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Home prices may have flattened out a bit in some markets, but VA loan limits are still getting a bit of a boost in 2026.

For most U.S. counties, lenders’ baseline limit for VA loans (backed by the U.S. Department of Veterans Affairs) is now $832,750, compared to $806,500 in 2025. And loan limits for single-family homes in counties with higher home costs also increased — from a maximum (or “ceiling”) of $1,209,750 in 2025 to $1,249,125 in 2026.

What could higher loan limits mean for you? If you’re a veteran considering a home loan, read on for a breakdown of what you can expect if you purchase a home this year.

What Is the VA Loan Limit?

To be clear: The VA doesn’t limit how much an eligible veteran, service member, or survivor using a VA loan benefit can borrow to finance a home. There are only limits on how much of the loan amount the VA will guarantee if the borrower is unable to repay the mortgage. And that limit can vary based on the status of the borrower’s VA entitlement.

Most borrowers who apply for a VA loan have something called “full entitlement.” This means that if the borrower defaults, the VA will guarantee — or repay the lender — up to 25% of whatever loan amount the lender approved based on its own criteria. If you’re a first-time homebuyer, or if you’ve paid off a past VA loan, you can expect to have a full entitlement.

But if a borrower has what the VA refers to as a “remaining entitlement” (they have a VA loan they’re still paying back), the VA will limit its guarantee based on the Federal Housing Finance Agency (FHFA) loan limit in the county where the home is being purchased.

Instead of paying the lender up to 25% of the full loan amount if the borrower defaults, the VA will limit its guarantee to up to 25% of the applicable FHFA loan limit minus the amount of the entitlement the borrower already used. Borrowers can still get a VA loan using their remaining entitlement, but they may have to make a down payment to get that loan.

To check your VA entitlement status, you can request a certificate of eligibility (COE) through your lender, online, or by mail.

💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you from start to finish.

When Do VA Loan Limits Apply?

You may wonder when VA loan limits apply and, more specifically, how annual changes to loan limits are calculated. The VA bases its loan guarantee limits on the conforming loan limits (CLL) the FHFA sets for conventional home mortgage loans that are eligible for purchase by Fannie Mae and Freddie Mac.

By law, the FHFA must adjust these limits annually to reflect changes to home prices in the U.S. Between the third quarter of 2024 and the third quarter of 2025, home prices increased, on average, by 3.26%, based on the FHFA House Price Index. So the 2026 baseline CLL increased by that percentage.

But your county’s loan limit could be considerably higher, depending on average home prices in your area.

These differences are, in part, due to the variability of cost of living by state.

2026 VA Loan Limit Calculator Table

Higher home prices across the U.S. brought the FHFA’s baseline limit (and, therefore, the VA’s baseline limit for 2026) to $832,750 for a single-family home in most counties.

But in counties where 115% of the median home value is higher than the baseline CLL, the limit has been increased by a percentage that reflects those higher prices. There is a ceiling, or cap, however, of 150%.

Here’s what that looks like for a single-family home in 2026 vs. 2025.

VA Loan Limits in 2026 and 2025

If you’re buying in Alaska, Hawaii, Guam, or the U.S. Virgin Islands special statutory provisions dictate the loan limit, which in 2026 is $1,249,125 for a single-family home.

VA Loan Limit Example

Here’s a hypothetical example of how a borrower could be affected by the county loan limit on a VA loan.

Let’s say Joe, a Navy veteran, wants to buy a home in San Diego County, even though he knows the cost of living in California is higher than average. Joe manages to find a $715,000 single-family home and he wants to buy with a VA loan, but he still owes $100,000 on another VA loan.

The 2026 single-family limit in San Diego County is $1,104,000. Since the VA will guarantee up to a quarter of that amount, Joe has a maximum entitlement of $276,000.

$1,104,000 x .25 = $276,000

But Joe has to subtract the amount of his entitlement he’s already used, which leaves him with $176,000.

So, the VA would guarantee up to $176,000 of Joe’s loan.

Since most lenders want at least 25% of a borrower’s loan amount to be covered by the VA entitlement and/or a down payment, Joe might have to make a $2,750 down payment to get a VA loan for this home.

$715,000 x .25 = $178,750

$178,750 – $176,000 = $2,750

How Does My County Loan Limit Affect Me?

Just like Joe in the example above, if you’re using a remaining entitlement, your county loan limit could determine whether you’ll have to make a down payment to buy the home you want.

It doesn’t mean you can’t get the loan. If you have enough to make the down payment required by your lender, you may even qualify for a VA-backed loan that’s more than your county loan limit.

It’s important to note that though the example provided here is for a home purchase, the same entitlement limits apply if you’re considering refinancing your VA loan. In that case, your county limit could affect how much you’ll be asked to pay in closing costs.

💡 Quick Tip: Apply for a VA loan and borrow up to $1.5 million with a fixed- or adjustable-rate mortgage. The flexibility extends to the down payment, too — qualified VA homebuyers don’t even need one!

How to Apply for a VA Home Loan

Most VA loans are “VA-backed” loans, which means they’re issued by approved private lenders. The VA’s guarantee that it will help repay the lender if a borrower defaults is an incentive for lenders to offer these loans with attractive terms.

Still, it can be a good idea to shop around for the loan that best meets your family needs, and compare interest rates, fees, customer service, and any additional benefits various lenders might be offering.

You also may want to compare the terms of your top VA loan offer to what you can get with different types of mortgage loans, including a conventional loan.

Of course, no matter which type of loan you ultimately choose, you’ll still have to qualify for a mortgage with a lender.

There isn’t a requisite minimum credit score for VA loans. Instead, the VA asks lenders to review the borrower’s “entire loan profile,” which could include your credit history, DTI ratio, employment history, and assets. Individual lenders also may have their own approval criteria you should be aware of when you’re ready to apply for a VA loan.

Pros and Cons of VA Loan Limits

The VA loan limit is just one of several factors you may want to consider if you’re thinking about using a VA loan for a home purchase or a mortgage refinance. Like any other mortgage option, VA loans have their pros and cons. Here are a few to keep in mind:

Recommended: 2026 Home Loan Help Center

The Takeaway

VA loan limits are based on home prices in the U.S., and they’re adjusted annually to reflect price increases.

If you’re a first-homebuyer or you’ve paid off a past VA loan, you shouldn’t have to worry about VA loan limits. But if you want to buy a home and you already have a VA loan, the loan limit for your county could determine whether you’ll have to make a down payment to qualify for the amount you hope to borrow.

SoFi offers VA loans with competitive interest rates, no private mortgage insurance, and down payments as low as 0%. Eligible service members, veterans, and survivors may use the benefit multiple times.

Our Mortgage Loan Officers are ready to guide you through the process step by step.

FAQ

Will VA home loan limits increase in 2026?

VA home loan limits increased significantly in 2026. The baseline limit for VA loans is now $832,750, compared to $806,500 in 2025.

What is the conforming loan limit for 2026?

The national baseline conforming loan limit for 2026 is $832,750, although some counties have higher limits. The VA loan limit for a county is the same as its conforming loan limit.

What is the DTI limit for a VA loan in 2026?

The Department of Veterans Affairs hasn’t set a hard-and-fast limit on the debt-to-income (DTI) ratio it requires for its loans. But generally, lenders allow a 41% maximum for a VA loan.

Photo credit: iStock/Thai Liang Lim

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

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

SOHL-Q126-018

When you’re preparing to buy a home, understanding the early steps in the mortgage process can make your search smoother and more effective.

Two common terms you’ll hear are prequalification and preapproval — each gives lenders and home sellers insight into your borrowing potential, but they differ in how they evaluate your finances and how much confidence they provide in your ability to secure a loan. Knowing the distinction helps you plan better, shop smarter, and present stronger offers in a competitive housing market.

Here’s a look at how these two steps vary, how each can play a part in a home-buying strategy, and how one in particular can increase the chances of having a purchase offer accepted.

What Does Prequalified Mean?

Getting prequalified is a way of finding out how much you might be able to borrow to purchase a home and what your monthly payments might be.

To get prequalified for a home loan, you’ll provide a few financial details to mortgage lenders. The lenders use this unverified information, usually along with a soft credit inquiry, which does not affect your credit scores, to let you know how much you may be able to borrow and at what interest rate.

You might want to get prequalified with several lenders to compare monthly payments and interest rates, which vary by mortgage term. But because the information provided has not been verified, there’s no guarantee that the mortgage or the amount will be approved.

Recommended: How Much House Can I Afford?

What Does It Mean to Be Preapproved?

Preapproval for a mortgage loan requires a more thorough investigation of your income sources, debts, employment history, assets, and credit history. Verification of this information, along with a hard credit pull from all three credit bureaus (which may cause a small, temporary reduction in your credit scores), allows the lender to conditionally preapprove a mortgage before you shop for homes.

A preapproval letter from a lender stating that you qualify for a loan of a specific amount can be useful or essential in a competitive real estate market. When sellers are getting multiple offers, some will disregard a purchase offer if it isn’t accompanied by a preapproval letter.

When seeking preapproval, besides filling out an application, you will likely be asked to submit the following to a lender for verification:

•   Social Security number and card

•   Photo ID

•   Recent pay stubs

•   Tax returns, including W-2 statements, for the past two years

•   Two to three months’ worth of documentation for checking and savings accounts

•   Recent investment account statements

•   List of fixed debts

•   Residential addresses from the past two years

•   Down payment amount and a gift letter, if applicable

The lender may require backup documentation for certain types of income. Freelancers may be asked to provide 1099 forms, a profit and loss statement, a client list, or work contracts. Rental property owners may be asked to show lease agreements.

You should be ready to explain any negative information that might show up in a credit check. To avoid surprises, you might want to order free credit reports from www.annualcreditreport.com. A credit report shows all balances, payments, and derogatory information but does not give credit scores.

Calculate Your Potential Mortgage

Use the following mortgage calculator to get an idea of what your monthly mortgage payment would look like.

Do Preapproval and Prequalification Affect Credit Scores?

Getting prequalified shouldn’t affect your credit scores. Only preapproval requires a hard credit inquiry, which can affect scores. But the good news for mortgage shoppers is that multiple hard pulls are typically counted as a single inquiry as long as they’re made within the same 14 to 45 days.

Newer versions of FICO® allow a 45-day window for rate shoppers to enjoy the single-inquiry advantage; older versions of FICO and VantageScore 3.0 narrow the time to 14 days.

You might want to ask each lender you apply with which credit scoring model they use.

Do I Have to Spend How Much I’m Preapproved for?

No, you don’t have to spend the full amount you’re preapproved for on a mortgage. Preapproval shows the maximum a lender is willing to offer based on your finances, not what you should borrow. Choosing a lower-priced home can leave room in your budget for savings, emergencies, and other financial goals.

Recommended: Guide to First-Time Home Buying

Are Prequalification and Preapproval the Same Thing?

Prequalification and preapproval are not one and the same. Here’s a visual on what’s needed for each:

Do I Need a Prequalification Letter to Buy a House?

No, you do not need a prequalification letter to buy a house, nor do you have to have a preapproval letter when making an offer on a house.

But getting prequalified can allow you to quickly get a ballpark figure on a mortgage amount and an interest rate you qualify for, and preapproval has at least three selling points:

1.    Preapproval lets you know the specific amount you are qualified to borrow from a particular lender.

2.    Going through preapproval before house hunting could take some stress out of the loan process by easing the mortgage underwriting step. Underwriting, the final say on mortgage approval or disapproval, comes after you’ve been preapproved, found a house you love and agreed on a price, and applied for the mortgage.

3.    Being preapproved for a loan helps to show sellers that you’re a vetted buyer.

The Takeaway

In the homebuying process, understanding the difference between mortgage prequalification and preapproval can make your search smoother and more strategic. Prequalification gives you a general idea of what you may afford, while preapproval involves verified financials and can strengthen your offers in a competitive market. Knowing when to use each step helps you shop confidently and prepares you to move quickly when you find the right home.

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.

FAQ

What is mortgage prequalification?

It’s an early step where a lender estimates how much you might be able to borrow based on basic financial information you provide.

What does mortgage preapproval mean?

Preapproval is a more formal process where the lender verifies your income, debts, and credit, and may issue a conditional approval for a specific loan amount.

How do prequalification and preapproval differ in documentation?

Prequalification uses self-reported details, while preapproval requires verified documentation like pay stubs and tax returns.

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

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

SOHL-Q126-077

Renovations can improve your home and increase its value. But as any seasoned homeowner will tell you, those projects can be expensive. If you can’t afford to cover the costs out of pocket, you may wonder if a construction loan is right for you. While it is an option, there are complications that people should be aware of, as well as other home loans for renovations that might be a better fit.

Let’s take a look at construction loans, their requirements, and some alternatives to consider.

What a Construction Loan Is and How it Works

Construction loans finance the building of a new home or substantial renovations to a current home. They are typically short-term loans with higher interest rates, designed to cover the costs of land, plans, permits and fees, labor, materials, and closing costs. They can also provide a contingency reserve if construction goes over budget.

With a construction loan for home renovation or a new build, applicants must submit project plans and schedules along with their financial information as part of the qualification process. We’ll get into that in more detail below.

How Funds Are Disbursed During the Project

Once approved for a construction loan for a remodel or new build, a homeowner receives funding for the first phase of the project only, rather than a lump sum. As construction progresses, assessments are provided to the lender so that the next round of funds can be released. Meanwhile, borrowers make interest-only payments on the funds they’ve received.

When construction is finished — and the borrower now has a home to serve as collateral — the construction loan may be converted to or paid off by a regular mortgage. The borrower then begins repaying both the principal and interest.

Eligibility Requirements and Typical Terms

The formal application process for a construction loan involves submitting plans and specifications for the proposed building. Your builder will need to provide blueprints, estimated costs, and a schedule for the project. With a typical home mortgage loan the back-and-forth is between you and the lender; in a construction loan the builder or contractor will also play a key role, supplying important supporting documents.

As with a typical mortgage, the lender will scrutinize the borrower’s credit score (680 or above is ideal) and debt-to-income ratio, and you can expect to be asked to provide proof of income. A down payment of 20% is often required for a construction loan — after all, the lender is loaning money against collateral that doesn’t entirely exist yet.

Recommended: Home Maintenance Checklist

Renovation Loans vs. Construction Loans: What’s the Difference?

Though renovation loans and construction loans can be used for similar purposes, there are important differences to know. Let’s take a closer look at both types of loans.

Renovation Loans

Unlike other types of home improvement loans, a renovation loan takes into account the property’s after-repair value, which is an estimation of the home’s value once the improvements are made. This can be good news for borrowers, especially those buying a fixer-upper. That’s because they may be able to secure a larger loan amount than they would with a traditional mortgage based on the home’s current value.

What’s more, renovation loans often come with lower interest rates than credit cards and unsecured personal loans.

Some common types of lending for renovations include:

•  Government-sponsored loans, such as the FHA 203(k) home loan, Freddie Mac’s CHOICERenovation loan, and Fannie Mae’s HomeStyle renovation loan. Each type has its own rules and requirements.

•  VA renovation loans, which are available to eligible veterans and active-duty military personnel.

It’s also possible to use a home equity loan or home equity line of credit for renovations. More on that below.

Construction Loans

As we mentioned, a construction loan is commonly used to pay for building a brand-new home. In some cases, the loan can be converted to a mortgage after your home is finished. However, getting one can be more challenging than securing a conventional mortgage.

Lenders generally want to see a debt-to-income ratio of 45% or lower and a high credit score, and you may be required to make a down payment of at least 20%. Depending on the type of construction loan you apply for, you may also be required to provide a detailed plan, budget, and schedule for the construction. Some lenders will also need to approve your builder.

There are different types of construction loans to consider:

•  Construction-to-permanent loans, or single-close loans, which converts to a mortgage once the project is finished. The borrower saves money on closing costs by eliminating a second loan closing.

•  Construction-only loans, or standalone construction loans, which must be paid off when the building is complete. You will need to apply for a mortgage if you don’t have the cash to do so.

•  Renovation construction loans, which are designed to cover the cost of substantial renovations on an existing home. The loan gets folded into the mortgage once the project is complete.

Pros and Cons of Using a Renovation Loan

As you explore different home improvement loans, consider the following pros and cons of renovation loans.

Pros

•  Borrowers may have access to substantial funds that can pay for major upgrades or repairs.

•  Money can be used for a wide variety of renovation projects.

•  The loan amount is based on the home’s projected value after the repairs and renovations are complete.

•  Interest rates tend to be lower than what you’d be offered with an unsecured loan or credit card.

Cons

•  You may be required to use your home as collateral.

•  As with any loan, you’ll need to meet certain eligibility requirements, such as a good credit score, low debt-to-income ratio, and proof of income and employment.

•  A renovation loan increases your debt load, which could put a strain on your finances.

Recommended: Home Inspection Checklist

Pros and Cons of Using a Construction Loan

There are advantages and disadvantages to consider before taking out remodeling construction loans to fund renovations.

Pros

•  Funds can be used to cover all construction expenses.

•  Borrowers can use equity from other investments as collateral.

•  Loan requirements are generally focused on the construction process instead of a borrower’s credit profile.

•  Borrowers may only need to make interest payments during construction.

•  Loan terms may be more flexible than a traditional loan.

Cons

•  Funds are released as work progresses instead of in one lump sum.

•  It can be difficult to find lenders that offer competitive rates and to qualify for them — particularly if you don’t have a flawless credit history.

•  Loans tend to be short-term and must be paid in full at the end of the term.

•  May need to provide extensive documentation on the construction process in order to get approved.

•  If construction is delayed, you may need to ask the lender for an extension on the loan. This can cause interest rates and fees to accumulate.

When to Use a Renovation Loan vs. a Construction Loan

The key to knowing when to use a renovation loan vs. a construction loan is written right in the names of these financial tools. If you’re building a home, a construction loan will be necessary. But if you are substantially renovating a home, a renovation loan might be just the ticket. It’s not your only option, however, and there are less complicated ways to finance small- or medium-size renovations.

Alternative Ways to Finance Home Renovations

If you are planning a small construction project or renovation, there are a few financing alternatives that might be easier to access and give you more flexibility. Here’s a look at home equity loan vs. HELOCs vs. home improvement loans.

Personal Loans for Renovations

An unsecured personal loan can fund a renovation project or supplement other construction financing.

Personal loan interest rates are typically lower than construction loan rates, depending on your financial profile. And you can frequently choose a personal loan with a fixed interest rate.

Personal loans also offer potentially better terms. Instead of being required to pay off the loan as soon as the home is finished, you can opt for a longer repayment period. And applying for a personal loan and getting approved can be much faster and easier than for a construction loan.

The drawbacks? You won’t be able to roll your personal loan into a mortgage once your renovation or building project is finished.

And because the loan is disbursed all at once, you will have to parse out the money yourself, instead of depending on the lender to finance the build in stages.

Cash-Out Refinance for Construction Costs

A cash-out refinance is also a good financing tool, particularly if you have a lot of equity in your current home. With a cash-out refinance, you refinance your home for more than you owe and are given the difference in cash.

You can estimate your building or renovation expenses with this Home Improvement Cost Calculator. Add your estimate to what you owe on your home to get the amount of your refinance.

Home Equity Loans and HELOCs

Both a home equity loan and a home equity line of credit (HELOC) allow you to borrow funds based on your home equity to use for any purpose you wish. Your home serves as collateral. This means that if you fail to repay what you borrow, with interest, the lender could foreclose. The good news, though, is that because the lending is secured by your home, interest rates are often pretty attractive.

Home equity loans are lump-sum loans, typically with a fixed interest rate. So your monthly payment remains the same for the full repayment term, which could be up to 30 years.

A HELOC is a credit line. You can draw against it as needed, up to the maximum you are allowed. For the first five or ten years, you often don’t have to repay the principal — you can just pay interest. Interest on HELOCs is more likely to be a variable rate, so payments can be somewhat unpredictable. After the initial “draw” period you have to stop borrowing and you begin to repay what you have borrowed, with interest.

Grants or Government Programs for Certain Renovations

FHA loans and VA loans aren’t the only government programs that can help fund renovations. There may be grants or loans available from government or nonprofit sources, depending on your specific renovation project and your personal circumstances. Check your local government web site for more information about programs in your local area. There are often programs specifically for older adults, Native Americans, and those in rural areas. If your renovations might make your home more energy efficient, also check in with your local power company.

Using Savings or Cash for Smaller Projects

Remember that if your renovations aren’t a big production, you may be able to earmark savings for them, if the repairs aren’t urgent and you are willing to be patient and save up the money. Flexing your savings muscle is a good idea even if you are financing some or all of the work. “When budgeting for a remodel, it can be helpful to have a dedicated fund for renovation expenses. This can help you allocate the appropriate amount of money,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.

The Takeaway

Planning a new home or substantial renovation? There are several ways to pay for the projects. One option is a renovation loan, which lets you pay for major (and minor) renovations without having to dip into your personal savings. Another option is a construction loan, which typically covers the entirety of new construction expenses. For smaller projects, a personal loan can be a good option — and a lot less complicated.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can you use a construction loan for renovations on an existing home?

It is possible to use a construction loan to fund renovations on an existing home, but it may not be the easiest way to borrow for your renovation. That said, if you need a very large sum and are planning to work with a builder or contractor who can help provide plans and other supporting documents, it is doable.

Can you convert a construction loan to a regular mortgage after renovations are complete?

It is possible to either convert a construction loan to a typical mortgage or take out a mortgage to pay off a construction loan. Explore what your options will be before you sign on to a construction loan with a lender.

Do you need equity in your home to qualify for a renovation or construction loan?

Lenders who fund renovation or construction loans often like to see that a homeowner has a significant amount of equity — sometimes 20% or more — before financing the work. The exception would be for an FHA 203(k) loan. If you have a credit score of 580 or better, you may be able to fund a renovation with an FHA loan even if you have just 3.5% equity. A score from 500 to 579 will require 10% equity.

How do inspections and draw schedules work with construction loans?

In the application stage of your construction loan, you will (with your builder or contractor’s help) submit a schedule with certain milestones that correspond to stages of funding of your loan. As your project reaches each milestone, the project manager, builder, or you will report in to the lender. It’s not just a casual phone call: Your draw request (the process of drawing down your loan) will require documentation, and an inspector may come out to review the work. Once all this is completed and the lender is satisfied, the lender will send the funds.

What are some alternatives if I don’t qualify for a construction or renovation loan?

If you don’t qualify for a construction loan for renovation or a government-backed renovation loan such as an FHA 203(k) loan, you might look into a personal loan, which is unsecured. Or if you have some equity built up in your home, you might fund your renovations by using a home equity loan, home equity line of credit (HELOC), or a cash-out refinance.

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

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

SOPL-Q126-004

Looking to start your own business? You’re not alone. Some 71% of Gen Z and millennials dream of being their own boss, according to a 2024 JustWorks/Harris Poll survey.

While launching your own business allows you plenty of professional freedom, the costs of setting up a business can be expensive. As you’re creating your business plan, one question you’ll likely face early on is, how much does it cost to start a business?

The average small business owner spends around $40,000 in their first full year. But that amount can vary significantly based on a number of factors, including the size, type, and location of the business.

Let’s take a closer look at the startup costs of different types of businesses and common ways to cover the expenses.

Typical Small Business Startup Costs

The adage is true: You have to spend money to make money. And unfortunately, some of the biggest business costs can come during the startup phase, when you are defining your business goals, finding a location, purchasing domain names, and generally investing in the infrastructure of your new company.

In order to make sure your business is on firm financial footing, you’ll need more than just a business checking account and a small business credit card. What’s important is to estimate your small business startup costs in advance so that you have a good understanding of what you’ll need and why. Here are some common ones to keep in mind:

Payroll

Many small businesses start out as a company of one. But if you’re planning on having employees, salary will likely be one of the biggest costs you’ll face. After all, offering an attractive pay and benefits package can help you recruit and retain top talent.

In addition to wages, you may also want to budget for other payroll costs, such as overtime, vacation pay, bonuses, commissions, and benefits.

Office Space

No matter what your business is, you’ll need somewhere to work. Are you leasing a storefront, or will you buy a membership to a coworking space or startup incubator? Even if you’re planning to work from home, you’ll want to consider whether your new business will increase your internet bills.

And don’t forget about the supplies you’ll need to do the work. Depending on your business, this could include computers, phones, chairs and desks, paper supplies, or filing cabinets.

Recommended: Best Cities to Start a Business in the U.S.

Inventory

How much it costs to start a company varies a lot, and one major factor in that variance is inventory. If you’re starting a business that sells products, you’ll need to have some inventory ready to go. Calculating stock as part of your startup costs helps ensure that you can buy your product in advance so that you’re ready to serve customers from day one.

Licenses, Permits, and Insurance

Some businesses, especially storefronts and restaurants, require more legal legwork than others.

For example, if you’re starting a native-plants landscaping business, will you need a permit? If you’re opening a new bar, will you have to get a liquor license? Licenses and permits vary by city and state, but most require an application fee.

Likewise, your new business may need one or more insurance policies to protect you in case of future litigation, so be sure to factor in the cost of monthly premiums.

And don’t forget about the costs associated with registering your business. Whether you plan to set up shop as a corporation, limited liability corporation or other business entity, you’ll often need to pay a nominal fee. The amount will depend on the state where you operate.

And if you plan on enlisting the help of a lawyer, accountant, or tax professional to get your business up and running, add those potential costs to your budget as well.

Advertising

Getting the word out about your new business is one of the most important things you can do to ensure that your business starts off strong. Whether you want to advertise on social media or rent a billboard, your startup costs should reflect money you plan to put toward taking out ads for your business.

Technology and Software

No matter what kind of business you have, technology is likely to play a key role. If you’re creating a product, you’ll probably need equipment to make it, but also software to track inventory, payment processing tools, and possibly workforce management and payroll programs. Internet startups are reliant on the e-commerce software they’re using to sell their products and services. And retail and restaurants generally need payment processing tools, as well as software to manage scheduling and payroll, among other things.

As you’re planning, consider what tech you’ll need to manage your operation. A realistic budget will include costs for setting up and maintaining your technology systems.

If there’s a major piece of tech or manufacturing equipment you need to run your business, you may be able to use equipment financing. This kind of funding can be easier for new companies to get since the equipment itself acts as collateral for the loan.

Professional Services

As mentioned earlier, from time to time, you may need specialized professional help for various tasks associated with your business. In many of these cases, you may want to hire someone with expertise on a project basis rather than as a full-time employee.

For example, you may want to use an accountant for bookkeeping and tax preparation; a lawyer when you need to initiate or approve a contract; or an IT expert to help with maintaining computer systems and cybersecurity. Depending on your company’s growth, you may even need to hire a human resources specialist to help you with hiring.

As you look at your business plan, think about what kinds of professional services you might need at various points in your company’s progress and add those costs to your budget.

Utilities and Operational Costs

Whether your business is in your home or in a dedicated building, you’ll need to consider the additional costs of supporting your office and operations. These may include utilities such as electricity, water and sewer charges, gas, heat, trash pickup, and internet access. If you’re working solo from home, you may not be spending much extra on these, but if you’re starting up a restaurant, for instance, these costs could be significant.

Unexpected Expenses and Emergency Funds

While you can’t expect the unexpected, you can prepare. Generally, it can be a good idea for small businesses to have between three and six months worth of their expenses set aside. That way, they’ll be able to cover costs if they hit a lull or experience equipment breakdowns. You may also find this fund helpful if, for instance, you need to replace a major piece of equipment, like a delivery truck.

Coming up with this reserve may be daunting, but you can build it up over time. Having a business line of credit may also help access funds you can draw on when you have an emergency.

Differences in Startup Costs Based on Industry

The actual cost of starting a small business can vary by business and industry. Here’s what you might be looking at if you want to start one of these common types of small businesses.

Online Business Startup Costs

As with brick-and-mortar stores, the cost of doing business online varies depending on the type of business you have. But in general, you’ll need to budget for things like:

•  Web hosting service and domain name

•  Web design and optimization

•  E-commerce software

•  Payment processing

•  Content creation and social media

If you’re selling products, you’ll need to invest in inventory and shipping. If you’re providing services, you may need to hire employees. All of these costs can be significant.

However, one benefit of starting your small business online is that you may be able to keep other costs low. For example, if you can conduct business from home, you may not need to rent office space, which can be a major savings. If you’re able to do the work without purchasing inventory or hiring employees, the startup costs can be even lower.

Average startup cost: $2,000 to $20,000 or more (depending on your business)

Storefront Startup Costs

If your business idea requires a physical space, your startup costs might range from $50,000 to $1 million, depending on how large a store you’re planning and what the stock will be. A medium-sized clothing store or boutique, for instance, might cost between $50,000 and $150,000.

Although $150,000 might seem like a daunting number, remember that many smaller, independently owned stores began with a much smaller budget.

Average medium-sized retail startup cost: $80,000-$150,000

Restaurant Startup Costs

If you’re planning to start earning money by selling your grandma’s famous bánh mì, you could be looking at startup costs of anywhere from $30,000 to $100,000 for a used food truck or cart to up to $2 million to buy a franchise restaurant. Typically, costs for small restaurants, including coffee shops, fall somewhere in the $275,000 to $425,000 range.

Average startup cost: $375,000

Recommended: 15 Types of Business Loans to Consider

How to Finance Your Startup Business

Many people who want to start a business are overwhelmed by the initial costs, but there are several ways to fund your passion project.

Friends and Family

Perhaps one of the most common ways to raise money for your small business is to ask friends and family to invest in you.

Friends and family loans can be ideal for financing a new small business because you can negotiate low-interest rates, set up flexible pay-back schedules, and avoid bank fees. Of course, borrowing money from friends and family can quickly become complicated by family drama, so make sure to agree on conditions before taking out a loan from a relative.

Outside Investors

When we’re discussing startup companies, we frequently hear about so-called “angel investors” sweeping in to fully fund new businesses. But there are other practical ways to fund your small business with outside investors.

Some small businesses use crowdfunding platforms to find investors who each contribute a small amount, and others use startup funding networks to find investors looking to fund their specific type of business.

Outside investors will want to know that your business is likely to succeed, so you’ll need a solid business plan to land outside funders.

Personal Savings and Investments

Most people end up covering some of their small business startup costs out of their own personal savings. Self-funding your new business venture can be the most convenient option. After all, if you’re your own funder, you don’t have to worry about family drama or picky investors. And putting your own money on the line can be an extra motivation to make sure that your business is set up to succeed.

Of course, it can seem overwhelming to save up enough money to fund your small business. Luckily, there are simple strategies to effectively manage your money.

Business Loans

If you’re looking to purchase equipment, buy inventory, or pay for other business expenses, a business loan might make sense for you.

There are various types of small business loans available, each with different rates and repayment terms.

Note that in some cases, lenders may be reluctant to give loans to a brand-new business because they want to see at least a year of revenue. You might need to put up some type of collateral to qualify for funding. Or it may sometimes be easier to qualify for startup business loans, which are designed specifically for younger companies.

When you’re considering a loan, a small business loan calculator can be useful to help you estimate what your monthly costs might be, as well as the full costs over the life of the loan.

You may be able to get a Small Business Administration (SBA) loan. SBA loans are partially backed by the government and often come with more advantageous terms than other loans, though they may require more paperwork upfront.

Using an SBA loan calculator can help you understand what the monthly costs of an SBA loan would be.

Recommended: Business Term Loans: Everything You Need to Know

Personal Loans

A personal loan can be used for just about any purpose, which can make it attractive for entrepreneurs who want to turn their passion project into a reality. These loans are usually unsecured, which means they’re not backed by collateral, such as a home, car, or bank account balance.

Personal loan amounts vary. However, some lenders offer personal loans for as much as $100,000. Most personal loans have shorter repayment terms, though the length of a loan can vary from a few months to several years.

While there’s a great deal of latitude in terms of how you use the funds, you might need to get your lender’s approval first if you intend on using the money directly for your business.

Recommended: How to Get a Small Business Loan in 6 Steps

The Takeaway

Going into business for yourself can be personally and professionally fulfilling. But it can also be expensive, especially if you’re starting from scratch. Estimating your startup costs early on can help ensure you’re on solid financial ground from the get-go. Labor, office space, and equipment are among the biggest expenses facing many entrepreneurs, but there are also smaller fees and charges you’ll likely need to consider.

Fortunately, small business owners have no shortage of options when it comes to covering startup costs. Dipping into personal savings and asking friends and family to invest are popular choices. Taking out a business loan or personal loan is another way to help finance a new business. The money can be used for a variety of purposes, and that flexibility can be especially useful when you’re just starting out.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What are the average startup costs for a small business?

Startup costs can vary significantly based on factors like the company’s type, industry, and location, but on average, a typical small business owner spends around $40,000 in the first year.

Can I start a business with no money?

It is possible to start a business without money, though it depends on the kind of business you have in mind. Some service-based businesses, such as pet care or being a virtual personal assistant, often don’t require money to start, and you may also not need funds to start selling hand-crafted goods. Dropshipping could be another option.

What business has the lowest startup cost?

Some of the businesses with the lowest startup costs are service-based companies that rely on skills you already have. For example, tutoring or freelance editing businesses can be relatively inexpensive to set up.

How long does it take for a business to become profitable?

You may see online that startups on average take as long as three to five years to become profitable. Bear in mind, however, that the amount of time it takes a business to achieve profitability can vary enormously, and low-overhead companies may be able to reduce that time.

What are the hidden costs of starting a business?

Costs that entrepreneurs may forget to take into account when they’re starting up a business can include utilities, office supplies, WiFi, and printing and mail charges.

Photo credit: iStock/Wavebreakmedia

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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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SOSMB-Q425-102

The foreign exchange market, or forex (FX), is the decentralized global market for trading fiat currencies. Forex is the largest, most liquid form of investing in the world, with an average daily trading volume of about $9.6 trillion, as of April 2025.

Forex traders buy and sell foreign currency pairs with the aim of profiting from often minute fluctuations in exchange rates. For example, an investor could trade their U.S. dollars (USD) for Euros (EUR). Or, they can trade their Japanese yen (JPY) for New Zealand dollars (NZD).

When the value of one currency rises relative to another, traders may see a gain or a loss, depending on which currency they are buying or selling. Investors must qualify to trade forex, which is a high-risk endeavor and typically involves the use of leverage.

Understanding Foreign Currency Investment

Although there are no centralized foreign currency exchanges, as there are for stocks, forex markets operate via a global network of banks and are open 24 hours a day, five days a week, excluding weekends.

Forex traders strategize around how they expect currency rates to fluctuate; when the value of one currency, such as the dollar (USD), rises relative to another currency, such as the Euro (EUR), traders can either see a profit or a loss, depending on whether they buy or sell the currency that has appreciated.

Traders use standardized abbreviations for each currency that are three letters and act as a kind of ticker symbol, or unique identifier (USD for the U.S. dollar, GBP for the British pound, CAD for the Canadian, and so on). The first two letters indicate the country; the last letter refers to the currency name.

How Currency Pairs Work

Forex trading is conducted using currency pairs, simultaneously buying one and selling the other when the price changes in the desired direction. Thus a forex trade will employ a format that uses both abbreviations: e.g., JPY/CAD or USD/EUR. The first currency is the base, the second is the quote. In order to trade forex, one has to become familiar with the conventions for quoting currency prices.

For example, according to Investor.gov, it’s typical to see the Euro exchange rate quoted in terms of dollars. So a EUR quote of 1.20 means that $1,200 USD will buy 1,000 Euros.

Forex for Retail Investors

Forex trading wasn’t available to retail investors until the 1990s, when the internet made electronic trading platforms possible, and margin was allowed. Prior to that, institutional investors typically placed forex trades over-the-counter (OTC) through a system of dealers and financial institutions known as the interbank market.

Now, however, it’s possible for qualified retail investors to place forex trades using standard broker-dealers. Retail investors may also access the forex derivatives market through futures, swaps, and forwards. The use of margin in forex trades is more complicated than when buying and selling other securities, so it’s important to understand the terms.

Exploring the Benefits of Investing in Foreign Currencies

Like other types of investments, forex trading, or investing in foreign currencies, can offer some benefits.

Portfolio Diversification

For one, investing in foreign currencies can add a degree of diversification to an investor’s portfolio. That means that while an investor may have built a portfolio with a number of other investments, such as stocks, bonds, and ETFs, foreign currency can be another element in the mix. Note, though, that it’s likely foreign currency should only comprise a small portion of a portfolio’s overall holdings.

Convenience and Accessible Markets

The forex markets operate 24 hours per day, five days a week, excluding weekends, unlike the standard stock exchanges. So, for investors who want to trade around the clock, the markets are almost always accessible.

There are four major forex trading sessions in a 24-hour period, split up by international region:

•   Sydney (Australia)

•   Tokyo (Asia)

•   London (Europe)

•   New York (The Americas)

Forex investors can trade from 22:00 UTC Sunday (in Sydney) to 22:00 UTC Friday (in New York). Check the local time in UTC, or Universal Time Coordinated, for your area.

There are minor sessions, too, but these are the four major sessions, and markets can be busy (when the Americas’ session overlaps with Europe’s), or less busy, depending on the time of day, and how many people are actively trading.

Hedge Against Domestic Currency Inflation

It’s possible that while a domestic currency is losing value due to inflation, foreign currencies could retain their value at the same time. That would, theoretically, provide investors with a hedge against inflation, but there’s no guarantee prevailing market forces would work to an investor’s advantage in such a scenario.

4 Ways to Invest in Foreign Currencies

There are several ways to get started in currency exchange investment.

1. Standard Forex Trading Account

First, you can work with a foreign exchange brokerage to trade the currency you’re holding (such as U.S. dollars) for another currency (Euros, Yen, etc.). The goal is that the currency you’re trading for, or buying, will increase in value relative to the currency you’re trading away, or selling.

Only qualified investors can trade forex, because it requires a margin account.

While the goal is straightforward, the process can get more complicated. For instance, there are a few ways to execute trades, such as spot trading, forward trading, and future trading. Spot trading is an instant cash trade, whereas forward and future trading may involve settling on terms at a time in the future (similar to trading options).

Further, investors should understand the concept of the bid-ask spread, which represents the difference between the buy and the sell price of a currency.

2. Currency CDs and Savings Accounts

Investors can also look into foreign currency CDs (certificates of deposit), which work more or less like traditional CDs but might offer higher yields.

Foreign savings accounts are another potential option, although it depends on local regulations. In some cases you must be a resident to open a savings account in another country.

3. Foreign Bond Funds

Investors can look at the possibility of purchasing foreign bonds, which are issued in other countries by foreign governments or foreign companies. There are many types of foreign bond investment types, and the credit quality will depend on the entity issuing the bond.

4. Currency ETFs

As mentioned, investors may want to look at currency ETFs. These ETFs are similar to foreign bond funds; there are also foreign currency ETFs on the market, which offer many of the same advantages of domestic or traditional ETFs, but can give investors exposure to the forex market. Likewise, exchange-traded notes, or ETNs, which are similar to bonds, are another potential investment investors can check out.

Risks Associated with Foreign Currency Investment

Foreign currency investment isn’t without risk, and in fact, can introduce some types of risk that investors may not otherwise encounter, such as political and interest rate risks.

Market Volatility and Political Risks

Since forex markets are so active, prices can change quickly, which means it’s a fairly volatile asset class. The news cycle (including economic, political, or social news) can cause sudden and drastic changes to prices. That means it may be a better fit for investors with a relatively high risk tolerance than those who are more risk averse.

Political risk is something to consider, too, as all currencies are backed by governments. If a foreign government is unstable or otherwise involved in some sort of political drama, it can affect the price of a currency. That can pose a risk to investors.

Interest Rate Risk

Some investments incur interest rate risk, which is when an investment loses value due to a fluctuation in interest rates. Foreign currencies may be subject to such risk, though interest rate risk is more commonly associated with bonds.

Currency Conversion and Transfer Costs

There may also be additional costs associated with currency trading and investing, including currency conversion and transfer costs. These may not always be applicable, but are something that investors should at least be aware of in the event that they do encounter them.

Investing in Forex: Key Points

In order to invest in foreign currency investing as safely as possible, remember, no investment is completely safe or risk-free, investors should brush up on the mechanics of the forex market.

Education Is Key

It’s important to understand the use of “pips,” as well as leverage in forex trading.

•   Ticks and Pips. A “pip” is a unit of measure that represents the smallest unit of value in a currency quote, which goes out to four decimal places: 0.0001. Using the above quote as an example, the difference between the “bid” (1.2100) and the “ask” (1.2104) is four pips. Ten ticks equal one pip.

Why does this matter? Because currency values fluctuate very slightly during the trading day, perhaps only several pips. That means that to make a significant return, traders deal with large quantities of currencies, which typically require margin, or leverage.

•   Leverage. To get to those large quantities, traders who qualify may use a margin account. For example, you may give your broker $1,000 to place a $10,000 trade, essentially borrowing $9,000 on margin. Most forex trading is done this way, using leverage and margin in order to generate returns.

That, of course, has its risks, since traders may incur losses and end up owing money to their brokers. In addition, using a margin account comes with terms and restrictions that can also impact trades.

The Importance of the Bid-Ask Spread

Also noted previously, the bid-ask spread is another important concept to know and incorporate if you’re trading or investing in foreign currency.

Effectively, the spread refers to the difference between a trader’s cost and the dealer’s profits. There’s a slight difference in what you’re willing to pay and what a seller is willing to sell for. In forex trading, the spread can be important to calculating overall potential returns.

Evaluating Risks Versus Rewards

Above all, it’s critical that investors keep their own personal risk tolerances in mind and weigh that against the potential gains they could see from foreign currency investing. It may not be a good fit for everyone’s investment strategy.

Currency Investment Strategies for Beginners

As noted, investing in or trading foreign currency involves pairs of currencies. Some currencies are more widely traded than others and are “paired” with one another or grouped as “major” currencies:

•   U.S. dollars

•   Euros

•   Japanese yen

•   British pounds

•   Swiss francs

•   Australian dollars

•   Canadian dollars

•   New Zealand dollars

There are also “minor” and “exotic” currency pairs. These are not traded as widely as the majors, but are still often swapped on exchanges. They may include pairings with the Hong Kong dollar, the Mexican peso, the Singapore dollar, or the Norwegian krone, among others.

Additionally, investors should know about foreign currency quotes. These quotes are similar to stock quotes, which list the current value, or price of a stock. Forex quotes display the bid and ask prices for a currency pair, since one currency’s value is relative to another currency. Here’s an example of a quote for a common pairing, Euros and U.S. dollars:

EUR/USD = 1.2100

In this example, Euros are the “base” currency, and U.S. dollars are the “quote” currency. That means that a single Euro is equal to 1.21 U.S. dollars.

Find New Opportunities With Currency ETFs

As mentioned, investors may want to look at currency ETFs, which offer many of the same advantages of domestic or traditional ETFs, but can give investors exposure to the forex market.

Advanced Currency Investment Options

While investors can trade currency itself, they can also look at more advanced ways of investing in the forex markets. That can include trading futures and options, or other types of relevant derivatives.

Foreign Currency Futures and Options

First and foremost, investors should be aware of the unique risks that financial derivatives can introduce into their portfolios. Trading options contracts is different from choosing stocks, so before you dive headfirst into forex options, it’s important to understand these strategies.

Currency options are derivatives, with currency itself as their underlying asset. There are calls, puts, and futures. If you’re not familiar with traditional options, it may be a good idea to review the basics before looking at forex options.

In effect, though, these options allow investors to hedge against unfavorable fluctuations of foreign currencies or to speculate on volatility in the forex market.

The Takeaway

Trading or investing in foreign currency is yet another avenue that investors can explore. As discussed, forex trading involves buying one currency with another, with the hopes that the price differences will work in the investors’ favor. Foreign currency markets are extremely liquid, which is another potential upside for some traders.

As always, though, there are risks to consider, and learning the ropes of the foreign currency markets may be tricky. If investors feel like they want to get their feet wet in the market, though, without diving straight in, it may be worthwhile to discuss their plans with a financial professional.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

FAQ

How does forex work in plain English?

Forex trading means buying one currency and selling another with the aim of seeing a profit. For example, if you use U.S. dollars to buy Euros, you might be able to buy more Euros if the value drops relative to the dollar and then sell the Euros for dollars when the value rises again.

Why is forex so risky?

Because the FX market is the biggest, most liquid global asset market, foreign currency prices can fluctuate rapidly. Combine that with the fact that trades are typically placed using substantial amounts of leverage, and there is a high degree of risk involved in most trades.

What is the Rule of 90 in forex?

This is a broad rule-of-thumb which states that 90% of new traders will experience major losses within 90 days that will wipe out 90% of their capital. This is meant as a reminder to exercise caution; it may not be literally true, but it speaks to the risks involved.

Photo credit: iStock/anyaberkut