How to Write a Letter of Explanation for a Mortgage

How to Write a Letter of Explanation for a Mortgage

Buying a house can be a fraught process, but when the market is hot, the days between offer and closing can feel endless, especially if the mortgage underwriter asks you to write a letter of explanation.

But there’s no need to panic—or assume that your mortgage application will fail. The lender is simply seeking clarification about any red flags in your financial documents or credit history.

What’s a Letter of Explanation?

Because a mortgage is a large loan, lenders need to know that the borrower is capable of shouldering the mortgage.

Lenders also know that life can’t be boiled down to a spreadsheet, and that it’s not unusual for a mortgage application to include things like a late credit payment or a period of job loss.

To do due diligence, the mortgage underwriter will ask you to explain the situation in a brief letter, which will be added to your mortgage application. Additional documentation and paperwork may be required.

Why Do I Need to Provide a Letter of Explanation?

Here are common issues that could trigger a request for a letter of explanation:

• Questions about your income if you don’t have W-2s or are self-employed

• Negative items on your credit report

• Employment gaps

• Your living situation if you don’t pay any rent or mortgage

• A property income or loss you claim

• Credit lines opened after you’ve put in your mortgage application

• Large deposits to, and sometimes withdrawals from, your bank account

Must I Explain a Large Deposit?

If there’s a big or unexplained deposit to your bank account, your lender may want to know where the money came from—and whether that money needs to be paid back.

A lender may also question any uneven income streams, or if deposits don’t line up with your W-2s or your tax returns.

If you received cash from, say, a parent to help with a down payment or closing costs, you may also need a gift letter signed by the giver and recipient that the money was a gift, not a loan. Your lender may have a template for a gift letter.

Your lender may be more likely to scrutinize any large deposits or withdrawals within the last 60 days.

Letter of Explanation Template

A letter of explanation is not an autobiography or an admission that you did anything wrong. It’s simply a statement of the reason for any discrepancy or issue, along with any documentation, to back up your current financial picture.

You can keep a letter of explanation brief. It should include:

• Your name and address

• Your lender’s name and address

• A subject line that includes your application number and name

• A brief paragraph explaining the situation

• A polite closing

• Your signed full name

It might look like this:

Lender name

RE: John Doe’s Loan Application, No. 6666666

Dear Sir or Madam:

I’m writing this letter to explain (the matter).

Please let me know if you need further clarification. Thank you.


John Doe (signed)

Enc.: (Relevant documentation).

The explanation paragraph can be both detailed and vague. Your lender will need to know dollar amounts, any relevant account numbers, and any resolution. Explain what caused a situation (for example, a job loss led to missing a credit card payment), but you don’t necessarily want to get stuck in the weeds about the “why.” Instead, it’s important to focus on how you rebuilt from that moment, supported by documentation.

Using the example, you could include your offer of employment when you got a new job, along with account statements showing proof of payment since then.

The tone of the letter should be polite and factual. Remember: Your goal is not to pull on the lender’s heartstrings; it’s to reassure them that your application is solid and you would responsibly pay back your mortgage on time.

If you’re describing a layoff, the underwriter doesn’t need to hear about your toxic boss or the confusing company culture. They just need to hear the barebones facts: Because of restructuring, your position was eliminated, which caused you to get behind on some of your bills.

Recommended: 4 Tips for Writing a Letter of Explanation for a Mortgage

Getting Your Mortgage Application in Shape

Knowing what documents you need and what a mortgage lender will look at can help get your application in strong shape before you file it. Your lender will scrutinize your credit history, and late payment, especially one within the last 12 months, may raise a red flag. But there are ways to proactively tackle any issues on your credit reports.

• Check your credit reports . Knowing what your mortgage lender may see can help you assess where any weak points may be, and what information they may ask for.

• Call the creditor if you have a recent late payment. Creditors know that accidents happen and bills may be misplaced. If your account is otherwise in good standing, it’s possible that a creditor may erase the late payment.

• Focus on additional aspects of your credit. Making sure to pay bills on time and keeping your credit utilization below 30% can help build credit.

• Think twice about opening accounts. Before and after applying for a mortgage, it can be a good idea to be mindful of opening new lines of credit or charging an extensive amount on current cards. Sometimes people who get preapproved and successfully make an offer on a house may get excited and begin buying furniture. But suddenly taking on more debt on cards can raise a red flag to lenders, which may result in being asked to write a letter of explanation.

Understanding how a lender will see your mortgage application can give you confidence and may help you head off any potential problems.

Recommended: Preapproved vs. Prequalified: What’s the Difference?

The Takeaway

A letter of explanation is just that when a mortgage lender needs clarity about a red flag or discrepancy that arises after your application. Knowing what to expect, having any documentation in place, and answering the question can all be helpful in getting your home loan approved.

Are you in the market for a mortgage? If so, look into SoFi’s fixed-rate mortgage loans with terms of 10, 15, 20, or 30 years. You may be able to put as little as 5% down.

Check your rate on a SoFi Home Loan.

Photo credit: iStock/scyther5

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

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See 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.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Buying a House Sight Unseen

6 Tips for Buying a House Sight Unseen

Whether relocating for a new job or competing in a seller’s market, many buyers need to move quickly. When time is of the essence, some may make an offer on a home without touring it in person.

Although this sounds complex, it’s nothing new and has had a resurgence. In 2020, 63% of homebuyers made an offer to buy sight unseen, Redfin reported.

Thinking about buying a house sight unseen? Here are six tips for navigating risk in the remote real estate market.

1. Get Preapproved for a Home Loan

Before making an offer, prospective buyers can do some front-end work to expedite the purchase process if they need financing. Becoming pre-qualified is a quick first step to get an estimate of how large a mortgage a buyer would likely qualify for. This helps house hunters focus their search on homes they can reasonably expect to obtain financing for.

Lenders determine prequalification according to basic financial information, such as income, debt, and assets. Often buyers simply self-report their finances at this stage.

Then there’s mortgage preapproval, a much deeper dive into qualifying for a mortgage. Becoming preapproved often requires bank statements, proof of assets, and a look at credit history.

When buying a house sight unseen, especially in a hot market, getting preapproved can reasonably assure sellers that buyers can get financing for the amount they’ve offered.

In a superheated market, with bidding wars, cash offers, and skipped inspections, some agents suggest going through full underwriting, with only the appraisal left in order to close the deal.

If you’re buying a vacation home or investment property, you’ll be evaluated by lenders in a similar fashion to your first home loan.

2. Research the Neighborhood

Whether you’re looking to buy in your favorite vacation destination or have never set foot in the area, there are resources available to better inform your search.

While listings can do a good job of capturing a house in its best light, they do not give buyers the full picture of the property’s curb appeal and neighborhood. To get the lay of the land, Google Maps and Google Earth are easy tools for exploring the property and neighborhood via street view and satellite imagery. Walk Score is useful to determine a home’s proximity to amenities like grocery stores, restaurants, and coffee shops.

Other apps can give insight into community characteristics and local happenings. NeighborhoodScout provides localized information on crime, school rankings, and real estate prices. Another option is Nextdoor, which lets users connect with neighbors, local businesses, and other resources.

A look at housing market trends in select cities can help you home in popular neighborhoods, home prices, demographics, and more.

3. Find a Trusted Real Estate Agent

Once you’ve taken care of financing and focused your search geographically, finding a reputable real estate agent can help take the guesswork out of buying a house sight unseen.

Since you won’t be able to tour the house in person, a buyer’s agent can act as your eyes and ears on the ground. Without their assistance, the sight-unseen house cost could rise significantly, thanks to unforeseen repairs and upgrades.

Finding a real estate agent who is familiar with the area can be advantageous for evaluating sight-unseen house prices. Their experience in the local market makes it easier to find comparable listings and weigh options.

When interviewing potential agents, you can ask if they’ve helped clients buy sight unseen before. Because your relationship will be virtual leading up to inspection or move-in day, it’s important to consider communication skills and style.

4. Take a Virtual Tour

Starting with online listing photos and virtual walk-throughs is helpful to determine if a house is worth a closer look. What’s more, photo editing and wide-angle shots can misrepresent a space, so organizing a guided virtual tour with a friend, relative, or real estate agent onsite may serve a buyer well.

Using FaceTime, Zoom, or similar video chat apps can let buyers ask questions in real-time and get a more intimate sense of the property. Seeing the space firsthand (albeit virtual) may give a more realistic impression than measurements and square footage alone can convey.

5. Touch Base After the Inspection, If You Have One

A home inspection is common with most real estate transactions.

A home inspector examines a house’s physical and interior structure, as well as major systems like plumbing, HVAC, and electrical. The resulting inspection report highlights any visible problems, necessary repairs, and potential risks.

When buying a house sight unseen, it can be beneficial to have your real estate agent attend and video call to walk you through any notable issues that arise.

A home inspection contingency in an offer generally allows buyers to pull out of the purchase if major issues are found. It may also be possible to negotiate with the seller to have repairs addressed or costs deducted from the purchase price.

In a supercharged market, buyers may choose to waive the home inspection contingency to improve their candidacy in a multiple-offer situation. Those who take this path may still be able to arrange a pre-offer home inspection. The results won’t be negotiable or permit backing out without losing the deposit.

Waiving the home inspection is a risk that may be best reserved for buyers with sufficient cash for repairs.

6. Arrange a Virtual Closing

If you have to buy sight unseen and can’t attend the closing in person, there are options for closing remotely, depending on the state and lender.

Certain documents, such as the deed and affidavit of title, need to be notarized to finalize the home purchase. Remote online notarization allows buyers to sign closing documents with an electronic signature and allows all parties to meet virtually.

The process is authorized in most states, but certain documents, including promissory notes, may need to be signed in person. Also, be sure to check if your state requires a lawyer to be physically present at the closing.

Lenders will usually need an appraisal of the property to finalize a home loan. This process can be arranged from afar or coordinated through your real estate agent.

At a virtual closing, closing costs can be paid electronically with a bank-to-bank or wire transfer.

Giving your lender, real estate agent, and the title company ample notice that you intend to close virtually can help seal the deal without a hitch.

The Takeaway

Do people put offers on homes without seeing them? Some do, yes. Having your financing in order, working with a knowledgeable real estate agent, and doing virtual research can be helpful when buying a house sight unseen.

If you’re shopping for a mortgage and rate, what SoFi offers may be, well, be eye-opening.

SoFi offers home loans with competitive rates and down payments as low as 5% for qualified buyers.

Need a mortgage for an investment property or second home? SoFi has those, too.

Find your rate with a few clicks.

Photo credit: iStock/MicroStockHub

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

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See 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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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Everything You Need to Know About No Credit Check Loans

Everything You Need to Know About No Credit Check Loans

Quick loans for bad credit can look mighty attractive. However, products like payday loans and auto title loans have major drawbacks, including short repayment periods and sky-high interest rates.

In fact, short-term loans can be so expensive that borrowers often end up paying exponentially more than they would if they’d financed the purchase some other way. And loan holders often end up re-borrowing, starting a vicious cycle that can quickly spin out of control.

So when you need money now, what should you watch out for—and what are some savvier alternatives to predatory loans? In this article, we’ll lay it all out.

What Are No Credit Check Loans?

No credit check loans, as their name implies, are loans that offer quick cash to borrowers without requiring a credit check. However, not requiring a credit check means these loans are riskier for the lender, which is part of how they can justify high-interest rates and fee schedules.

And when we say high, we mean high. It’s not hard to find payday loans with effective interest rates of about 400%, and sometimes up to 1000% or more.

Recommended: What Is Considered a Bad Credit Score?

No Credit Check Loans: Borrower Beware

Here’s how those numbers can work out when it comes to real money.

Say you take out a loan for $1,000, to be repaid over the course of a single year. (In many cases, payday loans, and other no credit check personal loans will require much faster repayment than this example—often just a few weeks).

If you receive the loan at an APR of 10%, you’d end up making monthly payments of $87.92 and paying a total of $1,055.04—just $55.04 in interest.

If you receive the loan at an APR of 30%, you’d end up making monthly payments of $97.49 and paying a total of $1,169.88, paying $169.88 in interest.

At an APR of 400%, however, you’d end up paying $344.24 per month for a total of $4,130.88—a whopping $3,130.88 in interest alone.

It’s clear to see how these loans can lead to financial trouble, even on a much smaller scale. Even under the best of circumstances, it can be difficult to get ahead of short repayment terms and steep interest rates.

Recommended: What is Consumer Debt?

Who Offers No Credit Check Loans?

Two of the most common types of these no-credit check loans are payday loans and auto title loans.

Payday loans, as you might have guessed, are designed to be repaid on the borrower’s next payday—generally within two to four weeks. Because payday loans do so often carry predatory interest rates and terms, some states have limited the size and interest rate of payday loans, but even small loans with lower interest rates can lead to financial trouble.

Auto title loans, or simply “title loans,” are another common type of short-term personal loan that doesn’t require a credit check. In the case of a title loan, the borrower gives the lender the title of their car as collateral for a cash loan of up to about 50% of the value of the car.

The borrower is still allowed to drive the car, but the loan principal plus interest is generally due within 30 days—again at astronomical rates. If the borrower is unable to pay the loan, they risk having their car repossessed.

Other lenders offer similar types of short-term, high-interest rate personal loans, sometimes advertising online loans with no credit check required or guaranteed loan approval.

Even if they aren’t called payday loans or title loans, the borrower would be wise to pay attention to the loan’s terms and conditions, particularly interest rates, fees, and expected repayment schedules.

Generally speaking, too-good-to-be-true financial products are often just that. Staying informed about the full implication of the loan’s terms and even doing the math to work out how much would be repaid over time can help borrowers avoid a potentially disastrous financial situation.

Alternatives to No Credit Check Loans

As financially harmful as no check credit loans can be, there still might be instances in which borrowers need quick access to money. Fortunately, there are some alternatives worth consideration.

For starters, borrowers might turn their attention to why they need the money in the first place. Short-term loans are often taken out to repay existing debt, an approach that might result in the borrower going even further into debt to try to scramble out of the hole.

In this scenario, attempting to negotiate the existing debt with current lenders might be a better tactic. Sometimes, credit card issuers and other lenders might offer repayment options to ease the immediate financial burden. It’s a tactic that’s worth asking a creditor about.

Another option: borrowing from friends and family, which can come with its own set of pitfalls. However, family loans are unlikely to create the same kind of debt spiral short-term cash loans might.

In order to keep things friendly, setting out a formalized loan agreement with interest rates and terms, similar to what you’d expect to sign for a traditional loan from a financial institution, is a good way to keep the transaction as objective as possible.

Credit unions are another source of small-dollar, payday loan alternatives—and importantly, credit unions are subject to a federal interest rate cap and other limits that keep these loans from becoming exorbitantly expensive.

And although they’re generally not an ideal solution, even credit cards usually carry lower interest rates than short-term cash loans. Some borrowers might also be able to utilize a promotional 0% interest rate period in order to aggressively pay off debt without paying interest.

The Takeaway

While no credit check loans can certainly be attractive, their high interest rates and associated fees can make them costly over time. Borrowers may not be able to repay the loans plus interest in the short repayment term required, which could lead to a debt treadmill scenario and, possibly, negative credit history consequences.

An alternative such as an unsecured personal loan usually does require a credit check and specific approval requirements. However, some lenders may consider extending loans to applicants with imperfect credit histories if there is a co-applicant on the loan agreement.

SoFi offers a range of unsecured personal loans with competitive, fixed interest rates and no fees. Checking your rate will not affect your credit score1.

SoFi members also get access to live customer support seven days a week, and qualified personal loan borrowers can take advantage of SoFi’s Unemployment Protection Program, if needed.

Ready to learn how a SoFi Personal Loan might help you get your money right? Check your rate today.

Photo credit: iStock/FG Trade

1Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see

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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Is It a Good Idea To Use a Personal Loan for Investing?

Is It a Good Idea to Use a Personal Loan for Investing?

Personal loans can be used to fund home repairs, consolidate high-interest credit card debt or cover an emergency expense. There’s also another way to use personal loans: investing in the stock market.

Using loans for investments could help with building a portfolio when you don’t have other cash to invest. While you may generate a solid return on those investments over time, there’s always the risk that you could lose money instead.

If you’re considering using personal loans to invest, it’s important to consider the pros and cons.

Can You Use Personal Loans to Invest?

Personal loans allow you to borrow a lump sum of money that you can use for virtually any purpose. Some of the most common uses for personal loans include home improvements, debt consolidation, vehicle purchases, medical bills, and emergency expenses.

In terms of using loans for investing, you can generally do so unless the lender specifies otherwise. While personal loans typically allow for flexibility in how the money can be used, lenders have the option to impose restrictions.

So why would private investors use personal loans to invest anyway?

There are different reasons for doing so. For some private investors personal loans could make sense if:

• They don’t have other cash available to invest.

• Shifts in the market create a buying opportunity that they’d like to capitalize on.

• Personal loan interest rates are low compared to the return potential for investments.

• They can afford to make the payments on a personal loan.

An investor line of credit is also an option. Unlike a loan, which offers a lump sum of cash to invest, an investor line of credit can be drawn against as needed.

For example, this type of personal borrowing arrangement may suit someone who’s investing in rental properties or fix-and-flip real estate and is unsure exactly how much they’ll need to invest.

When Using a Personal Loan to Invest Might Make Sense

Ultimately, whether you should consider using personal loans for investing may hinge on your investment goals, timeline for investing, and risk tolerance. But there are some situations where it might benefit you.

1. You Can Qualify for the Lowest Rates, Based on Credit

One of the most important factors lenders consider when approving personal loan applications is credit. Specifically, that means your credit scores and credit reports come under scrutiny.

The higher your credit score, the lower your interest rate on a loan is likely to be. If you’re interested in using personal loans for investments then getting the best rate matters.

Why? While you might be earning returns on your investments, you’re paying some of them back to the lender in the form of loan interest. So it makes sense to angle for the lowest rates possible. If you have good to excellent credit, that could be an incentive to get a personal loan or investor line of credit.

2. You May Be Able to Pay the Loan Off Early

Personal loans can be used to fund different types of investments, from stocks to mutual funds to real estate. But again, the interest you pay on the loan can eat away at your returns.

Being able to pay the loan off ahead of schedule could help you save money on interest charges. So think about your budget and what you might realistically be able to afford to pay each month to get the loan paid off early.

But be aware that doing so could trigger a prepayment penalty. While SoFi personal loans don’t have any prepayment penalties, other personal loan lenders may charge them.

If you get stuck paying a prepayment penalty that could wipe out any interest savings associated with paying the loan off early.

3. You’re Confident About Your Return Potential

Some financial experts might say that personal loans for private investors only make sense when they’re guaranteed to get a return that outpaces what they’ll pay in interest. But trying to predict a stock or exchange-traded fund’s future performance is an inexact science and not a recommended practice.

For that reason, it’s important to consider how confident you are about an investment paying off. This is where you may need to do some research to understand what an investment’s risk/reward profile looks like, how well it’s performed in the past, what’s happening with the market currently, and where it might be headed next.

In other words, you’ll want to perform some due diligence before using loans for investments. Looking at both the upsides and the potential investing risks can help with deciding if you should move forward with your personal loan plans.

When You Might Think Twice About Using Personal Loans for Investing

While there may be some upsides to using personal loans for investments, there are some potential drawbacks to weigh as well.

1. You Don’t Qualify for the Best Rates

When using personal loans for investing, the math becomes important since any interest you pay has to be justified by the returns you earn. Even if you’re investing in something that you’re sure is going to result in a sizable gain, you still have to consider whether the interest fits in.

If you don’t have great credit then any returns you realize may be overshadowed by the interest you’re paying to the lender. The total interest cost increases the longer you pay on the loan, which is also something to keep in mind if you’re considering a two-year, three-year, or even five-year repayment term.

Before applying for a personal loan, it’s helpful to check your credit reports and scores to see where you stand.

This can help you gauge what type of interest rates you’re most likely to qualify for if you do decide to go ahead with a loan.

2. You Have a Lower Risk Tolerance

Investments aren’t risk-free and some are riskier than others. If you’re taking on debt to invest in the market, you have to be reasonably sure that your investment will pay off. In the meantime, you have to be comfortable with the risk that involves.

The stock market moves in cycles, and volatility can affect stock prices from day to day. So it’s good to understand how you typically react to volatility and what level of risk is acceptable to you before taking out a personal loan.

If the idea of being stuck with a loan for an investment that doesn’t pan out isn’t something you can stomach, then it may not be right for you.

Likewise, you may want to take a pass on a personal loan if you’d be investing in something that you don’t fully understand or haven’t thoroughly researched.

3. Your Income or Expenses Could Change

Taking out a personal loan means you’re committing to repaying that money. While you might be able to afford the payments now, that may not be true if your income or expenses change down the line.

Something investors might not like to think about, but is a risk, is what if the market doesn’t perform favorably? What happens if there is a loss on the investment and you have to find other funds to make the personal loan payments? It’s a good idea to have a backup plan because even if the investment doesn’t provide the return that’s expected, the lender will still expect payments on that personal loan.

Before applying for a personal loan, ask yourself whether you’d still be able to keep up with the payments if your income were to decrease, your other expenses were to go up, or the investment didn’t see the return you thought it would.

If you don’t have an emergency fund in place, for instance, how would you manage the loan payments? Would you have to sell the investments you made to make a loan payment? Could you borrow money from friends or family?

Thinking about these kinds of contingencies can help you decide if a personal loan for investing is the best way to go.

What to Consider With Personal Loans for Investing

Before taking out a personal loan for investing, there are a few things to keep in mind. For instance, consider things like:

• How much you can afford to pay toward personal loans monthly.

• How much you need or want to borrow.

• Current personal loan interest rates.

• Which rates you’re most likely to qualify for, based on your credit history.

• Any fees a lender may charge, such as origination fees or application fees.

• Whether you’ll be able to repay the loan early and if so, what prepayment penalty might be involved.

Beyond credit scores, also consider what else is needed to get approved for a personal loan or an investor line of credit. For instance, lenders may look at your debt-to-income ratio, employment history, and what you plan to use the loan proceeds for.

Also, think about where you plan to use the money to invest. If you’re interested in trading stocks or ETFs, for example, you may want to choose an online brokerage that charges $0 commission fees for those trades.

The fewer fees you pay to your brokerage, the more of your investment returns you get to keep.

The Takeaway

Using personal loans for investments may suit some investors better than others. It’s important to weigh the potential rewards against any risk you may be taking on before committing to a personal loan for investing.

If you’re planning to use personal loans to build a portfolio, take time to compare lenders online to find the best fit for your needs, credit history, and budget. SoFi unsecured personal loans, for instance, offer competitive interest rates and come with no fees.

Learn more about SoFi’s personal loan options.

Photo credit: iStock/jacoblund

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

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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What Is the Cost to Replace an HVAC System?

Homeowners sometimes may not realize it’s time to replace their heating, ventilation, and air conditioning (HVAC) system until there’s a major issue.

And the condition of the overall system, along with other factors like home size, type of unit, and local climate might impact HVAC replacement cost.

HVAC system cost varies year by year and per individual situation. So understanding cost considerations for different HVAC equipment, types of systems, and everything replacement entails can help you budget and plan for paying for emergency home repairs.

Recommended: What are the Most Common Home Repair Costs?

HVAC System Parts

There are several ways to heat and cool a home that falls under the HVAC umbrella. Yet, most HVAC system parts and components can be grouped into the following categories.


Thermostats monitor temperature and can be used to adjust whether a HVAC system heats or cools a building. Generally, the temperature can be set manually or preset to regulate heating and cooling to a desired indoor temperature.

These systems can be connected to the HVAC system through wiring—or Wi-Fi in the case of smart thermostats. More advanced thermostats can be used to enhance comfort and efficiency by controlling temperature settings for multiple zones throughout a home or building.

Heating and Cooling Unit

The heating and cooling unit is the main component of any HVAC system. Common types include furnaces, boilers, heat pumps, and air conditioners.

Furnaces are generally located inside a structure and comprise a heating element powered by gas, oil, or electricity and a blower to circulate heated air through the building.

Boilers are traditionally interior units, too, but circulate hot water or steam to radiators or baseboards located throughout the property.

Air conditioners include condenser units, which are located outside because they produce hot air through the heat transfer process.

Heat pumps also consist of an external condenser, but a key difference is that they can be used to either heat or cool a home. These systems work in conjunction with an indoor blower unit to distribute heated or cooled air.


HVAC systems incorporate air filters to remove dust, allergens, and other particles from entering the return-air duct. Usually, air is drawn from multiple locations inside a building to the HVAC system.

Whether filters are the reusable or disposable variety, periodic cleaning or replacement is necessary to maintain optimal performance.

Ultraviolet lights are another option for treating air quality in an HVAC system. Their ability to disinfect the air of mold and pathogens makes them helpful for some homeowners with severe allergies.

Delivery System

Most buildings consist of multiple rooms and may include more than one floor. Distributing heated and cooled air throughout the space requires a system of ductwork and vents.

Many HVAC systems utilize separate supply and return ducts to circulate, filter, and treat air continuously. Supply ducts bring air from the heating and cooling unit to blowers and vents to heat or cool an area.

Meanwhile, return ducts transport untreated air back to the HVAC system.

Exhaust Outlet

Any HVAC system that involves combustion—burning oil, gas, or wood—will need an exhaust outlet to expel harmful fumes out of the building. An exhaust outlet can be its own vent or be connected to an existing chimney.

HVAC System Cost Estimates

The type of unit chosen for replacement is a key determinant of cost. Prices may fluctuate whether a full or partial replacement is needed and based on technological advances in HVAC efficiency.

Cost estimates below account for the HVAC unit, any system parts, installation, and removal of old equipment.


Boilers have been used to heat buildings for more than a century and are found in homes and commercial buildings alike. The average replacement cost can range between $4,000 and $7,500 depending on the type of boiler.

HVAC replacement cost for boilers can be higher if fuel tanks, piping, and gas hookup need to be repaired or installed.

Heat Pumps

Despite their name, heat pumps actually can be used to both heat and cool a building. These electric HVAC systems pull heat from outdoor air to heat a building even during cold weather conditions.

When it’s warm out, heat pumps cool buildings by drawing heat from indoor air and expelling it outside.

Depending on the type of heat pump and size of the system (measured in tons), costs average between $4,100 and $7,200.

Air-source heat pumps typically run on the cheaper end of the heat pump spectrum. Whereas ground source heat pumps (often called geothermal heat pumps) can cost between $6,000 and $20,000.

Although the upfront cost is significant, lower utility bills and 50-year equipment lifespan could see a return on investment in the long-run.

Central Air Conditioners

Central air conditioners work by drawing moisture from the air inside a building and returning cooled air throughout the structure via ductwork. The system usually consists of one unit located outside but near the structure.

The average cost for installing central air is between $3,800 and $7,500. Prices may be lower for 2-ton or smaller systems, while costs can creep higher if a building requires a 5-ton unit.

Besides the unit itself, the total footage of ductwork to be installed or replaced is a significant cost consideration.


The cost to buy and install a furnace can vary by energy type, total ductwork needed, and the model. On average, prices for replacing a furnace range from $2,000 to $7,000.

Furnaces that run on natural gas or electricity tend to be cheaper to replace than oil-fueled systems.

The total area that will be heated and how well a building is insulated are other factors that will affect the size of the system and potentially increase the cost.

Other HVAC Replacement Cost Factors

When evaluating HVAC options, the type of system is only part of the equation for determining the final price tag. There are many other factors that can affect how much an HVAC replacement will cost.

Local Climate

The popular real estate mantra, “location, location, location”, rings true for HVAC systems too. Whether you live in a cold, warm, or temperate climate will have implications for how an HVAC system is designed.

Property owners in warmer climates could face higher prices for replacing air conditioning units since greater capacity is needed. Meanwhile, costs for furnaces can be higher in more frigid regions where heating efficiency is more important.

Building Characteristics

The size, layout, and condition of a building can play a role in HVAC replacement cost.

Excluding geographic influences, larger structures generally require a more substantial HVAC system to match. The total square footage can impact the price for filtration, ductwork, vents, and zones throughout a building.

A home’s design could also affect how much you’ll pay for HVAC installation. More difficult jobs can add additional labor hours and drive up the cost.

Some possible complications to consider are the ease of accessing components ductwork and whether building renovations will be needed to accommodate new HVAC equipment.

Unit Efficiency

The operational efficiency of a new system is another factor of HVAC replacement cost. Although more efficient units are generally more expensive upfront, they can recoup long-term savings through lower energy bills.

There are different units to calculate energy efficiency per HVAC system. For air conditioners, the Seasonal Energy Efficiency Ratio (SEER) provides a ranking between 13 and 24.

Meanwhile, the Annual Fuel Utilization Efficiency (AFUE) shows how efficient a furnace or boiler runs. In both cases, the higher the score, the greater the efficiency.

While browsing models, keep an eye out for an ENERGY STAR® label to identify the highest-performing HVAC systems. To become certified, this equipment has been vetted by the Environmental Protection Agency and Department of Energy.

For instance, air conditioner models that achieve efficiency scores in the top 25 percent among competitors are eligible for ENERGY STAR® certification.

Paying for HVAC Replacement

The upfront cost of paying for HVAC replacement can be steep. If covering expenses with cash and savings alone isn’t feasible, there may be other ways to pay for these home improvements.

The HVAC unit cost for more environmentally friendly technologies, such as ground source and air source heat pumps, may be eligible for rebates and tax incentives.

For example, homeowners who install a geothermal heat pump can claim a tax credit of 26% of the cost of the equipment if installed during 2020 through 2022 22% of the cost as a tax credit if installed during 2023.

Recommended: Home Improvement Cost Calculator

The Takeaway

Even before major components or an entire system needs to be replaced, poor efficiency might increase utility bills. Staying on top of maintenance and knowing the heating and cooling unit’s estimated lifespan could help save money and keep a system running smoothly.

If replacement is necessary for your HVAC system, you may still have a sizable sum to pay after claiming tax credits or manufacturers’ rebates you might qualify for.

Instead of maxing out credit cards or dipping into a retirement account, a personal loan may be able to help with HVAC replacement costs.

A home improvement loan is another option to consider. SoFi offers unsecured home improvement loans, personal loans that don’t require collateral (as secured loans do). An example of a secured loan is a traditional home equity line of credit (HELOC), which uses the equity in the home as collateral.

Is it time to replace your HVAC system? A personal loan from SoFi can help keep your home safe and comfortable.

Photo credit: iStock/South_agency

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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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