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If you’ve saved for a down payment on a new place, congratulations on a major achievement. That’s probably quite a chunk of change, but, sorry to say, you are likely going to have to dig somewhat deeper to afford closing costs on your home. How deep, you ask? Closing costs average 3% to 6% of the loan principal. That can be a hefty sum.

Whether you are a first-time homebuyer or a seasoned property purchaser, it’s wise to know what to expect, in terms of both money and process, when it’s time to gather at the closing table. There are payments due from both the buyer and the seller as well.

Here, you’ll learn more about this important home-buying topic, including:

•   What are closing costs?

•   How much are closing costs on a house?

•   Who pays closing costs?

•   How much are closing costs for the buyer and the seller?

•   How can you lower closing costs?

What Are Closing Costs?

Closing costs are the fees needed to pay the professionals and businesses involved in securing a new home. These range from fees charged by appraisers, real estate agents, and title companies, to lender and home warranty fees.

Here are some key points to know:

•   When you apply for a mortgage loan, each lender must provide a loan estimate within three business days. This will give you information such as closing costs, interest rate, and monthly payment. Review those closing costs carefully.

•   Your closing costs will depend on the sale price of the home, the fees the chosen lender charges, the type of loan and property, and your credit score.

•   Closing costs are traditionally divided between the buyer and seller, so you won’t necessarily be on the hook for the whole bill. That said, the exact division between buyer and seller will depend on your individual circumstances and can even be a point of negotiation during the buying process.

What Fees Do Closing Costs Include?

Here are some of the closing costs a homebuyer should account for; you’ll learn more about specific costs a bit later on in this article.

Lender fees. This is the cost the lender charges for processing your loan. In addition to the origination fee, you may have “bought down” your interest rate with one or more points. Each mortgage point costs 1% of your mortgage amount and typically lowers your mortgage rate by 0.25% per point. That point money you are paying upfront is due at closing.

Appraisal and survey fees. It is easy to be wooed by pristine wood floors and dining room walls covered in vintage wallpaper, but surface good looks will only get you so far. You and your lender want to make sure that your potential new home is actually worth the purchase price. This means paying professionals to delve more deeply and provide a current market value.These home appraisal and survey fees are typically due at closing.

Title service. To make sure you’re buying property that actually belongs to the seller and that the property isn’t subject to any legal obligations, it’s necessary to do a title search. Your lender will likely require a lender’s title insurance policy for its protection. You may also want an owner’s title insurance policy to protect yourself. The buyer and seller often divide these costs.

Recording fees. When the title of the property is transferred from the seller to you, legal documents need to be recorded in the county records to make sure the property is correctly transferred into your name. County recorders typically charge fees for doing this.

Home warranty. A home warranty can be purchased to protect against major mechanical problems. A warranty plan may be offered by the seller as part of the deal, or a buyer can purchase one from a private company. Your lender, however, will not require a home warranty.

Private mortgage insurance (PMI). Often lenders require PMI if you make a down payment that is less than 20% of the purchase price. Putting less money down can make a buyer look less reliable when it comes to repaying debt in the eyes of lenders. That’s why they require this premium to protect themselves. This is usually a fee that you pay monthly, but the first year’s premium can also be paid at the time of closing.

How Much Are Closing Costs?

As briefly noted above, how much closing costs on a house typically are will range from 3% to 6% of the mortgage principal. Let’s say you take out a $300,000 mortgage loan to buy a house with an agreed-upon sale price of $350,000. Your closing costs could be 3%, or $9,000, or 6%, or $18,000.

Be aware that a “no closing cost mortgage” often means a higher rate and a lot more interest paid over the life of the loan. The lender will pay for many of the initial closing costs and fees but charge a higher interest rate.

Recommended: First-Time Home Buyer Guide

Who Pays Closing Costs?

Typically, closing costs are paid by both the buyer and the seller. Each has their own responsibilities to uphold.

Some fees are specific to the purchase and are payable by the buyer. These include title search, prepaid interest on the mortgage loan, and more.

Other costs are the seller’s responsibility: paying the real estate agent and so forth. Read on to learn more about who pays for what when closing on a home sale.

How Much Are Closing Costs for a Buyer?

Typically, the buyer pays the following closing costs:

•   Abstract and recording fees: These fees relate to summarizing the title search (more on that below) and then filing deeds and documentation with the local department of public records. You may find that abstract fees can cost anywhere from $200 to $1,000, and recording fees in the range of $125.

•   Application fee: Your lender may charge you to process your application. This could cost up to $500.

•   Appraisal fee: Your bank may request an appraisal to estimate the home’s value and make sure it is a wise investment. This is usually in the $300 to $400 range, but could be considerably higher, depending on the home, the area where it is located, and other factors.

•   Attorney costs: Working with a real estate attorney to review and vet documents may be an hourly rate (typically $150 to $400 per hour) or a project fee ($500 to $2,000). The specifics will vary depending on the individual professional you use, your location, how complex your purchase is, and other factors.

•   Credit reporting, underwriting, and origination fees: The lender may charge anywhere from $10 to $100 per applicant to check their credit score; underwriting fees (often in the $400 to $900 range) may also be added to closing costs. Origination fees can be about 1% of your loan’s value and cover the costs of the lender creating your loan documents.

•   Home inspection fee: This will likely cost between $300 and $500, but it could go higher. This is paid by the buyer, who is commissioning the work to learn about the home’s condition. In some cases, it may be paid at the time of service vs. at closing.

•   Homeowners insurance: Your lender may require you to take out homeowners insurance. The first payment may be due at closing. The exact amount will depend on your home value and other specifics of your policy.

•   Mortgage points: As described above, you might pay 1% of your loan upfront to bring down the interest rate by 0.25% percent. Some people might even pay multiples of that 1% to bring the rate down further.

•   Prepaid interest: Some interest on your mortgage is probably going to accrue between your closing date and when the first payment is due on your loan. That will vary with your principal and interest rate, but will be due at closing.

•   Private mortgage insurance: If you are putting down a smaller amount than the bank typically looks for, you may have PMI added to your monthly mortgage loan payment or pay a lump sum for the year ahead at closing.

•   Title search and title insurance fees: When a title search is done to see if there are any other claims on the property in question, the buyer typically pays the fee, which is usually in the $75 to $200 range. The lender often requires title insurance as a protection. This is likely a one-time fee that costs between 0.5% and 1% of the sale price. If your house costs $400,000, the title insurance could be between $2,000 and $4,000.

As you see, some of these fees will vary greatly depending on your specific situation, but they do add up. You’ll want to be sure to estimate how much closing costs are for a buyer and then budget for them before you head to your closing.

How Much Are Closing Costs for a Seller?

You may also wonder what closing costs are if you are selling your home. Here are some of the fees you are likely liable for at closing:

•   Real estate agent commission: Typically, the seller pays the agent a percentage of the sale price of the home at closing, often out of the proceeds from the sale. The commission is likely to be in the 5% to 6% range, and may be equally split between the buyer’s and seller’s agents.

•   Homeowners association fees: If the home being sold is in a location with a homeowners association (HOA), any unpaid fees must be taken care of by the seller at closing. The actual cost will depend upon the home being sold and the HOA’s charges.

•   Property taxes: The seller must keep these fees current at closing and not leave the buyer with any unpaid charges. These charges will vary depending on the property and location.

•   Title fees: The seller will probably pay for the costs associated with transferring the title for the property.

It’s important to anticipate these costs so you know just how much you will walk away with after you sell your home.

How to Reduce Closing Costs

Closing costs can certainly add up. Here are some ways to potentially lower your costs.

•   Shop around. Compare lenders not just on the basis of interest rates but also the fees they charge. Not every mortgage lender will charge, say, an application, rate lock, loan processing, and underwriting fee. See where you can get a competitive rate and avoid excess fees.

•   Schedule your closing for the end of the month. This can lower your prepaid interest charges.

•   Seek help from your seller. You might be able to get the seller to pay some of your closing costs if they are motivated to push the deal through. For instance, if the property had sat for a while, they might be open to covering some fees to nudge the deal along.

•   Transfer some costs into your mortgage payments. You may be able to roll some fees into the mortgage loan. But beware: You’ll be raising your principal and interest payments, and might even get stuck with a higher interest rate. Proceed with caution.

Recommended: Mortgage Lender vs. Mortgage Servicer: What’s the Difference?

Other Costs of Buying a Home

In addition to your down payment and closing costs, you also need to make sure that you can afford the full monthly costs of your new home. That means figuring out not only your monthly mortgage payment but all the ancillary costs that go along with it.

Understanding and preparing for these costs can help ensure that you are in sound financial shape for your first few years of homeownership:

Principal and interest. Your principal and interest payment is the amount that you are paying on your home loan. This can be estimated by plugging your sales price, down payment, and interest rate into a mortgage calculator. This number is likely to be the biggest monthly expense of homeownership.

Insurance. Your homeowner’s insurance cost should be factored into your monthly ownership expenses. Your insurance agent can provide you with details on what this policy will cover.

Property taxes. Property tax rates vary throughout the country. The rates are typically set by the local taxing authorities and may include county and city taxes. It’s important to factor in these costs as you think about your ongoing home-related expenses.

Private mortgage insurance. As mentioned, PMI may be required with a down payment of less than 20%. PMI is usually required until you have at least 20% equity in your home based on your original loan terms.

Homeowners association fees. If you live in a condo or planned community, you may also be responsible for a monthly homeowners association fee for upkeep in the common areas in your community.

Recommended: Things to Budget for After Buying a Home

Calculate Closing Costs

The tool below is a home affordability calculator, and it’s a great way to also see what the potential closing costs and additional monthly costs would be based on how much home you can afford.

The Takeaway

Before buyers can close the door to their new home behind them and exhale, they must be able to afford their down payment, qualify for a mortgage loan, and pay the closing costs — usually 3% to 6% of the loan amount. A home loan hunter may want to compare estimated closing costs in addition to rates when choosing a lender. It can be a wise way to keep expenses down.

If you’re shopping for a home loan, see what SoFi Mortgage Loans offer. You’ll find competitive rates, the ability to view your rate in just minutes, and a simple online application process. What’s more, qualifying first-time home buyers can put as little as 3% down.

Looking for a home loan? Take a look at the convenience and competitive rates that SoFi Mortgage Loans offer!

FAQ

How can I estimate closing costs?

Typically, closing costs will cost between 3% and 6% of your home loan’s amount.

When do I pay closing costs?

Your closing costs are typically paid at your closing. That is when you take ownership of the property and when your home mortgage officially begins.

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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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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What’s your number? That’s not a pickup line; it’s the digits a mortgage lender will want to know. In the range of 300 to 850, a score as low as 500 may open the door to a home.

But the credit score needed to buy a house is at least 620 for most types of mortgage loans. The lowest rates usually go to borrowers with scores of 740 and above whose finances are in good order.

Why Does a Credit Score Matter?

Just as you need a résumé listing your work history to interview for a job, lenders want to see your borrowing history, through credit reports, and a snapshot of it, expressed as a score on the credit rating scale, to help predict your ability to repay a debt.

A great credit score vs. a bad credit score can translate to money in your pocket: Even a small reduction in interest rate can save a borrower thousands of dollars over time.

Do I Have One Credit Score?

You have many different credit scores based on information collected by Experian, Transunion, and Equifax, the three main credit bureaus, and calculated using scoring models usually designed by FICO® or a competitor, VantageScore®.

To complicate things, there are often multiple versions of each scoring model available from its developer at any given time, but most credit scores fall within the 300 to 850 range.

Mortgage lenders predominantly consider FICO scores. Here are the categories:

•   Exceptional: 800-850

•   Very good: 740-799

•   Good: 670-739

•   Fair: 580-669

•   Poor: 300-579

Here’s how FICO weighs the information:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   New credit: 10%

•   Credit mix: 10%

Mortgage lenders will pull an applicant’s credit score from all three credit bureaus. If the scores differ, they will use the middle number when making a decision.

If you’re buying a home with a non-spouse or a marriage partner, each borrower’s credit scores will be pulled. The lender will home in on the middle score for both and use the lower of the final two scores (except for a Fannie Mae loan, when a lender will average the middle credit scores of the applicants).

💡 Recommended: 8 Reasons Why Good Credit Is So Important

A Look at the Numbers

What credit score do you need to buy a house? If you are trying to acquire a conventional mortgage loan, a loan not insured by a government agency, you’ll likely need a credit score of at least 620.

With an FHA loan, 580 is the minimum credit score to qualify for the 3.5% down payment advantage. Applicants with a score as low as 500 will have to put down 10%.

Lenders like to see a minimum credit score of 620 for a VA loan.

A score of at least 640 is usually required for a USDA loan.

A first-time homebuyer with good credit will likely qualify for an FHA loan, but a conventional mortgage will probably save them money over time. One reason is that an FHA loan requires upfront and ongoing mortgage insurance that lasts for the life of the loan if the down payment is less than 10%.

💡Recommended: How to Check Credit Scores Without Paying

Credit Scores Are Just Part of the Pie

Credit scores aren’t the only factor that lenders consider when reviewing a mortgage application. They will also require information on your employment, income, and bank accounts.

A lender facing someone with a lower credit score may increase expectations in other areas like down payment size or income requirements.

Other typical conventional loan requirements a lender will consider include:

Your down payment. Putting 20% down is desirable since it often means you can avoid paying PMI, private mortgage insurance that covers the lender in case of loan default.

Debt-to-income ratio. Your debt-to-income ratio is a percentage that compares your ongoing monthly debts to your monthly gross income.

Most lenders require a DTI of 43% or lower to qualify for a conforming loan.

How to Increase Your Credit Scores Before Buying a House

Working to improve or build credit over time before applying for a home loan could save a borrower a lot of money in interest. A lower rate will keep monthly payments lower or even provide the ability to pay back the loan faster.

Working on your credit scores may take weeks or longer, but it can be done. Here are some ideas to try:

1. Pay all of your bills on time. If you haven’t been doing so, it could take up to six months of on-time payments to see a significant improvement.

2. Check for errors on credit reports. Be sure that your credit history doesn’t report a missed payment in error or show a debt that’s not yours. You can get free credit reports from the three main reporting agencies.

To dispute a credit report, start by contacting the credit bureau whose report shows the error. The bureau has 30 days to investigate and respond.

3. Pay down debt. Installment loans (student loans and auto loans, for instance) affect your DTI ratio, and revolving debt (think: credit cards and lines of credit) plays a starring role in your credit utilization ratio. Credit utilization falls under FICO’s heavily weighted “amounts owed” category. A general rule of thumb is to keep your credit utilization below 30%.

4. Ask to increase the credit limit on one or all of your credit cards. This may improve your credit utilization ratio by showing that you have lots of available credit that you don’t use.

5. Don’t close credit cards once you’ve paid them off. You might want to keep them open by charging a few items to the cards every month (and paying the balance). If you have two credit cards, each has a credit limit of $5,000, and you have a $2,000 balance on each, you currently have a 40% credit utilization ratio. If you were to pay one of the two cards off and keep it open, your credit utilization would drop to 20%.

6. Add to your credit mix. An additional account may help your credit, especially if it is a kind of credit you don’t currently have. If you have only credit cards, you might consider applying for a personal loan.

💡Recommended: 31 Ways to Save for a House

The Takeaway

What credit score is needed to buy a house? The number depends on the lender and type of loan. An awesome credit score is not always necessary to buy a house, but it helps in securing a lower rate.

Ready to shop for a home? SoFi offers fixed-rate mortgage loans with competitive rates and perks.

Find your rate on a SoFi Mortgage in minutes.

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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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You may have heard that 20% is the ideal down payment, and that’s true. But the average down payment on a house runs south of 20%.

As of late, the median down payment on a house is 13%, the National Association of Realtors® found.

That’s nothing to sniff at. For a home selling for $400,000, 13% is a cool $52,000.

What’s the Average Down Payment On a House?

In 2021, the Average Down Payment On a House was $70,600 or 13% down

The average down payment nationwide was $70,600 in 2021, according to Optimal Blue, a division of Black Knight. The median for all buyers was 87% of the home price financed, or 13% down.

Because extremes can skew an average, the median is more informative. Of course, timing and location influence any mention of an average down payment, but here is the median and average by property type at that time:

Data source: Optimal Blue (June 4, 2021). Average down payment calculated via total loan value and purchase price values.

Average Down Payment by Age

The latest NAR Home Buyers and Sellers Generational Trends Report breaks down by age the percentage of a home that was financed by homebuyers in the 12-month period ending in July 2021.

Older buyers tend to use proceeds from the sale of a previous residence to help fund the new home. Buyers 57 to 66 years old, for instance, put a median of 21% down, the NAR report shows.

Most younger buyers depend on savings for their down payment. Buyers ages 23 to 31 put down a median of 8%, and those ages 32 to 41, 10%.

A fortunate 29% of younger millennial homebuyers received down payment help from a friend or relative.

Percentage of Home Financed

	All buyers	Ages 23-31	Ages 32-41	Ages 42-56	Ages 57-66	Ages 67-75	Ages 76-96
< 50%	11%	4%	6%	9%	20%	25%	22%
50-59%	5%	1%	2%	5%	8%	12%	15%
60-69%	5%	1%	3%	6%	7%	9%	13%
71-79%	13%	8%	12%	17%	16%	17%	15%
80-89%	24%	27%	28%	25%	22%	18%	18%
90-94%	15%	21%	18%	15%	8%	7%	6%
95-99%	17%	28%	20%	15%	9%	6%	2%
100% (financed the whole purchase)	10%	9%	11%	9%	9%	7%	10%

Average Down Payment by State

Down payments are tied to home prices in any state.

You can look into the cost of living by state for an overview and then find the median home value in a particular state at a given point in time and estimate your down payment.

Redfin, for example, shows a median sales price of $763,300 in California in late 2022. A 3% down payment would be $22,900; 10% down, $76,330; and 20% down, $152,660.

California is joined by Hawaii, Oregon, Washington, and Colorado on many lists of the most expensive states in which to buy a house.

Redfin put the median sales price of a home in the Aloha State at nearly $700,000 in late 2022. Three percent down would be $21,000; 10% down, $70,000; and 20%, $140,000.

Mortgages under conforming loan limits are often the most attractive for homeowners because they are backed by Fannie Mae and Freddie Mac. The limit is $647,200 for a one-unit property in most counties and $970,800 in high-cost counties (which includes all Alaska counties).

A jumbo loan may be used to finance a property exceeding those limits.

The least expensive states in which to buy a home? West Virginia, Arkansas, Iowa, Indiana, Ohio, Nebraska, Kansas, and Oklahoma are among them.

You might want to check out housing market trends by city also.

Down Payment Requirements by Mortgage Loan Types

A first-time homebuyer can often put as little as 3% down on a home purchase.

That is the minimum down required for a conventional home loan, a nongovernment loan and the kind favored by most buyers.

•   FHA Loans: An FHA loan, acquired through private lenders but guaranteed by the Federal Housing Administration, allows for a 3.5% down payment if the borrower’s credit score is at least 580. Someone with a credit score of 500 to 579 is required to put 10% down.

•   VA or USDA Loans: A VA loan or USDA loan usually requires no down payment.

A VA loan backed by the Department of Veterans Affairs is for eligible veterans, service members, Reservists, National Guard members, and some surviving spouses. The VA also issues direct loans to Native American veterans or non-Native American veterans married to Native Americans.

A USDA loan backed by the U.S. Department of Agriculture is for households with low to moderate incomes buying homes in eligible rural areas. The USDA also offers direct subsidized loans for households with low and very low incomes.

For all of the above loan types, the home being purchased must be a primary residence, but a homebuyer can use a conventional or VA loan to purchase a multifamily property with up to four units if one unit will be owner-occupied.

💡 Recommended: How to Afford a Down Payment on Your First Home

Calculate Your Potential Mortgage Based on Down Payment

Curious to see what your potential mortgage would look like based on different down payments?

Start with a home affordability calculator (like the one below) to get a feel for how much you’ll need to put down and other expenses.

Or use this mortgage calculator to estimate how much your mortgage payments would be depending on property value, down payment, interest rate, and repayment term.

Home Affordability Calculator

Should You Aim for 20% Down?

Should buyers try to put 20% down to get a mortgage loan? Here are some things to consider:

If Your Down Payment Is at Least 20%

Putting down at least 20% has benefits:

You won’t have to pay for mortgage insurance: If you put down 20% or more with a conventional loan, you won’t be required to pay for private mortgage insurance (PMI), which protects the lender if you were to stop making payments.

Your loan terms may be better: Lenders look at an applicant’s credit history, employment stability, income, debt to income ratio, and savings.

They’ll calculate the loan-to-value ratio, or what percentage of the home’s purchase price will be covered by the mortgage. Lenders often provide a better rate to borrowers who have an LTV ratio of 80% or lower — in other words, at least a 20% down payment — because they consider them a better risk.

You have instant equity in the property: You borrowed less than you could have, which translates to a lower mortgage payment, less interest paid over the life of the loan, and the potential later to take out a home equity loan.

If Your Down Payment Is Less Than 20%

If you have a down payment that’s less than 20%, you have plenty of company. Things to chew on:

A government loan could be the answer: FHA loans are popular with some first-time buyers because of the lenient credit requirements. Just know that up-front and monthly mortgage insurance premiums (MIP) always accompany FHA loans, and for the life of the loan if the down payment is under 10%. If you put 10% or more down, you’ll pay MIP for 11 years.

You may be able to improve your loan terms: If you can’t pull together 20% for a down payment, you can still help yourself by showing lenders that you’re a good risk. You’ll likely need a FICO® score of at least 620 for a conventional loan. If you have that and other positive factors, you may qualify for a manageable interest rate or better terms.

You can eventually cancel PMI: Lenders are required to automatically cancel PMI when the loan balance gets to 78% LTV of the original value of the home. You also can ask your lender to cancel PMI on the date when the principal balance of your mortgage falls to 80% of the original home value.

You may be able to find down payment assistance: City, county, and state down payment assistance programs are out there. They may take the form of grants or second mortgages, some with deferred payments or a forgivable balance.

The Takeaway

What is the average down payment on a house? The median is less than 20%, which usually means mortgage insurance and higher payments. But buyers who put less than 20% down on a house unlock the door to homeownership every day.

If you’re in the market for a mortgage, SoFi can help. Most SoFi fixed-rate mortgage loans require a down payment of 3% for qualifying first-time homebuyers and 5% for others, and as little as 10% down for jumbo loans.

Rates are competitive. Check yours in minutes.

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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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The 30-year fixed-rate mortgage dominates the American landscape, but the adjustable-rate mortgage gains some steam when rates are rising.

Because the initial ARM rate is usually lower than fixed-rate loans’, buyers who expect to sell within a few years are sometimes attracted to the low rates and payments.

Find out whether a fixed-rate or adjustable-rate mortgage works better for your particular situation.

Adjustable-Rate Mortgage Loans

In a nutshell: lower initial rate, more risk.

In most cases, an ARM rate will be fixed for three, five, seven, or 10 years and then periodically adjust.

ARMs are labeled with numbers that delineate a) the length of the introductory fixed phase and b) the frequency of rate adjustments afterward. The 5/1 ARM, for example, has a low five-year introductory rate that can then change every year for the remainder of the loan.

If you see a 7/6 or 10/6 ARM, that means the rate can adjust every six months after the introductory period.

Pros of Adjustable-Rate Mortgage Loans

A five- or seven-year ARM tends to have an introductory rate that’s lower than that of a 30-year fixed-rate conventional or FHA loan. A three-year ARM rate may be much lower.

So during periods of rising mortgage rates, ARMs offer a great option for borrowers to save money before the initial rate adjustment.

That includes first-time homebuyers who are looking for lower initial rates and monthly payments and who understand that their rate will likely rise if they keep the loan.

Also, higher conforming loan limits in 2022 made it possible for lenders to qualify more borrowers for ARMs that could be backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

ARMs have caps on how much the rate can increase or decrease. There is usually an initial cap, a periodic adjustment cap, and a lifetime cap. More and more of the loans have rates tied to a new index, the Secured Overnight Financing Rate (SOFR). For those, the rate may go up or down a maximum of one percentage point every six months (which is why you see a 7/6 and so on) after an initial adjustment, which could be two or five percentage points, with a 5% lifetime cap.

Cons of Adjustable-Rate Mortgage Loans

ARMs provide less stability than fixed-rate mortgages. After the initial fixed-rate period, there’s no certainty about how much monthly payment amounts will go up or down.

Most ARMs are fully amortizing, but if you choose an interest-only loan, you won’t be paying down any principal for years.

One set of ARM devotees plans to refinance the loan before the initial rate adjustment — to a fixed-rate loan or to another adjustable-rate mortgage — betting that rates will be lower then. But that’s a risk.

Fixed-Rate Mortgage Loans

In a nutshell: long-term predictability.

A fixed-rate mortgage has an interest rate that stays the same for the life of the loan, regardless of changes in the broader economy.

Pros of Fixed-Rate Mortgage Loans

Fixed-rate mortgages offer greater stability and predictability over the long term compared with adjustable-rate loans.

The National Association of Realtors® puts the average homeowner tenure at 10 years. Redfin found that the typical homeowner had spent 13.2 years in their home in 2021. Older homeowners may stay longer. So if you’re not going to get a move on within a few years, it may be comforting to lock in. You can refinance later if rates decrease.

Cons of Fixed-Rate Mortgage Loans

The 30-year fixed-rate home loan has a higher average interest rate than most ARM introductory rates.

Small differences in interest rates can add up. Use a mortgage calculator to see for yourself.

Then again, lifetime rate caps on most ARMs are five percentage points above the introductory rate.

Lay the Groundwork for a Mortgage

Do you know how much of a mortgage you can afford?

You can get an idea by pre-qualifying with lenders and using a home affordability calculator.

Then there’s pre-approval for a mortgage, which requires a credit check and provides a specific amount that you can tentatively borrow.

Which lender will offer you the best loan options and the most competitive rates?

Think About How Long You May Keep the House

How long might you live in the home? If short term, an ARM might make sense.

If the rates you see are close to those of a fixed-rate mortgage, you might go with predictability.

Consider How Quickly You May Want to Pay Off Your Mortgage

If you go the traditional route, should you choose a 15-year or 30-year mortgage?

Generally the shorter the mortgage term, the lower the rate. Some people who can afford to make a high monthly payment take out 10-year loans.

Even if you initially take out a mortgage for a certain number of years, you have the option to pay off the mortgage early.

Understand How Your Adjustable Rate Would Work

If you’re seriously considering an adjustable-rate mortgage, you’ll want to understand the rate caps and adjustments.

If your rate reached the maximum, would you still be able to afford the payments?

It doesn’t hurt to get loan estimates for both fixed-rate and adjustable-rate mortgages when shopping for a mortgage. After learning the loan details, you may decide that an ARM is right for you. If you aren’t comfortable with the terms, you might opt for a fixed rate.

The Takeaway

If you’re looking for a mortgage, you’ll want to think about how long you might stay in the home and whether you’ll want to refinance in the coming years. Weigh the pros and cons of an adjustable-rate loan and a fixed-rate loan to decide what might be best for your situation.

If a fixed-rate mortgage seems the way to go, check out the deals and term lengths SoFi offers. And know that the rates are competitive.

Find your rate in minutes with no obligation.

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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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There are few things as exciting as touring a house and thinking, “This is it! I’ve found my dream home.” Maybe the property has a fireplace or the perfect patio that has you imagining how great it would be to make it yours.
Then comes the less fun part: figuring out how to finance your home purchase.

For the vast majority of people, acquiring a new home means taking out a mortgage. For 90% of homebuyers, that means opting for a conventional 30-year fixed-rate mortgage.

Conventional mortgages are those that are not insured or guaranteed by the government.

But that doesn’t mean what is called a conventional home loan is right for everyone. Here, learn more about conventional mortgages and how they compare to other options, including:

•   How do conventional mortgages work?

•   What are the different types of conventional loans?

•   How do conventional loans compare to other mortgages?

•   What are the pros and cons of conventional mortgages?

•   How do you qualify for a conventional loan?

How Conventional Mortgages Work

Conventional mortgages are loans that are not backed by a government agency. Provided by private lenders, they are the most common type of home loan. A few points to note:

•   Conventional loans are offered by banks, credit unions, and mortgage companies, as well as by two government-sponsored enterprises, known as Fannie Mae and Freddie Mac. (Note: Government-sponsored and government-backed loans are two different things.)

•   Conventional mortgages tend to have a higher bar to entry than government-guaranteed home loans. You might need a better credit score and pay more in interest, for example. Government-backed FHA loans, VA loans, and USDA loans, on the other hand, are designed for certain kinds of homebuyers or homes and are often easier to qualify for. You’ll learn more about them below.

•   Among conventional loans, you’ll find substantial variety. You’ll have a choice of term length (how long you have to pay off the loan with installments), and you’ll probably have a choice between fixed-rate and adjustable-rate products. Keep reading for more detail on these options.

•   Because the government isn’t offering any assurances to the lender that you will pay back that loan, you’ll need to prove you are a good risk. That’s why lenders look at things like your credit score and down payment amount when deciding whether to offer you a conventional mortgage and at what rate.

Conventional vs Conforming Loans

As you pursue a home loan, you’ll likely hear the phrases “conventional loan” and “conforming loan.” Are they the same thing? Not exactly. Let’s spell out the difference:

•   A conforming loan is one in which the underlying terms and conditions adhere to the funding criteria of Freddie Mac and Fannie Mae. There’s a limit to how big the loan can be, and this figure is determined each year by the Federal Housing Finance Agency, or FHFA. In 2022, that ceiling was set at $647,200 for most of the United States. (It was a higher number for those purchasing in certain high-cost areas.)

So all conforming loans are conventional loans. But what is a conventional mortgage may not be conforming. If, for instance, you apply for a jumbo mortgage (meaning one that’s more than $647,200 in 2022), you’d be hoping to be approved for a conventional loan. It would not, however, be a conforming mortgage because the amount is over the limit that Freddie Mac or Fannie Mae would back.

Types of Conventional Loans

When answering, “What is a conventional loan?” you’ll learn that it’s not just one single product. There are many options, such as how long a term (you may look at 15- and 30-year, as well as other options). Perhaps one of the most important decisions is whether you want to opt for a fixed or adjustable rate.

Fixed Rate

A conventional loan with a fixed interest rate is one in which the rate won’t change over the life of the loan. If you have one of these “fully amortized conventional loans,” as they are sometimes called, your monthly principal and interest payment will stay the same each month.

Although fixed-rate loans can provide predictability when it comes to payments, they may initially have higher interest rates than adjustable-rate mortgages.

Fixed-rate conventional loans can be a great option for homebuyers during periods of low rates because they can lock in a rate and it won’t rise, even decades from now.

💡 Recommended: What Is a Fixed-Rate Mortgage?

Adjustable Rate

Adjustable-rate mortgages (also sometimes called variable rate loans) have the same interest rate for a set period of time, and then the rate will adjust for the rest of the loan term.

The major upside to choosing an ARM is that the initial rate is usually set below prevailing interest rates and remains constant for a specific amount of time, from six months to 10 years.

There’s a bit of lingo to learn with these loans. A 7/6 ARM of 30 years will have a fixed rate for the first seven years, and then the rate will adjust once every six months over the remaining 23 years, keeping in sync with prevailing rates. A 5/1 ARM will have a fixed rate for five years, followed by a variable rate that adjusts every year.

An ARM may be a good option if you’re not planning on staying in the home that long. The downside, of course, is that if you do stay put, your interest rate could end up higher than you want it to be.

Most adjustable-rate conventional mortgages have limits on how much the interest rate can increase over time. These caps protect a borrower from facing an unexpectedly steep rate hike.

Also, read the fine print and see if your introductory rate will adjust downward if rates shift lower over the course of the loan. Don’t assume they will.

💡 Recommended: Fixed-Rate vs Adjustable-Rate Mortgages

How Are Conventional Home Loans Different From Other Loans?

Wondering what a conventional home loan is vs. government-backed loans? Learn more here.

Conventional Loans vs. FHA Loans

Wondering whether a conventional or FHA loan is better for you? FHA loans are geared toward lower- and middle-income buyers; these mortgages can offer a more affordable way to join the ranks of homeowners. Unlike conventional loans, FHA loans are insured by the Federal Housing Administration, so lenders take on less risk. If a borrower defaults, the FHA will help the lender recoup some of the lost costs.

But are FHA loans right for you, the borrower? Here are some of the key differences between FHA loans and conventional ones:

•   FHA loans are usually easier to qualify for. Conventional loans usually need a credit score of at least 620 and 3% down. With an FHA loan, you may get approved with a credit score as low as 500 with 10% down or 580 to put down 3.5%.

•   Unlike conventional loans, FHA loans are limited to a certain amount of money, depending on the geographic location of the house you’re buying. The lender administering the FHA loan can impose its own requirements as well.

•   An FHA loan can be a good option for a buyer with a lower credit score, but it also will require a more rigorous home appraisal and possibly a longer approval process than a conventional loan.

•   Conventional loans require private mortgage insurance (PMI) if the down payment is less than 20%, but PMI will terminate once you reach 20% equity. FHA loans, however, require mortgage insurance for the life of the loan if you put less than 10% down.

💡 Recommended: Private Mortgage Insurance (PMI) vs Mortgage Insurance Premium (MIP)

Conventional Loans vs VA Loans

Not everyone has the choice between conventional and VA loans. Conventional loans are available to all who qualify, but VA loans are only accessible to those who are veterans, active-duty military, or surviving spouses of those who served.

VA loans offer a number of perks that conventional loans don’t:

•   No down payment is needed.

•   No PMI is required, which is a good thing, because it’s typically anywhere from 0.58% to 1.86% of the original loan amount per year.

There are a couple of potential drawbacks to be aware of:

•   Most VA loans demand that you pay what’s known as a funding fee. This is typically 1.25% to 3.3% of the loan amount.

•   A VA loan must be used for a primary residence; no second homes are eligible.

Conventional Loans vs USDA Loans

Curious if you should apply for a USDA loan vs. a conventional loan? Consider this: No matter where in America your dream house is, you can likely apply for a conventional loan. USDA loans, however, are only available for use when buying a property in a qualifying rural area. The goal is to encourage people to move into certain areas and help them along with accessible loans.

Beyond this stipulation, consider these upsides of USDA loans vs. conventional loans:

•   USDA loans can offer a very affordable interest rate versus other loans.

•   USDA loans are available without a down payment.

•   These loans don’t require PMI.

But, to provide full disclosure, there are some downsides, beyond limited geographic availability:

•   USDA loans have income-based eligibility requirements. The loans are designed for lower- and middle-income potential home buyers, but the exact cap on income will depend on your geographic area and how many household members you have.

•   This program requires that the loan holder pay a guarantee fee, which is typically 1% of the loan’s total amount.

Benefits and Drawbacks of Conventional Mortgages

Now that you’ve learned what is a conventional loan and how it compares to some other options, let’s do a quick recap of the pros and cons of conventional loans.

Benefits of Conventional Loans

The upsides are:

•   Competitive rates. Yes, mortgage rates have been rising steeply recently, but they are still far from their high point of 16.63% in 1981. Plus, lenders want your business and you may be able to find attractive offers.

•   The ability to buy with little money down. Some conventional mortgages can be had with just 3% down.

•   PMI isn’t forever. Once you have achieved 20% equity in your property, your PMI can be canceled.

•   Flexibility. There are different conventional mortgages to suit your needs, such as fixed and variable rate home loans. Also, these mortgages can be used for primary residences (whether single- or multi-family), second homes, and other variations.

Drawbacks of Conventional Loans

Now, the downsides of conventional loans:

•   PMI. If your mortgage involves a small down payment, you do have to pay that PMI until you reach a target number, such as 20% equity.

•   Tougher qualifications vs. government programs. You’ll usually need a credit score of 620 and, with that number, your rate will likely be higher than it would be if you had a higher score.

•   Stricter DTI requirements. It’s likely that lenders will want to see a 45% debt-to-income ratio (or DTI, your total monthly recurring payments divided by your monthly gross income). Government programs have less rigorous qualifications.

How Do You Qualify for a Conventional Loan?

Conventional mortgage requirements vary by lender, but almost all private lenders will require you to have a cash down payment, a good credit score, and sufficient income to make the monthly payments. Here are more specifics:

•   Down Payment: Many lenders that offer conventional loans require that you have enough cash to make a decent down payment. Even if you can manage it, is 20% down always best? It might be more beneficial to put down less than 20% on your dream house.

•   Credit score and history: You’ll also need to demonstrate a good credit history to buy a house, which means at least 620, as mentioned above. You’ll want to show that you make loan payments on time every month.

Each conventional loan lender sets its own requirements when it comes to credit scores, but generally, the higher your credit score, the easier it will be to secure a conventional mortgage at a competitive interest rate.

•   Income: Most lenders will require you to show that you have a sufficient monthly income to meet the mortgage payments. They will also require information about your employment and bank accounts.

💡 See what your mortgage payments would be using our mortgage calculator.

The Takeaway

A conventional home loan is a very popular option for homebuyers. These mortgages, which are not guaranteed by the government, have their pros and cons, as well as variations. It’s also important to know how they differ from government-backed loans, so you can choose the right product to suit your needs. Buying a home is a major step and a big investment, so you want to get the mortgage that suits you best.

That’s where SoFi can help. We offer fast, competitive fixed-rate mortgage loans with as little as 3% down for qualifying first-time homebuyers. Let us help make your dreams of homeownership come true.

It takes just minutes to get prequalified online.

FAQ

What is the minimum down payment for a conventional loan?

What is a conventional home mortgage’s minimum down payment? In most cases, 3% of the purchase price is the lowest amount possible.

How many conventional loans can you have?

A lot! The Federal National Mortgage Association (FNMA, aka Fannie Mae) allows a person to have up to 10 properties with conventional financing. Just remember, you’ll have to convince a lender that you are a good risk for each and every loan.

Do all conventional loans require PMI?

Most lenders require PMI (private mortgage insurance) if you are putting less than 20% down when purchasing a property. However, you may find some PMI-free loans available. They typically have a higher interest rate, though, so make sure they are worthwhile given your particular situation.

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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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