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While it is possible to buy a second home without a down payment, the scenarios where you can do so are quite rare.

Traditional zero-down payment programs may not be available to you because you’re no longer a first-time homebuyer. Lenders are also hesitant to offer second home mortgages with low down payments. The down payment requirements for a second home are usually 10% or more.

But you may be in luck: Sometimes you can figure out how to buy a second home with no down payment. Read on to learn:

•   What does buying a second home involve?

•   What are the usual down payment requirements for a second home?

•   How can you buy a second home with no down payment?

What to Know About Buying a Second Home

Buying a second home comes with a different set of guidelines and rules than purchasing your first home. You’re no longer considered a first-time homebuyer, which disqualifies you from many down payment assistance programs. However, your situation will be treated differently depending on how you want to use the property. Consider the following possibilities:

Moving into the Second Home

If your plan is to keep your first home as a rental property and move into the second home, you may have some options. A low interest mortgage loan may be available in one of two ways.

•   USDA loans in approved areas have zero down payment options. You’re allowed to get a second home with a zero-down USDA loan if you meet certain requirements involving citizenship, income, and other factors. You must live in the property as your principal residence, and you cannot have a USDA loan on your first property. In addition, you must financially qualify for both homes. To count rental income for the first home, USDA requires 24 months of rental income history.

Other qualifiers for this kind of loan include:

•   The current home no longer meets your needs for certain reasons (for example, if your family is growing and you live in a two-bedroom home, you’re relocating for a new job, or you’re getting divorced).

•   You don’t have another way to obtain the property without the USDA loan.

•   You can only keep one other house besides the new second home.

If, say, you’re moving from to a new region for a job opportunity and USDA loans are available in the area you’re moving to, it’s possible to keep your first home and buy a second if you meet the above conditions.

Worth noting: An obstacle for borrowers can be that lenders need a way to verify rental income. A signed lease and bank statements may not be enough. Your lender may want to see the rental income reported on your taxes for two years to count.

•   VA Loans may also offer zero down payment options. Available to veterans, service members, and surviving spouses, these government-backed loans can only be used to purchase property that will be a primary residence. So, if you’re moving from one place to another and qualify, you can use a VA loan to purchase the next property with no money down.

Buying the Second Home as a Vacation Home or Rental

Is there a way to buy a second home with no down payment if you plan to use it as a vacation home or rental? Options are few and far between if you’re not planning to use the property as your principal residence. When you’re looking at non-owner-occupied financing, lenders usually want a bigger down payment, not a smaller one.

That said, here are a couple of options that could answer the question of how to buy a second home with no down payment:

•   Private loans: If you finance through a relative or other private source, it’s possible to obtain a no-money-down mortgage. Terms are agreed upon by both parties.

•   Seller financing: Much like a private loan, the conditions of seller financing (aka owner financing) a loan are whatever the two parties agree on. If the seller is willing to let you buy the property with no money down, you might be able to make this work. However, seller financing usually comes with a bigger down payment, not a smaller one.

Do You Need a Down Payment on a Second Home?

Down payment requirements for a second home are usually higher. Lenders also look for a higher credit score. The loftier down payment requirement and credit score reflect the fact that the lender is taking on elevated risk since borrowers are more likely to default on a second home than a first home. A lender may expect your down payment to be right around the average down payment on a house, which is currently 13%.

Yet, your mortgage lender is also looking for a loan that accommodates your unique situation to help you to buy a second home. Though no down payment options are rare, your lender may have access to financial products that allow for a smaller down payment.

Can You Buy Another Home When You Have a Current Mortgage?

If you financially qualify, buying another house when you have a mortgage is possible. Generally speaking, lenders look for a strong credit history and enough income to cover your debts (including the cost of the new mortgage) to determine if you qualify for an additional mortgage.

Recommended: What Is a Second Mortgage?

Using Home Equity as a Down Payment Source

If you don’t have enough cash for a down payment on a second home, you may be able to tap your home equity. A home equity loan or a home equity line of credit (HELOC) can help you access money to use for a down payment on a second home.

Though not all lenders will permit this, using home equity may be possible if you want to keep your first home and have no other way of obtaining enough money for a down payment on your second.

It may be advisable to get a home equity loan or HELOC while you are still living in your first house. This allows you to qualify for owner-occupant rates, which are typically much lower than non-owner-occupied rates.

Recommended: HELOC vs. Home Equity Loan: How They Compare

The Takeaway

While there aren’t many options for financing a second home with no down payment, you may be in luck. There are some no down payment loans available to qualified buyers, and these loans can help you preserve cash for renovations, improvements, and other expenses. Even if you can’t find a no down payment mortgage for a second home, you will likely have a number of financing options you can tap into that may allow you to snag another property.

When you’re thinking about home financing options, whether for a mortgage or a HELOC, you’ll want a flexible, helpful partner to help you through the process. SoFi can do just that. In addition to mortgage loans, we offer a home equity line of credit that can help you tap into your home’s value and use the funds for a variety of purposes. You can access up to 95% of your home’s equity up to $500,000, enjoy low interest rates, and have a dedicated SoFi Mortgage Loan Officer to guide you.

Unlock your home’s value with a home equity loan brokered by SoFi today.

FAQ

What is the minimum down payment for a second home?

For a second that is not going to be your primary residence, most lenders look for at least a 10% down payment.

How do I buy a second home without 20% down?

With a higher credit score and other financial qualifications, you may be able to find a lender or a program with a required down payment less than 20%.

Can I buy another house if I already have a mortgage?

If you’re a qualified buyer with good debt and income levels with a strong credit history, a lender may be able to approve you for a second mortgage.

Can I use my equity to buy another house?

It may be possible to use home equity to buy another home. Contact a lender to go over your unique situation.

Photo credit: iStock/Nuttawan Jayawan

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

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

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

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For many people, purchasing a home is the very definition of living their best life and achieving the American dream. But it’s not the right choice for everyone or might not be the right move to make at a given moment.

Owning a home may be the biggest financial commitment you’ll ever make, so it makes sense to carefully consider the upsides and downsides of buying vs. renting. Sometimes, the flexibility and affordability possible with renting can be a good fit.

Read on for advice that will help you answer, “Should I rent or buy a house?”

•   Learn the pros and cons of buying vs. renting a home

•   Take a quiz to help you decide if you should buy or rent a home

•   Find out the steps to take when you’re ready to start hitting the open houses

Rent or Buy a Home: Pros and Cons

Deciding whether to rent vs. buy is a very individual decision. There’s no rule about which is better; much will depend on your personal goals and your financial situation.

Here, take a closer look at whether it is better to buy or rent a house.

Advantages of Renting

Here, the upside of being a renter:

•   Low-maintenance lifestyle. Your landlord is typically responsible for repairs and maintenance, so your time and money can be spent elsewhere.

•   Potentially lower monthly expenses. Your landlord may also pay some of your monthly utilities, and you aren’t responsible for paying property taxes.

•   Flexibility. When your lease is up, you can renegotiate or move…across the street or across the country. If you aren’t ready to lock into a location for at least a few years, renting can be a smart step.

•   Low investment. You don’t need to make a big investment (like the down payment and closing costs associated with home buying) when you move into a rental. You might have to put down a security deposit, but that will typically be much less costly.

Disadvantages of Renting

Now, consider the downside of being a renter vs. a homeowner.

•   Rules to follow. Your landlord may have restrictions that you don’t like, such as no pets or no remodeling.

•   Not building wealth. The rent you pay each month doesn’t give you any equity in a property. It just goes to the owner, unless you set up a rent-to-own agreement.

•   Lack of control over your monthly charges. Your rent could spike due to inflation, the housing market heating up in your area, and other factors.

•   Uncertainty. If the owners decide to sell the building you live in, you may need to move unexpectedly and quickly, which can also get expensive.

Advantages of Buying

If you decide to buy vs. rent, here are some of the benefits you may enjoy.

•   Building wealth. As you make mortgage payments, you are usually building home equity.

•   Tax advantages. Homeowners may be able to deduct both mortgage interest and their property tax payments (plus possibly other related expenses) from their federal income taxes if they choose to itemize their deductions.

•   Freedom. You have far fewer restrictions involving remodeling, pet ownership, and so forth. Want to paint a bathroom purple, rip out a wall, or adopt five rescue dogs? Go for it.

•   Stability. You can put down roots in a community and school district. When you decide to move, it’s your decision.

•   Affordability. Sometimes a mortgage payment can be cheaper than rent, especially if you get a good mortgage rate.

Looking at the price-to-rent ratio of a city helps gauge whether it makes more sense to buy or pay a landlord. The housing market dynamics of your location may determine this aspect of whether to buy or rent a house.

Disadvantages of Buying

Now that you know the potential upsides of owning your own home, take a look at the potential drawbacks.

•   High costs. The price of homeownership may be painful in a hot market.

What’s more, accumulating the cash to make a down payment can be challenging and take years of saving. Plus, the closing costs when securing a home can be considerable.

•   Credit score. You typically need to qualify for a mortgage, and your credit score will be a factor. Those with excellent credit scores will get better rates; those with lesser scores may want to wait to build their rating before buying.

•   Maintenance. You’re generally responsible for all repairs, maintenance, and utilities, plus homeowners insurance, property taxes, and any homeowner association (HOA) dues. These can not only impact your finances but also your lifestyle. Taking care of a home and property can require an investment of time and energy.

•   Locked in place. You probably can’t pick up and move on a whim. If you decide to move, until your home is sold, you’re still responsible for mortgage payments and the expenses attached to your new place.

Take the Rent or Buy Quiz

Are You Really Ready to Buy?

When deciding between renting vs. buying a house, the answer may already be clear to you. If you’ve decided to buy, it might make sense to take the following steps.

•   Make sure you’re ready for a long-term commitment. If you’ve saved enough for a down payment and know how much house you can afford, those are good signs. Otherwise, create a home-buying budget and saving plan to get started.

•   Consider if your line of work allows for job continuity with steady income. Have you had this type of income for the past two years or more? That kind of stability can be important to lenders.

•   If your debt-to-income ratio (DTI) appears too high for a loan program you would like to apply for, you may need to consider paying down some debt. To calculate your DTI ratio, divide your monthly debt payments by your monthly gross (pretax) income. The federal Consumer Financial Protection Bureau advises renters to consider keeping a DTI ratio of 15% to 20% or less (rent is not included in this ratio). However, mortgage lenders usually like to see a DTI ratio of no more than 36%, though that is not necessarily the maximum.

•   Save money for a down payment, closing costs, and other fees, plus some funds for moving expenses and any remodeling/repairs.

•   Check if your credit score is good enough to buy a house, and, if yours falls short, work on building it.

•   Do a gut check to see if you’re really ready to be your own landlord, meaning being responsible for your own home maintenance, inside and out.

•   Get pre-qualified or pre-approved for a mortgage by providing a few financial details to lenders, who usually will do a soft credit check and estimate how much you may be able to borrow and the terms. A pre-qualification or even a pre-approval can also help give you a leg up when you start home shopping.

The Takeaway

Should you buy or rent a home? That will be a personal decision, reflecting your finances, the housing market’s dynamics, your willingness to take on the responsibilities of homeownership, and your inclination to put down roots in a certain location. Both owning and renting have pros and cons, and making the right decision will likely require deep thinking and thorough planning.

If you’re ready to become a bona fide homeowner, getting pre-qualified for a mortgage loan with SoFi is quick and convenient. SoFi offers competitive rates and may require as little as 3% down for qualifying first-time homebuyers.

SoFi: The smart and simple way to find your home mortgage rate.

FAQ

Is it better to rent or buy a home?

There isn’t a simple yes/no answer to whether it is better to rent or buy a home. Each has its advantages and disadvantages and may or may not suit a person’s needs at a given moment. For instance, owning a home can allow you to build equity and personal wealth, but the maintenance responsibilities and expenses may offset that. Renting may be cheaper, but you may not be able to personalize your space the way you’d like or perhaps own pets.

Is renting cheaper than owning a home?

Renting can be cheaper than owning a home, though that can depend upon housing market conditions in a given area and the particulars of the home in question. In general, people who rent don’t have to pay property taxes and they may not be responsible for the cost of improvements and repairs, which can make things more affordable.

Is homeownership a good investment?

Buying a home can be a good investment. It allows you to build equity and may offer tax deduction opportunities. However, if property taxes rise steeply or major home repairs loom (like a new roof), home ownership could prove financially challenging.

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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.

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 .

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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The Federal Home Loan Mortgage Corporation, or FHLMC, is known as Freddie Mac, the entity created by Congress for the purpose of buying mortgages from lenders to increase liquidity in the market. Freddie Mac was created in 1970 and expressly authorized to create mortgage-backed securities (MBS) to help manage interest-rate risk.

Because the FHLMC buys mortgages, lenders don’t have to keep loans they originate on their books. In turn, these lenders are able to originate more mortgages for new customers. The mortgage market is able to keep capital flowing and offer competitive financing terms to borrowers because of this system. In other words, the market runs more smoothly because of Freddie Mac and its sister company, Fannie Mae, the Federal National Mortgage Association (FNMA).

If you want to know more about how this government-sponsored enterprise works and how it affects your money, read on for details on:

•   What is the FHLMC and what are FHLMC loans?

•   What is the difference between Freddie Mac and Fannie Mae?

•   What are Freddie Mac mortgages?

•   How does the Federal Home Loan Mortgage Corporation work?

Freddie Mac and Fannie Mae

These organizations, with their friendly-sounding nicknames, serve a very important purpose. Freddie Mac and Fannie Mae were created for the purpose of stabilizing the mortgage market and improving housing affordability. These government-sponsored enterprises (GSEs) do this by increasing the liquidity (the free flow of money) in the market by buying mortgages from lenders. Mortgages are then pooled together into a mortgage-backed security (MBS) and sold to investors. The process created the secondary mortgage market, where lenders, homebuyers, and investors are connected in a single system.

In the past, Freddie Mac and Fannie Mae operated as private companies, though they were created by Congress. Fannie Mae came first in 1938, followed by Freddie Mac in 1970. Freddie Mac’s addition in 1970 resulted in the creation of the first mortgage-backed security.

The federal government took over operations at both companies following the financial crisis in 2008. According to the National Association of Realtors, without government support of Freddie Mac and Fannie Mae, there wouldn’t be very much money available to lend for mortgages.

The Federal Housing Finance Agency (FHFA) has oversight of Freddie Mac and Fannie Mae. On a yearly basis, they assess the financial soundness and risk management of Fannie Mae and Freddie Mac.

What Is the Purpose of the FHLMC?

As mentioned above, the FHLMC, or Freddie Mac, makes the housing market more affordable, stable, and liquid by buying mortgages on the secondary market. When they buy these loans, the retail lenders they buy them from are able to originate more mortgages to new customers and keep the mortgage market flowing smoothly.

There are many types of mortgage loans; the ones that Freddie Mac buys are known as conventional loans. The mortgage loan must meet certain standards (such as loan limits) for Freddie Mac to guarantee they will buy these loans.

In general, the process of successfully obtaining a mortgage usually looks something like this once the buyer has made an offer on a house that’s been accepted:

•   The consumer finds a lender, if they haven’t already done so, and will apply for a mortgage.

•   The lender collects documentation required by the loan type and submits it to underwriting.

•   The underwriter approves the loan.

•   The homebuyer closes on the loan, and mortgage servicing begins

•   The lender sells the loan on the secondary mortgage market to Freddie Mac (or Fannie Mae or Ginnie Mae, depending on what type of loan it is and from what type of lender it originated).

From a homebuyer standpoint, they will see the outward mortgage servicing, which is the entity to which they will send their monthly payment and who takes care of the escrow account. The mortgage servicer is the one who forwards the different parts of the mortgage payment to the appropriate parties.

Mortgage servicing can also be sold from servicer to servicer, but this is different from the sale of a mortgage to Fannie Mae or Freddie Mac.

Freddie Mac is also tasked with the responsibility of making housing affordable. There are specific mortgage programs guaranteed by Freddie Mac and offered by lenders.

•   HomeOne®. HomeOne is a mortgage program that offers low down payment options for first-time homebuyers. There are no income or geographic limits.

•   Home Possible®. Home Possible is a program for first-time homebuyers and low- to moderate-income homebuyers. It offers discounted fees and low down payment options.

•   Construction Conversion and Renovation Mortgage. This type of loan combines the costs of purchasing, building, and remodeling into one loan.

•   Manufactured Home Mortgage. For qualified buyers, Freddie Mac can guarantee mortgages when buying manufactured homes that meet their criteria.

•   Relief Refinance/Home Affordable Refinance Program (HARP). For borrowers with a good repayment history but little equity, loans are available to refinance into a more affordable rate.

Recommended: What Is the Average Down Payment on a House?

Understanding Mortgage-Backed Securities

After a mortgage is acquired from a lender, Freddie Mac can do one of two things: either keep the mortgage on its books or pool it with other, similar loans and create a mortgage-backed security (MBS). These MBS are then sold to investors on the secondary mortgage market.

What’s attractive about a mortgage-backed security to an investor is how secure it is. Fannie Mae and Freddie Mac guarantee payment of principal and interest. Both Fannie Mae and Freddie Mac issue mortgage backed securities now.

Does the FHLMC offer Mortgage Loans?

Freddie Mac does not sell mortgages directly to consumers. You won’t see a Freddie Mac mortgage or an FHLMC loan advertised to consumers. Instead, the FHLMC buys mortgages from approved lenders that meet their standards.

Recommended: What Are the Conforming Loan Limits?

The Takeaway

The housing market in the United States arguably benefits from the role of the Federal Home Loan Mortgage Corporation. Lenders can essentially originate mortgages to as many borrowers as can qualify. The free flow of capital created by the FHLMC also means mortgages are less expensive for homebuyers all around. In short, the smooth operation of the housing market owes much of its success to Freddie Mac and Fannie Mae.

If you’re shopping for a home and looking for a lending partner, consider what SoFi has to offer. With dedicated loan officers, competitive interest rates, flexible terms, and low down payment options, SoFi Mortgage Loans can offer something for nearly every borrower.

SoFi Mortgage Loans: Simple, smart, flexible.

FAQs

What does FHLMC stand for?

FHLMC is an abbreviation of Federal Home Loan Mortgage Corporation. It is commonly referred to as Freddie Mac.

What type of loan is FHLMC?

Freddie Mac guarantees conventional loans that adhere to funding criteria, but it does not offer Freddie Mac mortgages directly to consumers.

What is the difference between FNMA and FHLMC?

Fannie Mae and Freddie Mac originated in different decades and initially had different purposes, but for the most part, they serve the same purpose today of helping to improve mortgage liquidity and availability.

Photo credit: iStock/Andrii Yalanskyi

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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Buying an investment property before your first home can be an interesting and financially sound plan. There are clear advantages — generating cash flow or building equity in your asset could benefit you and your family for years to come. You may be able to qualify as a first-time home buyer and take advantage of programs that allow you to buy a multi-family property. You may also be able to produce a strong enough income for the unit to pay for itself.

Yet, there can be significant sacrifices you may need to contemplate in order to make this dream happen. Here, learn what needs to happen if you’re planning on buying an investment property before your first home, including:

•   Is buying an investment property before your first home a good idea?

•   What are the steps for buying a house to rent?

•   What are the benefits of buying a house as an investment while still renting?

Purchasing an Investment Property 101

Purchasing an investment or rental property is similar to a regular home purchase. When you’re looking at buying an investment property for which you qualify as a first-time home buyer, however, there are some special considerations. Here is a guide:

Step 1: Decide if you’re going to live in a part of the investment property.
One of the first things you should decide when purchasing a rental property is if you’re going to live in a part of the investment property. This decision will affect what types of properties you’re going to look at, how you’re able to finance the property, and how much down payment you’ll need to come up with.

For example, if you can buy a house to rent with two to four units and live in one yourself, you may be able to finance the purchase as an owner-occupied property. This may qualify you for lower interest rates, lower down payment options, and more favorable loan options. However, you do have to live on the property. You cannot finance a property with an owner-occupied loan without living on the property as this is considered a type of mortgage fraud.

Here’s a quick summary of the difference between owner-occupied and non-owner-occupied rental properties.

Owner-Occupied	Non-Owner-Occupied
Down payment options from 3.5%	Down payment typically around 15%
Lower interest rates by about half a basis point	Interest rates higher by about half a basis point

Step 2: Get preapproved for a loan.
Before you go shopping, make sure a lender is willing to give you a mortgage. Qualifying as a first-time homebuyer has some positives. On the one hand, you may have a better debt-to-income ratio since you don’t own a home yet. However, you may have a shorter credit history or a smaller down payment. Whatever the case, it’s helpful to get some numbers from your lender to assist with your investment.

Factors your lender will take into account when deciding what to lend to you include:

•   Amount of your down payment

•   Owner occupied status

•   Credit score

•   Debt-to-income ratio

•   Employment history.

Your lender will also take into account what programs you qualify for. Financing options for an investment property are wide. Some may include:

•   FHA

•   VA

•   USDA

•   Conventional

•   Private lending

•   Seller financing

Quick note: If you do decide to purchase a rental property and live in part of your investment property, your lender may be able to use the potential rent from that to qualify you for a mortgage.

Step 3: Find a property that meets your criteria
Now that you have your budget and parameters set, you’re ready to find a property. You may want to enlist the help of a real estate agent who can serve as your first-time homebuyer guide, especially since you want to buy an investment property right off the bat.

Your agent can help you write an offer while your lender may be able to help you apply for a mortgage online. You’re well on your way to buying a house to rent at this stage.

Step 4: Start your rental business.
Be sure to check local ordinances and business requirements for becoming a landlord. If you’ve got a plan and do your research, you may see success. Just don’t believe what you may see on TV, which makes owning a rental property look easy. Landlording is a tough job, and there’s a lot you need to know about the business before you start. Buying a house while renting is an endeavor that takes time and effort.

Buying a House While Still Renting

The benefit to buying an investment property before your first home is that your debt-to-income may be more favorable than for someone who has a mortgage. What this means is it’s possible you don’t have too much debt to qualify for a rental property.

The possible downsides are that you may not have the cash reserves to protect yourself from the risks of being a landlord. There’s always something that needs to be repaired or replaced.

What to Know As a New Landlord

Unlike what you may have heard or imagined, becoming a landlord can be anything but passive. You’ll also want to research all you can and put proper systems in place. Here’s a little of what you can expect to encounter as a new landlord.

•   Learn local housing laws. Housing laws can make or break you. Are short-term rentals allowed (if that’s what you’re planning)? What rights does your tenant have? If you need to evict a tenant, what does the process look like? Will you benefit by putting your property in an LLC?

There’s a lot to navigate, and you may want to consider hiring a property management company that specializes in this.

•   Determine how much to charge for rent. You’ll want to look at what other properties in the area are charging for rent and position yourself competitively. Also, consider what other landlords are allowing and charging when it comes to pets.

•   Prescreening is key. The reliability of your tenant is so important. It’s incredibly stressful when you’re not paid rent. Don’t rent to someone who “feels” like they would be a good tenant. Do your due diligence. Check credit and their background, and call references.

•   Create a plan for home maintenance, repairs, and other issues. If you’re hiring a property management company, plan for the expense. If you’re doing it yourself, make a list of contacts to call for the different issues that come up (electrical, plumbing, locks, handyman, etc.).

•   Have procedures in place for unit turnover. It’s an incredibly intense time when a tenant leaves and another needs to move in. How are you going to handle inspections? Cleaning? Deposits? You will need a system for logging such events and being prepared for turnover.

Recommended: Fixed-Rate vs. Adjustable-Rate Mortgages

The Takeaway

While landlording has a lot of responsibilities and risk, there can also be a lot of reward. If you’re really interested in buying a house while renting, you’ll find a way to make it work.

If you’re starting to shop for a new home and need a partner to help with your lending needs, see what SoFi has to offer. With a wide range of loans to choose from, low down payment options, and competitive interest rates, SoFi Mortgage Loans can be a great fit.

A SoFi Mortgage: Smart, simple, and flexible.

FAQ

How much profit should you make on a rental property?

There’s no easy answer for how much profit you should make on a rental property. Some investors buy property for the appreciation alone. There are also a number of methods for determining how much profit investors want to make on an investment property, such as cash flow, the 1% rule, gross rent multiplier, cash on cash return, cap rate, or internal rate of return. Those can help provide guidelines.

Should I buy an investment property and live in it?

If you’re able to live in your investment property, you can qualify for owner-occupied financing, which means lower down payments and better interest rates. But it also depends on your plans. If you want to renovate an investment property, living in it during renovations could be challenging.

Is rental property a good investment in 2023?

Rental demand is strong in 2023, but buying property is more dependent on your individual situation rather than market conditions.

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Photo credit: iStock/luismmolina

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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If you, as a mortgage holder, have money in an escrow account, you may see an escrow refund after an escrow analysis at the end of the year. It may not happen often, but an escrow refund check comes if there’s an excess amount in your escrow account. Regulations set by the Consumer Financial Protection Bureau (CFPB) allow the mortgage servicer to retain two months’ worth of your escrow payment as a cushion. Amounts greater than $50 above the cushion should be refunded to you. Escrow balances less than this amount can be retained in the escrow account for the next year or refunded to the borrower.

Escrow refunds generally come when there’s an expense that’s smaller than expected, such as a lower insurance bill or fewer taxes. Your mortgage servicer pays the lower amount and then, when the servicer conducts an escrow analysis, the difference will be refunded to you, typically by check. The funds can also come when an escrow account is closed, such as when the mortgage is paid off or refinanced.

Here, you’ll learn more about escrow refunds, including:

•   What is an escrow refund?

•   How is escrow overage calculated and dispersed?

•   When might you expect an escrow refund?

•   How long does an escrow refund take?

The Escrow Process 101

You might have heard the term “escrow” in a couple of different settings when you’re buying a home. First, an escrow account is like a savings account that is set up for holding earnest money after you make an offer on a house.

And second, a different escrow account is set up by your mortgage servicer after you close on the loan. It can manage your taxes, private mortgage insurance (PMI), and/or homeowner’s insurance. The second factor is most likely to trigger a refund.

Recommended: What Is an Escrow Holdback?

In its simplest form, the escrow process looks like this:

1.    The mortgage servicer sets up an escrow account.

2.    The borrower makes monthly payments to the mortgage servicer.

3.    The mortgage servicer deposits the portion of the monthly payment for the homeowners insurance, taxes, and mortgage insurance into an escrow account.

4.    The taxing entity, homeowners insurance provider, and/or mortgage insurance company send the mortgage servicer a bill.

5.    The mortgage servicer pays the bill on the borrower’s behalf.

6.    The mortgage servicer audits accounts every year to determine if there is an overage or a shortage.

7.    If there is an overage above $50, the borrower can be refunded that money. The servicer will alter the monthly payment lower for the next year.

8.    If there is a shortage, the mortgage servicer will modify your monthly payment to account for both the shortage in the last year and the increased cost for the upcoming year.

What Is an Escrow Refund?

An escrow refund occurs when you, as a mortgage holder, receive a check at the end of the year for the extra money you paid into your escrow account. This is a requirement of mortgage servicing.

When you start making monthly payments to your mortgage servicer, you’ll pay the same amount each month. This amount typically includes your principal, interest, property taxes, homeowners insurance, and PMI (if you have it). The portion designated for taxes, PMI, and homeowner’s insurance will go into your escrow account. This amount is saved until your bill is due. The mortgage servicer pays the bill and deducts the amount from your escrow account.

Every year, the mortgage servicer is required to conduct an escrow analysis. This is a process where the servicer looks at the deposits made by you as well as the bills for insurance and taxes. Adjustments are made, and if you overpaid, you get a refund.

Escrow Refunds at Closing

You also might be wondering, “Do you get escrow money back at closing?” The process for escrow refunds at closing is a little different.

•   Your lender typically uses the money from your existing escrow account to apply toward your down payment or closing costs.

•   Then, for the new escrow account opened by your mortgage servicer, you will contribute what are called “prepaid closing costs” to the account to fund your escrow account. If you end up paying too much, you’ll see an escrow refund check from your servicer after an escrow analysis has been performed.

Mortgage servicers like escrow accounts because it helps protect their investment in your home. When the homeowner’s insurance is paid, the lender can be assured there is protection for the home should anything happen to it. Likewise, when the taxes are paid, the lender doesn’t have to worry about the taxing entity placing a lien on the home.

Recommended: What Is Escrow?

When Might You Expect An Escrow Refund?

Mortgage servicers are required to complete an escrow analysis at the end of the escrow account computation year, according to Regulation X of the Real Estate Settlement Procedures Act (RESPA). After the yearly escrow analysis, you will receive an escrow account statement. This statement will show you the deposits and expenses for the year, as well as show you a projection of anticipated expenses for the upcoming year.

It will also notify you of changes to your monthly payment that need to be made. These steps help ensure that your mortgage servicer is able to pay your taxes and insurance in full from your monthly payment. It’s common for the amount to change a bit from year to year.

If the escrow analysis uncovers a surplus above the allowable cushion in your escrow account, you can expect a mortgage escrow refund within 30 days.

Here are some common scenarios where you might expect to see a refund from your escrow account.

Mortgage Payoff

When you pay off your mortgage or refinance with a new low interest mortgage loan, your mortgage servicer is no longer required to hold an escrow account for you. You may receive a refund from your escrow account for any unused funds.

Lower Tax Bill

If your tax bill decreases, that means the amount collected from your monthly mortgage payment over the year will be more than what is actually due. The excess amount in your escrow account could be refunded to you after escrow analysis.

Better Insurance Rate

If you change your homeowners insurance to a company that offers a better rate, you may be due a refund. If this happens, you’ll likely pay the higher premium that you had locked into your monthly payment for the year. However, once the escrow analysis is completed at year’s end, the savings will be apparent and you should receive your refund.

Private Mortgage Insurance No Longer Required

On many conventional mortgages, there may come a time when you don’t need to pay for mortgage insurance. Let’s say you were a first-time homeowner who put less than 10% on your house. When your home equity reaches 20%, you may be able to have the private mortgage insurance premium removed (depending on the type of mortgage you have).

This may happen in the middle of the year before your servicer expects it. Your monthly payment may not be adjusted until an escrow analysis is completed at the end of the year. After an analysis has been completed, you’ll likely receive a refund because you’ve been overpaying for that mortgage insurance you no longer need.

Recommended: What Is a Mortgage Contingency?

Purchase Overpay

If you overpaid for an escrow item when you closed on your home, the surplus can be refunded to you after an escrow analysis.

When You Won’t See an Escrow Refund

The part of your monthly mortgage payment that goes toward your escrow account is set at the beginning of the year. However, tax rates and insurance rates often increase during the year. When your tax or insurance bill is due, your escrow servicer will pay the larger bill even though there isn’t enough money in the escrow account to cover it. This may result in a negative escrow balance.

In the case of a negative escrow balance, the servicer uses their own money to cover the shortfall. To make up for the shortage, the servicer will make adjustments after completing escrow analysis and take steps to collect the shortfall. The adjustment will also account for the new increased amounts due monthly during the upcoming year.

How Soon Can I Expect a Refund?

For ongoing mortgage payments: Your escrow servicer is required to issue a refund within 30 days of discovering a surplus of $50 or more. (This surplus is above a two-month allowable cushion of escrow payments that your mortgage lender may hold.). Borrowers must be current on their mortgage payment, however, to be able to receive this refund.

If you pay off your mortgage: Your escrow servicer may refund the balance of your escrow account within 20 days. Or, if your new mortgage is with the same servicer, the servicer can apply the balance of the escrow account to a new escrow account with your permission.

The Takeaway

You may see an escrow refund coming your way if you’ve negotiated a better deal for your homeowners insurance, expect to pay less in taxes, or no longer need to pay PMI. It will happen automatically because your mortgage servicer is required to perform yearly escrow analysis. You’ll also receive a refund if you pay off your mortgage and possibly when you refinance. Once that happens, the servicer has 30 days or less to refund the money you’re owed from your escrow account.

If you need a reliable mortgage partner, consider what SoFi Home Loans have to offer. With competitive rates, low down payment options, and dedicated loan officers, you can be assured you’re in good hands.

When you’re ready for a new mortgage, a refinance, or a home equity loan, SoFi is here to help.

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Photo credit: iStock/MaslovMax

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