback that you may hear used is a repair escrow.

This may sound like a pretty good arrangement, but an escrow holdback isn’t a possibility for every borrower and in every scenario. Consider the following:

•   The lender’s underwriter will review the appraisal and any accompanying inspection reports to confirm that the sales price is met and that the property does not show evidence of any deferred maintenance items that can have an effect on things like safety, soundness, or structural integrity.

•   These are often referred to as health and safety issues. Health and safety issues can affect whether the home is eligible for financing.

•   Most lenders will not close a loan on a home that has been called out for things like missing railing, stairs, fencing, and much more.

It’s not hard to imagine a situation where a homebuyer needs the seller to repair something that cannot be completed until after the contract’s closing date, like in the snowstorm example above. Depending upon the repair, a lender may allow for the seller to place funds in escrow for what’s known as defect cure within a specified period of time for a specified amount.

These repairs could be expected or unexpected as the parties move through the home-buying process. Generally, the appraiser calls out the more obvious issues that hurt a home appraisal and may recommend further inspection by an expert for something noted in their report. If an appraiser requests an inspection, the lender’s underwriter may review the report and require some repairs.

Another example of a situation in which an escrow holdback could be a valuable tool: when a seller needs the proceeds from the sale of the home in order to comply with the repair request.

These are examples of how and when an escrow holdback could be warranted and beneficial.

Recommended: 31 Ways to Save for a Home

How Does the Escrow Holdback Process Work?

If you’re curious about how the escrow holdback process works, consider these points that spell out the process in more detail:

•   Normally, the first step is the buyer’s and seller’s agents negotiating any required repairs through an addendum to the purchase contract. This is drawn up by the real estate agents and signed by all parties.

•   The document will likely outline the repairs that the buyer (or lender) would like the seller to make, the timeframe for those repairs, and details about how and when the payments to the contractors are to be made.

•   This contract addendum is then sent to the escrow company (or the attorney) and to the lender, who will review the document. The underwriter of the loan will have the last say as to whether the escrow holdback is approved.

•   If it is approved, then the closing may proceed as initially planned. However, not all holdback requests will be approved.

   The lender may have conditions around the approval of an escrow holdback. These can include but are not limited to such requirements as improvements having to be completed within 180 days of the mortgage closing date.

•   The lender will likely establish an escrow completion account with the title company from the purchase proceeds. This is typically equal to 120% of the estimated cost for completing the improvements and more.

•   Once the repairs are completed, another inspection occurs to verify that the work has been satisfactorily finished. The escrow account can then release the funds.

It’s important to note that not all transactions qualify for an escrow holdback. The criteria can vary between lenders, property, and even type of transaction (sale of existing property or of a new construction home).

Recommended: What to Look for When Buying a House

What Qualifies for an Escrow Holdback?

Generally, lenders prefer that repairs take place prior to the closing, but exceptions can be made — like when repairs must be delayed due to inclement weather.

This may limit escrow holdbacks to repairs that require some work on the outside of the home, such as repairs to a roof, yard, or plumbing accessed outdoors.

Here are some types of repairs that are factors that affect property value and residents’ safety and may qualify for an escrow holdback:

•   Patio problems

•   Pest control

•   Roof repair

•   Septic tank issues

•   Sprinkler system problems

•   Yard cleanup

Again, there are no sure things or guarantees of how an escrow holdback will work. That’s because it is ultimately up to all of the involved parties to agree on the terms.

Beyond the weather causing a delay, lenders are often looking to determine whether the repairs present a risk to the property (their collateral) or present health and safety issues to the prospective occupants. As you might imagine, a lender generally won’t want to make a loan for a property that they believe could threaten the health or safety of its occupants.

Recommended: The 7 Steps to Buying a House

What if Your Situation Doesn’t Qualify for a Holdback?

Say you believe there is an issue that merits an escrow holdback, but the lender doesn’t approve it. Now what? There’s not much, unfortunately, that you can do in this situation. The most likely scenario is that the closing date will need to be pushed out to make time for any required repairs before loan closing.

As you pursue an escrow holdback, it might be helpful to understand that some lenders’ guidelines may not offer escrow holdbacks under any conditions.

This could be due to such issues as the follow-up involved in closing the holdback proves too arduous. Or perhaps there are difficulties in getting the repairs completed within the specified period of time given. If lenders have been burned in any of these ways in the past, they may decide the process is too risky.

In the event that a lender refuses an escrow holdback agreement, you might have to delay your closing. If the lender also refuses to make a loan, you (the buyer) could be in a very tough spot. Even if you’re willing to pay for the cost of repairs in order to move forward with the lending process, this may not be in your best interest.
You do not yet own the property, and issues can arise from making repairs.

It may be wise to get your real estate lawyer’s and real estate agent’s opinions about how to handle this kind of difficult situation. They can help you explore any options that exist.

Recommended: First-time Homebuyer’s Guide

The Takeaway

Escrow holdbacks can be a way to solve for needed repairs of a property you are interested in buying or have already begun to purchase. By keeping funds in this kind of account, the parties involved may be able to satisfactorily complete the work needed and pay for it in a clear and equitable way.

No matter your situation, you’ll likely want to work with a lender that can help you navigate the home-buying process. While you’re shopping for a mortgage, check out customer service reviews in addition to rates and terms.

SoFi offers mortgage loans with competitive rates and low down payment options. Plus, the process is simple, quick, and convenient.

Looking for an affordable mortgage loan that you can access easily? See what SoFi has to offer!

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

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

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Better to buy or rent? The price-to-rent ratio is a reference point that can help gauge affordability in any city — especially for people on the move. More specifically, the price-to-rent ratio can be helpful when looking at a certain area and deciding whether to sink your life savings into a home, or pay a landlord and wait to buy.

Read on to see the home price-to-rent ratio in some of the biggest U.S. cities.

First, What Is the Price-to-Rent Ratio?

The price-to-rent ratio compares the median home price and the median annual rent in a given area. (You’ll remember that the median is the midpoint, where half the numbers are lower and half are higher.) To make sense of a city’s price-to-rent ratio, here’s a general idea of what the number suggests:

•   A ratio of 1 to 15 typically indicates that it’s more favorable to buy than rent in a given community.

•   A ratio of 16 to 20 indicates that it’s typically better to rent than buy.

•  A ratio of 21 or more indicates that it’s much better to rent than buy.

As you can see, the ratios could be useful when considering whether to rent or buy. Investors also often look at the ratios before purchasing a rental property.

The number also may be used as an indicator of an impending housing bubble. A substantial increase in the ratio could mean that renting is becoming a much more attractive option in that specific housing market.

If you’re exploring different areas, it can also be a good idea to estimate mortgage payments based on median home prices. That way, you can determine if it’s a cost you can reasonably afford to add to your budget on a monthly basis.

Recommended: Cost of Living Index by State

Price-to-Rent Ratio by City

Here are 52 popular metropolitan areas and their price-to-rent ratios. As of the third quarter of 2022, the median home sale price in the U.S. was $454,900, the Federal Reserve Bank of St. Louis reported.

Median sale price listed comes from Redfin as of December 2022. Median rents listed come from the Zumper National Rent Report from November 2022, based on a one-bedroom apartment. Remember, as home prices and rents shift over time, so do the ratios.

1. San Francisco

It’s no secret that San Francisco housing prices are way up there. The median sale price was $1,352,500, and the median rent for a one-bedroom apartment was $3,000 per month (or $36,000 a year). That gives the hilly city a price-to-rent ratio of nearly 38.

2. San Jose, Calif.

Golden State housing continues its pricey reputation in San Jose. The median sale price here was $1,222,500, and the city had a median one-bedroom rent of $30,480 annually ($2,540 a month), leading to a price-to-rent ratio of 40.

3. Seattle

The Emerald City had a median sale price of $820,000. Meanwhile, the median annual rent for a one-bedroom was $23,160, for a price-to-rent ratio of around 35.

4. Los Angeles

A median sale price of $965,000 and a median one-bedroom rent of $29,160 a year ($2,430 a month) shines a Hollywood light on renting, with a rent-to-price ratio of 33.

5. Long Beach, Calif.

With a median home price of $765,000 and one-bedroom rent averaging $1,770 a month, Long Beach earned a ratio of 36.

6. Honolulu

The ratio in the capital of Hawaii is a steamy 25, with a $552,500 median sale price and a median rent of $21,600 per year.

7. Oakland, Calif.

Oakland, across the bay from San Francisco, had a median sale price of $870,000 and median rent of $26,760 a year ($2,230 a month). This earned the location a price-to-rent ratio of 32.

8. Austin, Texas

A hotbed for artists, musicians, and techies, Austin had a price-to-rent ratio of nearly 27. This was thanks to a median sale price of $540,000 and median annual rent of $20,160.

9. San Diego

Hop back to Southern California beaches and “America’s Finest City,” where a median sale price of $835,000 and median rent of $30,000 a year led to a ratio of almost 28.

10. New York, N.Y.

The median sale price here was $790,000 and median rent was $45,480 a year ($3,790 a month), which equates to a price-to-rent ratio of roughly 17.

Of course, the city is composed of five boroughs: the Bronx, Brooklyn, Manhattan, Queens, and Staten Island, and it’s probable that most of the sales under $790,000 were not in Manhattan (where the median sale price was $1.2 million) or Brooklyn (where the median was $950,000). Just looking at Manhattan using the same annual average rent figure, the ratio looks more like 26.

11. Boston

With a median sale price of $775,000 and median rent of $36,000 a year, Beantown had a price-to-rent ratio of over 21.

12. Portland, Ore.

The midpoint of buying here of late was $524,500, compared with median rent of $18,480 per year, for a price-to-rent ratio of 28.

13. Tucson, Ariz.

In Tucson, the median sale price of $329,950 and median annual rent of $11,280 came out to a ratio of 29.

14. Denver

The Mile High City logged a renter-leaning ratio of nearly 29, thanks to a median sale price of $575,000 and median annual rent cost of $20,040.

15. Colorado Springs, Colo.

With a median sale price of $420,000 and annual rent of $14,760, this city at the eastern foot of the Rocky Mountains had a recent price-to-rent ratio of 28.

16. Albuquerque, N.M.

In the Southwest, Albuquerque heated up to a ratio of 26, based on a median home sale price of $300,000 and annual rent of $11,400.

17. Washington, D.C.

The nation’s capital is another pushpin on the map with a high cost of living. The median sale price of $650,000 compares with median rent of $27,600 annually ($2,300 a month), translating to a ratio of nearly 24.

18. Mesa, Ariz.

With a median sale price of $430,000 and median annual rent of $16,320, Mesa has a price-to-rent ratio of 26.

19. Las Vegas

Sin City has reached a ratio of 25, based on a $385,000 median sale price vs. $15,600 in annual rent.

20. Phoenix

Phoenix’s price-to-rent ratio has revved up to 24, with a median home sale price of $408,000 and $16,680 in rent.

21. Raleigh, N.C.

North Carolina’s capital, the City of Oaks, logs a ratio of nearly 27. This is based on a $407,500 median home sale price and median annual rent of $15,240.

22. Tulsa, Okla.

Tulsa had a price-to-rent ratio of 19, with median annual rent of $10,680 and home sale prices at a median of $203,750.

23. Dallas

This sprawling city had a recent median sale price of $400,000 and median annual rent of $17,040, leading to a price-to-rent ratio of 23.

24. Sacramento, Calif.

This Northern California city had a recent median sale price of $450,000 and median annual rent of $18,720, for a price-to-rent ratio of 24.

25. Fresno, Calif.

Fresno makes the list with a price-to-rent ratio of 20, based on median home sale prices of $380,000 and median annual rent of $15,960.

26. Oklahoma City

The capital of Oklahoma had one of the lower price-to-rent ratios until recent home price spikes. It logs a ratio of 24 lately, based on a median sale price of $251,800 and median annual rent of $10,440.

27. Arlington, Texas

Back to the Lone Star State, this city between Fort Worth and Dallas has a price-to-rent ratio of 24. This is thanks to a median sales price of $320,000 and median annual rent of $13,200.

28. San Antonio

This Texas city southwest of Austin had a median sale price of $285,000 and median annual rent of $13,920, resulting in a price-to-rent ratio of 20.

29. El Paso, Texas

El Paso traded a low price-to-rent ratio for a higher one when home prices rose. It’s at a 23, based on recent figures of a median sale price of $235,000 and median rent at $10,200 a year.

30. Omaha, Neb.

With a median sale price of $255,000 and median annual rent of $10,920, Omaha has a recent home price-to-rent ratio of 23.

31. Nashville, Tenn.

The first Tennessee city on this list is the Music City, with a price-to-rent ratio of 21. Nashville has a median sale price of $440,000 and a median annual rent of $20,400 ($1,700 per month).

32. Virginia Beach, Va.

The ratio here has nearly reached 20, based on a median home sale price of $330,000 and median rent of $16,800 per year.

33. Tampa, Fla.

This major Sunshine State city has a price-to-rent ratio of almost 21, based on a median home sale price of $410,000 and median annual rent of $19,800.

34. Jacksonville, Fla.

This east coast Florida city had a recent ratio of 19, based on a median sale price of $289,000 and median rent of $15,000 per year.

35. Charlotte, N.C.

Charlotte’s price-to-rent ratio of 22 arises from a median home sale price of $391,900 and median annual rent of $17,760.

36. Fort Worth, Texas

Panther City’s price-to-rent ratio has crept up to 22, based on a median home sale price of $340,000 and median rent of $15,120 per year.

37. Houston

Houston, we have a number: it’s a price-rent-ratio of 19. That’s based on a median sale price of $305,000 and median annual rent of $16,080.

38. Louisville, Ky.

Kentucky’s largest city has a median home sale price of $224,950 and median annual rent of $12,720. That leaves Louisville with a price-to-rent ratio of almost 18.

39. Columbus, Ohio

The only Ohio city on this list has a price-to-rent ratio of 19, due to a median sale price of $249,900 and median annual rent of $12,840.

40. Atlanta

Heading South, Atlanta has a median sale price of $400,000 and median annual rent of $19,440, for a price-to-rent ratio of 20.

41. Miami

Those looking to put down roots in this vibrant city will find a price-to-rent ratio of just under 19, based on a median home sale price of $525,000 and median rent of $19,200 annually.

42. Minneapolis

The Mini-Apple is sweeter on renting, with a ratio of 21. This is based on a median sale price of $320,000 and median annual rent of $14,880.

43. New Orleans

Next up is another charming southern city. New Orleans has a price-to-rent ratio of nearly 18, given a median sale price of $325,000 and median rent of $18,240 per year.

44. Kansas City, Mo.

In this Show-Me State city, a median home value of $246,000 and median annual rent of $12,720 equate to a price-to-rent ratio of 19.

45. Chicago

Chi-Town’s 14 price-to-rent ratio is based on a $310,000 median home sale price and $22,440 median annual rent.

46. Memphis, Tenn.

Memphis logs a price-to-rent ratio of nearly 15, with a median home sale price of $179,500 and median annual rent of $12,240.

47. Indianapolis

The ratio in this capital city is 18, thanks to a median home sale price of $225,000 and median annual rent of $12,360.

48. Philadelphia

This major East Coast city had a recent median sale price of $250,750 and median annual rent of $17,640, for a price-to-rent ratio of 14.

49. Baltimore

Charm City had a recent median home sale price of $215,000 and median annual rent of $16,560, resulting in a price-to-rent ratio of 13.

50. Newark, N.J.

Newark, anyone? The median sale price here is $409,000, with median rent at $1,400 a month (or $16,800 a year), leading to a ratio of 24.

51. Milwaukee

Milwaukee is slightly more favorable to homebuyers than renters, thanks to a price-to-rent ratio of 15. This Midwest city had a recent median sale price of $180,000 and median annual rent of $11,640.

52. Detroit

Detroit saw a spike in home sale prices, though the latest median sale price was a relatively low $82,000, compared with median annual rent of $13,200. This resulted in a price-to-rent ratio of 6.

How to Calculate Price-to-Rent Ratio

If you don’t see your city on the list, rest assured that it’s possible to calculate price-to-rent ratio yourself. To do so, you’ll simply take the median home sale price in your area and divide it by median annual rent.

Here’s an example: Let’s say the median rent in a city is $3,000 a month, and the median sale price is $1 million. You’d divide $1 million by $36,000 ($3,000 per month multiplied by 12, the number of months in the year). The result is a price-to-rent ratio of nearly 28.

The Takeaway

The price-to-rent ratio lends insight into whether a city is more favorable to buyers or renters. Usually in a range of 1 to 21-plus, the ratio is useful to house hunters, renters, and investors who want to get the lay of the land.

If you’re in the market to buy, whether as a primary homeowner or an investor, give SoFi Mortgage Loans a look. SoFi Home Loans have competitive rates. Plus, you may qualify for a loan with well under 20% down

Interested in a home loan with SoFi? Find your rate in minutes.

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Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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If you’re home shopping, you may be looking at duplexes. These properties are typically a single structure with two separate units. At face value, buying a duplex might seem like a BOGO (buy one, get one free) deal, but it isn’t as simple as purchasing two homes for the price of one.

It’s important to analyze the pros and cons of buying a duplex before you start bidding or sign a contract. In this guide, you’ll learn about the following topics:

Defining ‘Duplex’

A duplex is composed of two living units on top of each other or side by side.

Duplexes have separate entrances for each occupant. That means single-family homes that have been subdivided typically do not count as duplexes.

For a side-by-side duplex, both entrances are likely on the street. If a duplex is stacked, the second-floor occupant might share an exterior entrance with the first-floor occupant, and then have an entrance to themselves upstairs.

In addition to private entrances, the units have their own bathrooms, kitchens, and other living features. In terms of the exterior, occupants may share a backyard, garden, or driveway.

Every duplex has one thing in common: a shared wall. If the duplex units are side by side, the occupants will share a wall. One on top of the other? Occupants share a ceiling/floor.

Just because properties share a wall doesn’t inherently make them a duplex. Sometimes duplexes are confused with twin homes.

A twin home may look like a duplex, but the shared wall is in reality the lot line between the two homes. So it’s two connected properties, each on its own lot. A duplex is two properties, owned by the same person, on a single lot.

The square footage of each duplex half is typically quite similar to the other. In many, occupants will find that the layouts mirror each other (if they’re side by side), or duplicate exactly (if they’re on top of each other).

Properties with carriage houses or guesthouses are not considered duplexes: They usually do not share walls, and the smaller residence is considered an accessory dwelling unit or ADU.

Duplexes fall in the category of multifamily dwellings, which also include triplexes and quads (aka fourplexes). According to the National Multifamily Housing Council, more than 17 million renters (or about 17% of all renters) live in two- or four-unit dwellings.

Benefits of a Duplex

Duplexes have the exciting “two for one” energy, which can make buying them enticing. The style of living comes with benefits for the buyer, including:

•   Income to help with mortgage. Duplex owners who decide to live in one of the units can rent out or Airbnb the other, making income to help offset the monthly mortgage payments and upkeep.

Recommended: 25 Things to Know When Renting Out an Airbnb

•   Potential tax benefits. Mortgage interest is tax-deductible for a primary or secondary home if the home acquisition debt is $750,000 or less ($375,000 for a married couple filing separately).

   Resident duplex owners can write off mortgage interest and property tax only on the half of the property they live in. However, if they have a renter, they can write off repairs to that unit, any utility bills paid for the rental, and management fees. The IRS even allows the owner to depreciate the rented half of the property.

•   Flexibility in the future. Having two homes on one lot opens up options for owners. They can rent out a unit or use it as an office or studio space. In the future, the unit could become an apartment for aging parents or a guest suite for visiting family members.

•   Landlord proximity. If a duplex owner is getting into the landlord business for the first time, it might be beneficial to live close to the tenant. In the event of a repair or emergency, the tenant is just steps away.

   Additionally, because of landlord proximity, duplex owners might find that renters keep the home in better condition. If the landlord is living on the property, a tenant might be less likely to abuse features or leave problems unreported.

   A duplex could also be a good opportunity to live next to a family member or close friend. It means both parties live on the same property but not with each other. For some arrangements, it’s a good balance between living together while also apart.

•   Affordability. If you’re wondering how much duplexes cost, know this: Because it’s two properties with a single price, duplexes can be more affordable than two single-family homes. Plus, duplexes may often be located in more affordable neighborhoods.

Recommended: Factors That Affect Property Value

Drawbacks of a Duplex

Double the property doesn’t always mean double the fun. Here’s why a duplex might not be the right fit for all buyers:

•   Affordability. When numbers are crunched, two properties in one sounds like a deal, but the price of a duplex may be higher than that of a single-family home nearby. And if a duplex buyer does not plan to occupy the property, the down payment will typically be at least 15% of the purchase price, and homeowners insurance, known as landlord insurance, will usually be more expensive (often as much as 25% more) for an investment property. This can be a key concern when thinking about how to buy a duplex.

•   Tax season could be complicated. Yes, a homeowner can offset costs with a tenant in a duplex, but they’ve just signed themselves up for a more complicated tax scenario than with an owner-occupied single-family home.

•   Landlord responsibilities. Many homebuyers are drawn to the idea of a duplex because they can generate income while living there. However, being a landlord isn’t just about collecting rent checks each month. Duplex owners are responsible for their renter’s unit, meaning fixing issues and being available for general repairs.

   No one wants to address an overflowing toilet at 2 am, but as a landlord, that might well be a reality. It’s a 24/7 job, and not only will a duplex owner be responsible for fixing the issues, but the cost of repairs will have to come out of their pocket.

•   Finding good tenants. Finding renters can be challenging. Owning a duplex doesn’t automatically guarantee extra income, and the process of finding reliable renters can be time-consuming. Plus, duplex owners will have to start the process anew each time a tenant moves out.

   Remember, if the second dwelling is unoccupied, the duplex owner still owes the same amount each month. Before buying a duplex, it’s worth considering how much time owners can put into searching for the right tenant, and if they want to have that responsibility long term.

•   Bad tenants. Let’s face it, not all tenants will be perfect. In reality, they could be loud, rude, messy, and/or late on rent. There are a multitude of things that could go wrong with a renter, and duplex owners should be comfortable bringing issues to the table. Owners who decide to live onsite could get stuck with a less-than-considerate neighbor.

Recommended: 31 Ways to Save for a Home

Estimate a Mortgage Payment for a Duplex

Now that you know about the pros and cons of owning a duplex, if you’re still interested in the idea of purchasing one, use the mortgage calculator below to get an estimate of what future mortgage payments would be.

Obtaining a Mortgage

If, now that you know the pros, the cons, and the costs, you are still ready to move ahead, the next step is how to buy a duplex would be financing your purchase. A potential duplex buyer who plans to occupy one of the units can apply for an FHA loan, VA loan, or conventional financing. (Investors are limited to conventional mortgage loans.) FHA loans can be a good choice for first-time home buyers, those with less-than-perfect credit, and buyers who do not have a large down payment.

Check out our first-time home buyers guide for additional information on mortgages, loans, and closing costs.

Applicants may be able to use projected rental income to qualify for a loan. For rental income to be taken into account, though, renters usually must have already signed a lease. And not all of the projected income applies; a percentage is usually subtracted to account for maintenance and vacancies.

It makes sense for would-be buyers to have a good feel for their budget, as well as the potential costs associated with buying a property.

Knowing whether you plan to live at the address or rent out both units is a big consideration. Investors usually need a higher down payment than owner-occupants do. (Investment properties don’t qualify for private mortgage insurance, so typically a down payment of at least 20% is needed to get traditional financing.)

The Takeaway

Buying a duplex can be a great opportunity to own two properties, perhaps occupying one and earning rental income on the other. But there are pros and cons to be considered, as well as implications for your finances.

If you are moving ahead with buying a home, SoFi can help. SoFi offers mortgage loans with competitive rates, and qualifying first-time homebuyers can put as little as 3% down.

Great rates, available to view in minutes: See how easy SoFi Mortgage Loans can be.

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

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

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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If you’re fortunate enough to have a family member or close friend who is giving you funds to put towards a down payment, congratulations. But in this scenario, a gift letter can be an important part of validating money given to you for the down payment or closing costs on a home.

Approximately 22% of first-time homebuyers received gift funds to help with the purchase of a home, according to a 2022 National Association of Realtors^® (NAR) survey.

Properly documented gift funds will help the mortgage loan to pass underwriting so your loan may be approved. In this guide, you’ll learn the story on gift letters, how they differ for various types of mortgages, plus other important details.

What Is a Gift Letter?

A mortgage gift letter is a legal document whose primary purpose is to state that down payment funds given to the borrower are not expected to be repaid. The lender wants to ensure that the borrower is not taking on more debt to help finance the mortgage, even if it is money from family or friends. The letter is required to pass underwriting.
It’s essential that a gift letter include all the necessary elements to be considered in your loan application.


💡 Quick Tip: You deserve a more zen mortgage loan. When you buy a home, SoFi offers a guarantee that your loan will close on time. Backed by a $5,000 credit.‡

What Should Be Included in Gift Letters?

Lenders usually provide a standard gift letter for you and the donor to complete, but it’s helpful to know what needs to be stated. Gift letters should include the following details:

•   Dollar amount of the gift

•   Name of the donor, address, phone number, and details of the account from which the money will be or was drawn

•   Relationship to the borrower

•   Name of the borrower, address, and phone number

•   Address of the home associated with the down payment

•   The donor’s signed statement saying the funds will not need to be repaid by the borrower

•   Language saying the funds were not made available to the donor by any party interested in the sale of the property

•   The dated signatures of borrower and donor.

Note: Along with a gift letter, the lender may want to see proof of funds in the donor’s account and evidence the money was deposited into the borrower’s account.

Does Timing and Amount of a Gift Matter?

When it comes to gift letters, when and how much you received may need to be documented.

Amount

There typically is no limit on the amount of gift money, but when a deposit is more than half of your monthly household income, lenders usually will want an explanation.

For USDA loans and FHA loans, you’ll need to explain any amount over 1% of the purchase price or appraised value of your home that was deposited in your account recently. There are exceptions, including tax refunds and bonuses, that do not need to be “seasoned” or explained.

Timing

A lender will look at bank statements for the past 60 to 90 days. Amounts that existed in your account before this time are considered seasoned, and you may not need to provide a gift letter for that money. The amount of a deposit inside that time frame may need a letter of explanation.

If you have money in other places, you’ll want to deposit it into your bank account for proper seasoning.

Who Can Give Down Payment Gifts?

Down payment gift regulations vary by loan type, but generally, gift funds are allowable on many mortgage types from close family members or friends. There are some key differences between regulation for down payment gifts for conventional and government home loans (USDA, VA, and FHA mortgages).

FHA Loans

Under Federal Housing Administration guidelines, gift funds for the down payment are allowable from the following donors:

•   Relatives of the borrower

•   The borrower’s employer or labor union

•   A close friend with a clearly defined and documented interest in the borrower

•   A charitable organization

•   A government agency or public entity that provides homeownership assistance to low- and moderate-income families or first-time homebuyers.

The gift must not come from an entity that has an interest in the sale of the property, such as the seller, the builder, the real estate agent, or the broker.

Buying a fixer-upper? This guide to FHA 203(k) loans and options could be a good read.

Conventional Loans

Under conventional loan guidelines (meaning non-government), gift funds are allowable from these sources:

•   A relative, which Fannie Mae defines as someone related by blood, marriage, adoption, or legal guardianship

•   A domestic partner or fiance.

The donor may not be anyone with an interest in the transaction, such as the builder, developer, or real estate agent.

USDA or VA Loans

With loans backed by the Department of Agriculture or Veterans Affairs, the only people who cannot provide gift funds are those who would benefit from the sale, such as the seller, lender, real estate agent, or developer. The gift funds must be properly sourced, which means the lender wants to see a paper trail from the bank account of the donor to that of the borrower.


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

Are There Limits on Gifts?

No, but some loans may require borrowers to come up with a portion of the down payment. This is what’s known as a minimum borrower contribution, and it applies to conventional loan financing. It is different based on what type of real estate is being purchased, be it a primary residence, second home, or investment property.

Primary Residences

For primary residences, there is no minimum borrower contribution. All of the money needed to complete the transaction can be a gift. This is true whether the loan-to-value ratio is above or below 80% for conventional financing.

Second Homes

For second homes, if the loan-to-value is above 80% (meaning the down payment was less than 20%), borrowers must make a minimum contribution of 5% from their own funds. This is also true on principal units with two to four units.

Investment Properties

Gift funds are not allowed on conventional mortgages for investment properties. Fannie Mae also states that gift funds are not to be used for investment properties.

Recommended: How to Buy a House From a Family Member

How Does This Affect Taxes?

Taxes may affect the donor of the funds, unless the home purchaser makes special arrangements to pay taxes on the gift funds.

The money gifted may be excluded from tax as per the annual exclusion amount. The IRS says the annual exclusion for gifts is $17,000 for 2023. This is per person, so if buying real estate with a partner, the amount doubles to $34,000.

If the gift is from a set of parents, each parent can gift that amount to each of the borrowing partners. This allows for $68,000 to be gifted before triggering the gift tax. In other words:

•   Parent 1: $17,000 for borrowing partner 1, $17,000 for borrowing partner 2 = $34,000

•   Parent 2: $17,000 for borrowing partner 1, $17,000 for borrowing partner 2 = $34,000

Adding the amount for both parents contributing for both borrowers equals $68,000.

If that amount is exceeded, each donor can also claim it as part of the lifetime exclusion on estate taxes, which has a limit of $13.61 million for 2024.

Gift Equity Letters vs Gift Letters for Mortgages

A gift of equity is when the seller gives a portion of the home’s equity to the buyer. It is transferred to the buyer as a credit in the transaction and may be used to fund all or part of the down payment on principal or second homes.

If there is a gift of equity, a gift of equity letter is required. A signed gift letter and settlement statement with the equity gift will be retained in the loan file.

While there are similarities, there are also some differences.

Gift of Equity	Gifts for Mortgages
Must be applied as a reduction in purchase price or credit	Gifts can be an unlimited amount but are not accepted for investment properties
Borrower may not receive cash back at closing for gift equity	Borrower can receive funds back at closing
Required to notify appraiser of equity gift	Appraiser doesn’t need to know about it
Is from the seller, who can be a relative. For FHA loans, only equity gifts from family are acceptable	Is from a donor related to the borrower
Can be used to fund the down payment and closing costs	Can be used to fund the down payment and closing costs
Permitted for principal and second homes	Permitted for principal and second homes

Whether you’re fortunate enough to receive a gift or you’re making your own way toward homeownership, this mortgage calculator may come in handy.

Recommended: Mortgage Loan Help Center

The Takeaway

A gift letter ensures that the money, or equity, you receive when buying a home is validated when your mortgage loan goes through underwriting. It’s a necessary step on your way to loan approval that a good mortgage lender may be able to help you with.

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

SoFi Mortgages: simple, smart, and so affordable.

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Photo credit: iStock/Pictac

*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 On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
^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 Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

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

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

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