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Many first-time house hunters lie awake at night worrying, Will I qualify for a mortgage? With the wide variety of loan programs, down payment requirements, and credit thresholds out there, qualifying for a mortgage can feel like a bad choose-your-own-adventure story: “Didn’t prequalify? Return to page 1.”

Let’s take some of the mystery out of how to qualify for a mortgage.

9 Mortgage Qualification Factors

What goes into qualifying for a home loan can be especially confusing. Here are some things that may come into play when qualifying for a home loan.

1. Down Payment

Down payment requirements vary based on the type of home mortgage loan you’re applying for.

Conventional Loan Down Payment

You may have heard that 20% down is the ideal. But in 2024, the median down payment across all homebuyers is 18%, and for first-time homebuyers, it’s 9%, according to research by the National Association of Realtors®. And some conventional loans require just 3% down for first-time homebuyers.

The 20% figure is cited as a goal because putting down 20% helps buyers avoid the added cost of private mortgage insurance (PMI), which is required if your down payment is less than 20%. But you can also avoid PMI by seeking a “piggyback” mortgage or lender-paid mortgage insurance.

If you’re getting help from loved ones for your down payment, you’ll need to document that with a gift letter.

FHA Loan Down Payments

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. FHA loans are popular with first-time homebuyers. Over 80% of FHA mortgages are issued to first-time buyers each year.

If your credit score is at least 580, you may qualify for a down payment of 3.5% on an FHA loan. (FHA 203(k) loans for fixer-uppers also ask for 3.5% down.) With a score between 500 and 579, you’ll need at least 10% down.

Upfront and annual mortgage insurance is required for FHA loans, usually for the entire term.

USDA Loan Down Payment

A loan insured by the U.S. Department of Agriculture is aimed at moderate-income households that purchase or build in eligible rural areas. Incredibly, no down payment is required. The USDA also directly issues loans to low- and very-low-income buyers in eligible rural areas and provides payment assistance.

USDA loans require an upfront guarantee fee and an annual premium for the life of the loan, but it’s lower than FHA loan mortgage insurance rates.

VA Loan Down Payment

The great perk of VA loans is that no down payment is usually required, but a sizable one-time funding fee is. (You may be exempt from the funding fee if you’re eligible for VA disability compensation for a service-connected disability or meet other conditions.)

Recommended: First-Time Homebuyer Programs

2. Credit Score

Credit scores attempt to distill an individual’s financial history down to a single number that indicates their worthiness to lenders.

The FICO® Score range of 300 to 850 is categorized like this:

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

Borrowers seeking a conventional loan will likely need a credit score of at least 620. For an FHA loan, applicants with a score as low as 500 may be considered. But 580 is the minimum credit score to qualify for the 3.5% down payment advantage.

A USDA loan usually requires a score of 640; a VA loan, a minimum of 580 to 620. In some cases, you don’t have to have a FICO Score to qualify for a home loan. Fannie Mae’s nontraditional credit program and government loan programs allow for a credit profile to be built based on things like rent payments and utility bills.

3. Income

Technically, there’s no minimum income required to apply for a mortgage. But your income can limit the amount you’ll qualify for. Lenders also like to see evidence that your income is stable, and will look at an applicant’s last two years of employment. That means you’ll need to provide pay stubs, W-2s or 1099s, and tax returns.

Many types of income count toward a mortgage application: overtime, commissions, bonuses, dividends, Social Security, alimony, and child support. Lenders may ask for documentation (such as a letter from your employer) that such income is expected to continue for the next several years.

Self-employed homebuyers should keep in mind that lenders look at your income after deductions. Taking too many deductions, however deserved, can lower the size of the loan you’ll qualify for.

For some types of loans, there can be upper income limits. Conventional, FHA, and VA loans have no upper limits. But with USDA loans, your income must not exceed 115% of the median income in your area. You can evaluate your eligibility for a USDA loan on the agency’s website.

4. Debt-to-Income Ratio

Typically, your income doesn’t matter as much as your debt-to-income ratio. Your DTI is calculated by dividing your total monthly debt, including your proposed house payment, by your gross monthly income, and is expressed as a percentage.

For example, say you pay $1,500 a month for a mortgage, $100 a month for a car loan, and $400 a month on a student loan. Your total monthly debt comes to $2,000. If you make $6,000 a month before taxes and deductions, your debt-to-income ratio is 33% ($2000 divided by $6000, multiplied by 100).

“If you have multiple debts, you want to make your minimum payments so you don’t hurt your credit score,” Kendall Meade, a Certified Financial Planner at SoFi said. “If you have cash left over after that, you should develop a strategy for which debts to pay off first,” she suggested.

Depending on your credit score, down payment, and cash reserves, your DTI ratio may weigh heavier or lighter in the qualification process.

•   Conventional Loan DTI: The maximum DTI for a conventional loan is 45%, but exceptions can be made for strong compensating factors.

•   FHA DTI: FHA guidelines allow for a DTI of 43%, but higher ratios are allowed with compensating factors.

•   USDA Loan DTI: The USDA usually allows a maximum DTI of 41% but may make exceptions for those with higher credit scores and stable employment.

•   VA Loan DTI: VA guidelines call for a maximum DTI of 41%, but lenders set their own limits based on an applicant’s financial health.

Recommended: How Do I Afford a Down Payment on My First Home?

5. Assets

Lenders will want to know about any valuable assets you hold. The idea is that these assets can be converted to cash in the event you face financial hardship down the road. Assets can include cash accounts, retirement accounts, stocks and bonds, cars, boats, RVs, jewelry, artwork, and collectibles. You’ll be asked to provide proof of ownership and value, such as appraisal letters.

6. Documentation

Not having the proper documentation in the mortgage loan process can hold things up. As noted above, lenders usually ask for:

•   Tax returns from the past two years.

•   Two years’ worth of W-2s or year-end pay stubs. If you are self-employed, other evidence of income.

•   Child support or divorce documents.

•   Bank statements.

•   Statements from additional assets.

•   Gift letters.

•   Photo ID.

•   Rental history and contact information.

7. Property Type and Purpose

Up to now, we’ve discussed mortgage qualification factors that are based on the buyer’s financial history. But lenders also consider the purpose of the property you want to buy. A “primary residence,” meaning a home that a buyer purchases with the intention of living in it, will usually qualify for a lower interest rate and better terms than a vacation home or investment property.

The type of home you purchase also makes a difference. Single-family houses secure the best rates. Other types of housing that may incur special fees include condos, co-ops, manufactured houses, log homes, mixed-use developments, and nontraditional architecture. Homes shaped like dinosaurs or flying saucers just make lenders a little nervous.

8. Mortgage Type

The type of mortgage you may want to seek will depend on your credit scores, income, the lender’s loan menu, and more. Government-backed mortgages (FHA, VA, and USDA loans) are acquired through approved lenders, and conventional home loans are issued by a bank, credit union, or other private lender.

•   FHA loan: Mortgages backed by the Federal Housing Administration have lower credit requirements than conventional loans. For borrowers with good credit and a medium down payment, a conventional loan may actually be less costly.

•   VA loan: Loans insured by the Department of Veterans Affairs are for active-duty service members, veterans, and some surviving spouses. The VA also has a Native American Direct Loan program, which allows Native Americans to buy, build, or improve a home on federal trust land.

•   USDA loan: Loans backed by the U.S. Department of Agriculture are for moderate-income buyers who choose a home in a designated rural area. The USDA also offers direct loans for low-income households.

Most mortgages come with a fixed interest rate, but a variable rate can be an option for some conventional loans, as can a variety of mortgage terms or lengths. The fixed-rate 30-year mortgage dominates the U.S. landscape.

One last wrinkle: There are conforming loans and nonconforming loans. By meeting loan limits, a conventional conforming loan is eligible for purchase by Fannie Mae and Freddie Mac. If it isn’t eligible, it’s a nonconforming mortgage — like the government loans or a jumbo loan.

9. Other Mortgage Qualification Considerations

When browsing for a home, you might consider loan prequalification or preapproval.

Prequalification is a simpler process. You’ll provide basic information, which can be by phone or online, and a lender will estimate what size loan you might be approved for. No information is verified at this point.

For preapproval, you’re required to give a lender access to your financial history. After reviewing your credit, income, and assets, the lender will offer a loan up to a specific amount. It doesn’t guarantee that you’ll be approved when you formally apply, though.

Prequalification and preapproval can be great ways to dip your toe into the home-buying waters. Then you may apply with more than one lender. Comparing loan estimates can help you determine which option is best for you financially.

Do I Qualify For a Mortgage?

To help you determine how big a home loan you might qualify for, there are a variety of online mortgage calculators to help get you started:

•   Mortgage Calculator

•   Home Affordability Calculator

Dream Home Quiz

The Takeaway

Many factors that can help or hurt your chances of getting approved for a mortgage loan. Your down payment, credit score, income, debt-to-income ratio, assets, documentation, property type and purpose, mortgage type, and prequalification or preapproval status all play a role. Some of these factors can compensate for weaknesses in other areas. For instance, a lower income is less of a problem if you have plenty of valuable assets to draw on. And a high down payment can counter a middling credit score.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What are the four things you need to qualify for a mortgage loan?

To qualify for a mortgage loan, you’ll need a stable income, strong credit score, modest debt-to-income ratio, and documentation of your employment and assets. Believe it or not, some loan programs do not require a down payment!

What is the lowest income needed to qualify for a mortgage?

There is no minimum income required to apply for a mortgage. However, your income will determine how large a loan you’ll qualify for. Sometimes, your assets can compensate for a lower income. And there are government-backed programs, especially for low-income borrowers.

At what age do you not qualify for a mortgage?

There is no maximum age limit to qualify for a mortgage loan. In fact, lenders legally cannot deny someone a loan term based on their age. For instance, a 70-year-old can still qualify for a 30-year mortgage term.

What do banks check before giving a mortgage?

Just about everything. Banks check your credit history and score, proof of employment and income (W-2s, 1099s, tax returns), your assets (bank statements), your debts (credit card bills), and anything else that will give them a picture of your overall financial health and future prospects.

Do mortgage lenders look at your spending?

Yes, mortgage lenders may look at your bank and credit card statements for the last two years to see whether your spending habits are consistent and where your money goes.

Is everyone eligible for a mortgage?

Pretty much anyone who can afford to carry a mortgage can qualify for one. However, it’s possible that someone who earns money under the table or holds their assets in offshore accounts wouldn’t be able to document their financial qualifications to satisfy a lender.

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.
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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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 .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOHL-Q424-145

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Wondering whether to pay off a mortgage or put the funds toward investments is a happy dilemma for some homeowners. The answer will depend on your financial situation, but let’s look at pros and cons of each along with a strategy that can allow you to combine the best of both worlds.

Paying Off a Mortgage vs Investing in the Market

Maybe you’ve socked away a nice savings. Or perhaps you inherited some money. If you’re trying to decide whether to put the money toward paying down your home mortgage loan or into the market, it helps to understand the mortgage payment process.

How Does a Mortgage Loan Work?

There are different mortgage types you likely considered when shopping for a mortgage, but in general, someone borrows money from a lender to buy a house at a certain interest rate and term length. As payments are regularly made (usually monthly), part of each payment goes toward the principal, lowering the balance. Early on in the life of your loan, the bulk of the payment will cover your interest charges. As the balance goes down, more of each payment typically goes toward the principal.

Recommended: Answers to Common Mortgage Questions

Components of a Mortgage Payment

You may hear the components of a mortgage payment summarized in an acronym: PITI. This stands for principal, interest, taxes, and insurance.

Principal

Initially, your principal is the amount of money you borrow. As you pay down your loan, the principal is the remaining (current) balance. When it comes to the mortgage loan payments themselves, the principal is the portion of the payment that goes toward the balance, reducing the amount. As noted above, as the balance goes down, more of your payment goes toward the principal and less to interest.

Interest

The interest is based on the interest rate charged on the loan’s principal, and these dollars go to the lender, serving as a key part of the cost of borrowing. As your loan balance goes down, less of your payment typically goes toward interest. Most mortgage loans have a fixed interest rate; others are variable, based on a certain financial index.

Move your cursor on the amortization chart of this mortgage calculator tool to see how principal and interest change over time.

Taxes and Insurance

A mortgage payment typically contains a month’s worth of property tax, which is based on the assessed value of the home and the tax rate where you live. A payment also may include a month’s worth of homeowners insurance and, if applicable, mortgage insurance that protects the lender in case of default.

Investment Gains vs Loan Interest Saved

At a high level, to determine which strategy can have the biggest positive financial impact, you can compare what investment gains you’ve had (or estimate future gains) and compare that to how much interest you would save when paying down your mortgage more quickly.

Pros and Cons of Paying Off Your Mortgage Early

Pros include the following:

•   You won’t have a mortgage payment anymore, which frees up money for other purposes: investing, paying for a child’s college expenses or wedding, and so forth.

•   You no longer have to worry about having the funds to make your payment. This can be especially helpful if unexpected expenses arise.

•   Typically, paying off your mortgage early will lower the amount of money that you pay in total interest — which means that you’ll pay less for your home overall.

•   Paying off a mortgage early gives you a guaranteed financial return, while there is always risk involved in putting money into the market.

•   If you need to borrow against the home in the future, none of the proceeds will be needed to pay off a current mortgage.

Cons include the following:

•   If the current stock market return rate is pretty good and your mortgage rate is low, paying off your mortgage early could have a lower rate of return than being in the market.

•   Your credit score could drop a bit because you’ll no longer have a mortgage in your mix of open types of credit.

•   Focusing on rapidly paying off a mortgage may cause someone to drain their emergency savings fund, something that’s not typically recommended.

•   Although uncommon now, some lenders charge a prepayment penalty for early mortgage payoffs. When this clause exists, it’s for the first three years of a mortgage. Check your mortgage note for specifics, or ask your lender or loan servicer.

•   When you no longer have a mortgage, you no longer qualify for the mortgage interest tax deduction.

Pros and Cons of Investing

Pros include the following:

•   Many times, when you buy shares of stock, you can get a good return on your investment in the long term. To get a sense of current returns, you can check the 10-year annualized return for the S&P 500.

•   If you’re in a workplace retirement plan, like a 401(k), your employer may match your contributions up to a certain amount.

•   Stocks are liquid assets, which means that you can buy and sell a portion of your portfolio at any time. You can’t really do that with a house. Plus, some stocks will provide you with dividends that you can reinvest or spend.

Cons include the following:

•   You could lose your entire investment in the stock market, including the initial investment. If you’re a common stockholder, you get paid last if a company defaults.

•   If you’re managing your own portfolio, you’ll need to invest time into investigating stocks, deciding what to buy and sell, and otherwise monitoring the stock market.

•   If you sell stocks at a profit, you’ll usually need to pay capital gains tax (although this can be offset if you also have some losses).

•   While investing, you’ll still need to make your mortgage payment (until the home is paid off).

•   Depending on your personality type, watching a stock that you own decline in value can be an emotional experience, and for some people, keeping tabs on their portfolio can be stressful. check that portfolio.

Evaluating Your Financial Situation

You may feel the urge to pay down your mortgage or make investments, but whether you should actually do so requires calculating two key figures: your net worth and your debt-to-income ratio (DTI). To determine your net worth, add up all of your assets (what you own) and subtract your liabilities (what you owe). Assets include your home’s value, vehicles, bank accounts, investments, and cash. Do not include your income. Liabilities are your mortgage, car, personal and student loans, credit card balances, and so forth. If you owe more than you own, the time may not be right to make a big investment — in either your home equity or the stock market — even if you are paying all your bills on time.

For the second metric — your DTI — add up your gross (pre-tax) monthly income as well as your monthly debt obligations, such as your mortgage, car payment, and other loan payments. Divide your total monthly debt by your total gross monthly income, and the resulting ratio (say, 0.30 or 30%) is your DTI. A lower DTI (say, under 30% or even 20%) indicates more cash flow to either put toward your mortgage or to invest.

Factors You Should Consider

Timing The earlier you can begin to apply extra payments to pay down your mortgage principal, the more you’ll benefit, because a lower principal will reduce interest over the life of the loan. That said, the earlier you can begin to invest, the longer you’ll have for your investments to build in value. Plus, because of compound interest, each dollar that you invest today will be worth more than a dollar that you would invest years from now.

Taxes Starting in 2018 and set to last through 2025, the federal government nearly doubled the amount of the standard deduction that taxpayers can claim. This means that far fewer people itemize their deductions, which in turn means that the mortgage interest deduction isn’t used by those taxpayers when they file their income taxes.

Home values If real estate values are dropping in your area, paying down your mortgage can help you from going underwater (owing more on the home than what it’s currently worth). Being underwater can make it more difficult to sell or refinance the home. Struggling homeowners can look for mortgage relief programs.

Recommended: Home Loan Help Center

Other Considerations

To this point, the post has largely focused on this question: Is it better to pay off a mortgage or invest? Let’s take a step back and look at issues to consider before doing either. First, do you have an emergency savings fund that could cover your monthly expenses for three to six months? If not, that’s a priority often recommended by experts.

Plus, if you have high-interest debt, such as credit card balances that you don’t pay off each month, it’s usually better to pay that off before either paying extra on your mortgage or investing.

Another strategy: You could consider refinancing your mortgage to a lower rate to lower your mortgage payment. Then, when you put extra money toward the balance, even more would go to the principal than when the interest rate was higher.

Deciding What’s Best for You

Pay off your house or invest? Perhaps the information provided has already allowed you to make a decision. However, there’s one more strategy to consider: doing both.

Best of Both Worlds: Funding Both at Once

Instead of simply considering two options, pay off mortgage or invest, another possibility meets in the middle: making additional contributions to your investments while also paying extra on your mortgage principal. This is most effective early on, but adds value through the life of the mortgage.

If the stock market becomes especially volatile or is significantly heading downward, you could focus on the mortgage paydown during that time period.

The Takeaway

Whether you choose to pay off a mortgage or invest depends on your financial situation and priorities. Each choice has pros and cons, but a best-of-both-worlds strategy is to do both.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is there any disadvantage to paying off your mortgage early?

If a mortgage note includes a prepayment penalty, this can cost you money. Other disadvantages are loss of the mortgage interest tax deduction and a potential drop in credit scores. Plus, it may be more advantageous to invest those dollars instead.

Should I pay off my mortgage or save money?

It depends, but you definitely want to make sure you save up three to six months of expenses in an emergency fund before you pay down your mortgage.

Is it better to pay off my mortgage or invest for retirement?

Ideally, you can do both. If that’s not financially possible right now, weigh the interest rate on your loan and whether or not you benefit from the mortgage interest deduction on your tax return vs. what you think you might be able to earn on investments in the market. This will help you make your decision.

Should I invest when I have a mortgage and other debts?

If “other debts” include high-interest debt, such as credit cards that aren’t paid off in full each month, it typically makes sense to prioritize the payoff of that debt over investing. If your employer offers a retirement plan with a company match, you might want to prioritize that investment in order to capture the match. And if you are paying your current debts comfortably, investing more widely could be the right move.

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Photo credit: iStock/burcu saritas

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

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.
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.

SOHL-Q224-1903244-V1

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If you’re shopping for a home loan, you may be wondering if using mortgage points to “buy down” your interest rate is a good move for you.

The answer is … it’s complicated.

Whether you’re buying or refinancing your home, purchasing mortgage points from your lender can lower your monthly payment and reduce the overall amount of interest you’ll pay on your loan. And that’s certainly an appealing prospect.

But it’s important to understand how points work — how much they can cost and how much they might save you over the life of your loan — before you decide to hand over that extra cash up front at your closing.

What Are Mortgage Points?

Mortgage points, also known as discount points, may be used by a borrower to prepay some of the interest on a home loan in exchange for a lower mortgage rate. The borrower pays more up front (the points are paid as a fee at closing) but can end up saving money over time because the interest rate is then reduced for the life of the loan.


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

How Do Mortgage Points Work?

Lenders typically base their interest rate offers on several factors, including a borrower’s credit profile and current market rates. But once you receive that initial offer, your lender also may give you the opportunity to buy down your rate through the use of mortgage points. (If the lender doesn’t bring it up, you can ask.)

Every point purchased reduces the interest rate a borrower pays by a predetermined percentage, which can vary from one lender to the next. But let’s say your lender offers you an initial rate of 3.25% and provides a 0.25% rate reduction if you purchase one discount point. If you decide to buy the point, your rate would then be 3%.

Each point you buy typically costs 1% of the amount you’re borrowing, and that money is due up front. So, for example, if your loan is for $200,000, a point will cost $2,000 at closing. If that seems too steep, you may be able to purchase a fraction of a point. A half-point in this scenario would cost $1,000, or three-quarters of a point would be $1,500.

How Do Points Affect Your Mortgage?

Here’s a hypothetical example to illustrate how buying one point could reduce the cost of a 30-year, fixed-rate $200,000 mortgage. (This is a bare-bones example, so the payment amount includes principal and interest only.)

Discount points purchased	None	1 point ($2,000)
Loan principal	$200,000	$200,000
Interest rate	3.25%	3%
Monthly payment	$870	$843
Total interest paid over life of the loan	$113,348	$103,555
Total saved over life of the loan	None	$9,793

Keep in mind that the borrower in this scenario would have to stay with the loan for the entire 30-year term to get the full savings — and that can be rare these days. Homeowners only stay in a home for an average of eight years, and many refinance their home loans.

That’s why it’s important to factor in your “break-even point” — when the savings from the lower mortgage cost offset what you paid for the discount points — before you make your decision.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

What Is the Break-Even Point?

Paying points on a mortgage can lower your monthly payment and save you thousands of dollars — if you keep the same loan long enough to recover the money you paid up front. If you plan to move or refinance before you reach and pass that threshold, paying points may not make sense.

To calculate the approximate point at which you would get back what you spent on prepaid interest, you can divide the amount you paid for any points by the amount you’ll save each month on your payment. For example, as noted in the chart above, if you purchased one point for $2,000 at closing, you’ll save $27 each month. Divide $2,000 by $27 and you’ll see you can expect to break even in 74 months — or about six years. If you plan to stay in your home much longer than that, buying down your rate could be worth considering.

Can You Buy Points for an ARM?

You can buy points if you decide to go with an adjustable-rate mortgage (ARM) instead of a fixed-rate mortgage. But it may not be worth it if the points apply only to the ARM’s initial interest rate, which typically lasts for three, five, seven, or maybe ten years. If the rate goes up after that and you decide to refinance, you could lose out on the savings you hoped to get when you paid for the points.

Recommended: How an Interest-Only Mortgage Works

Are Mortgage Points Tax Deductible?

Discount points, which are considered prepaid interest, may be deducted as home mortgage interest if you itemize deductions on Schedule A of your Form 1040. But you’ll need to meet certain criteria in order to deduct mortgage points and you may not be able to deduct all of the mortgage interest and points in the year you paid them.

It’s important to note that only discount points, which represent prepaid interest, are tax deductible. “Origination points,” which also may be referred to as mortgage points, are not tax deductible. These points, which you’ll also pay at closing, refer to the various fees lenders may charge in preparing your mortgage (such as processing, underwriting, administration, or document preparation costs).

Your accountant or tax preparer should be able to answer your questions if you aren’t clear about the amount you can deduct on your annual return.

Is There a Limit on the Points You Can Buy?

The maximum number of points you can purchase to reduce your interest rate may differ based on factors like the financial institution, type of loan you choose, or how much you need to borrow. According to a survey of lenders performed weekly by Freddie Mac, the average number of points reported on 30-year, fixed-rate conventional loans in 2022 was 0.9.

Benefits and Risks of Mortgage Points

Here are some things to consider when you’re deciding if buying points makes financial sense for you.

How Long Do You Plan to Stay in the Home?

If you run the numbers and think you’ll keep your loan past your break-even point, it could be worth paying extra up front. But if it’s a starter home, or you expect to relocate for your career, buying points may not be prudent.

Do You Have Plenty of Money Saved?

Homeownership can be expensive. Are you certain you have enough saved to make a decent down payment, pay for points as well as other closing costs, and still have funds in reserve for the inevitable expenses related to homeownership? If not, you may want to reconsider the benefits of buying down your interest rate.

Did the Seller Agree to Pay Some Closing Costs?

If the seller agreed to pay some or all of your closing costs, you may be able to negotiate discount points as part of that offer.

Do You Plan to Make Extra Payments?

Paying for points could be a smart strategy if you expect to hold on to the same loan for a long time. However, if your goal is to pay off your mortgage early — perhaps by paying more toward the loan principal whenever possible — points may not offer the savings you expected.

Would the Money Be Better Spent on Your Down Payment?

If you have plenty of money saved and you’re trying to decide between increasing your down payment or buying points, you may want to run the numbers to determine which choice will give you a better return on your investment.

If your time horizon is short, you may save more by making a bigger down payment. If you plan to stick around for several years at least, you may choose to put your money toward discount points.

Remember, depending on the type of loan you have, if you make a down payment that’s less than 20%, your lender probably will require that you purchase private mortgage insurance. PMI could add about 0.3% to 1.5% to the cost of your mortgage. And you’ll likely have to pay it every year until your equity in the home reaches 20%.

Pros and Cons of Mortgage Points

Pros	Cons
You can lower your monthly mortgage payment	High up-front costs can make closing even more expensive
You may be able to save on interest over the life of your loan	Could deplete cash needed for furniture, renovations, moving, etc.
Discount points may be tax deductible for those who itemize	Could lose money if you sell or refinance before breaking even

Ready to Go Rate Shopping?

Make sure when you shop rates, you’re comparing apples to apples. Some lenders may offer an interest rate that appears lower than others but has a fraction of a point or a point tied to it. If two lenders are offering a 3% interest rate on a 30-year, fixed-rate loan, but one is charging a point to get that rate and one isn’t, the one that isn’t charging the point is offering you a more affordable deal.

Be cautious when comparing mortgage rates: If it isn’t clear how much you’ll pay to borrow, you can ask a loan officer to walk you through your loan estimate and/or to calculate your costs based on different time frames. Lenders are required to disclose information about their products in a way that allows borrowers to make meaningful comparisons.

The Takeaway

What’s the point of mortgage points? They allow homebuyers to reduce their loan’s interest rate by paying some of the interest up front. Buying discount points can save you money on interest over time, but only if you keep the loan long enough to recover the upfront cost.

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

SoFi Mortgages: simple, smart, and so affordable.

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Photo credit: iStock/Prostock-Studio

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

⁺Lock and Look program: Terms and conditions apply. Applies to conforming, FHA, and VA purchase loans only. Rate will lock for 91 calendar days at the time of pre-approval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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.
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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Real estate investments make money through appreciation and rental income. Real estate can diversify a portfolio and act as a hedge against inflation, since landlords can pass rising costs to tenants. But the down payment on multifamily investment properties? At least 20%, or 25% to get a better rate.

It’s true that eligible borrowers may use a 0% down U.S. Department of Veterans Affairs (VA) loan for a property with up to four units as long as they live there. But those loans serve a relative few and are considered residential financing. Properties with more than four units are considered commercial.

So how can a cash-poor but curiosity-rich person tap the potential of multifamily properties? By not footing the entire bill themselves.

Can You Buy a Multifamily Property With No Money?

When you buy real estate, you typically have two options: Buy with cash or finance your purchase with a mortgage loan.

There are various types of mortgages. If you take out a home loan, you’ll likely need to pay a portion of the purchase price in cash in the form of a down payment. The minimum down payment you make will depend on the type of mortgage you choose — the average down payment on a house is well under 20% — and it will help determine what terms and interest rates you’ll be offered by lenders.

This money needs to come from somewhere, but it doesn’t necessarily need to come from your own savings account. When investors buy multifamily properties with “no money down,” it just means they are using little to no personal money to cover the upfront costs.

If you don’t have much cash of your own, there are several ways that you can fund the purchase of a multifamily investment property.


💡 Quick Tip: Jumbo mortgage loans are the answer for borrowers who need to borrow more than the conforming loan limit values set by the Federal Housing Finance Agency ($832,750 in most places, and up to $1,249,125 in high-cost areas). If you have your eye on a pricier property, a jumbo loan could be a good solution.

6 Ways to Pay for a Multifamily Property

Find a Co-Borrower

If you don’t have the money to front the costs of a property yourself, you may be able to partner with a family member, friend, or business partner. They may have the money to cover the down payment, and you might pull your weight by researching properties or managing them.

When you co-borrow with someone, you’ll each be responsible for the monthly mortgage payments. You’ll also share profits in the form of rents or capital gains if you sell the property.

Give an Equity Share

You may give an equity investor a share in the property to cover the down payment. Say a multifamily property costs $750,000, and you need a 20% down payment. An equity investor could give you $150,000 in exchange for 20% of the monthly rental income and 20% of the profit when the property is sold.

Borrow From a Hard Money Lender

Hard money loans are offered by private lenders or investors, not banks. The mortgage underwriting process tends to be less strict than that of traditional mortgages. Depending on the property you want to buy, no down payment may be required.

These loans (also called bridge loans) have high interest rates and short terms — one to three years is typical — with interest-only payments the norm. For this reason, they may be used by investors who may be looking to flip the property in short order, allowing them to make a profit and pay off the loan quickly.

House Hack

House hacking refers to leveraging property you already own to generate income. For example, you might rent out an in-law suite or list your property on Airbnb.

Another option: You could rent out your primary residence and move into one of the units in a multifamily property you buy. This way, you’d probably generate more income than if you had rented out the unit to a tenant.

Finally, you could hop on the ADU bandwagon if you own a single-family home. Accessory dwelling units can take the form of a converted garage, an attached or detached unit, or an interior conversion. The rental income can be sizable. To fund a new ADU, homeowners may tap home equity, look into cash-out refinancing, or even use a personal loan.

Seek Seller Financing

If you don’t have the cash for a down payment on a property, you may be able to forgo financing from a lending institution and get help instead from the seller.

With owner financing, there are no minimum down payment requirements. Several types of seller financing arrangements exist:

•   All-inclusive mortgage: The seller extends credit for the entire purchase price of the home, less any down payment.

•   Junior mortgage: The buyer finances a portion of the sales price through a lending institution, while the seller finances the difference.

•   Land contracts: The buyer and seller share ownership until the buyer makes the final payment on the property and receives the deed.

•   Lease purchase: The buyer leases the property from the seller for a set period of time, after which the owner agrees to sell the property at previously agreed-upon terms. Lease payments may count toward the purchase price.

•   Assumable mortgage: A buyer may be able to take over a seller’s mortgage if the lender approves and the buyer qualifies. FHA, VA, and USDA loans are assumable mortgages.

Invest Indirectly

Not everyone wants to become a landlord in order to add real estate to their portfolio. Luckily, they can invest indirectly, including through crowdfunding sites and real estate investment trusts (REITs).

The Jumpstart Our Business Startups Act of 2013 allows real estate investors to pool their money through online real estate crowdfunding platforms to buy multifamily and other types of properties. The platforms give average investors access to real estate options that were once only available to the very wealthy.

REITs are companies that own various types of real estate, including apartment buildings. Investors can buy shares on the open market, and the company passes along the profits generated by rent. To qualify as a REIT, the company must pass along at least 90% of its taxable income to shareholders each year.

As investment opportunities go, REITs can be a good choice for passive-income investors.


💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

The Takeaway

Buying a multifamily property with no money down is possible if you take the roads less traveled, including leveraging other people’s money. And if you have the means to make a down payment on a property, your first step is to research possible home mortgage loans.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I buy a multifamily home with an FHA loan?

It is possible to buy a property with up to four units with a standard mortgage backed by the Federal Housing Administration (FHA) if the buyer plans to live in one of the units for at least a year. The FHA considers homes with up to four units single-family housing. The down payment could be as low as 3.5%. There are loan limits.

A rarer product, an FHA multifamily loan, may be used to buy a property with five or more units. The down payment is higher. You’ll pay mortgage insurance premiums upfront and annually for any FHA loan.

Is a multifamily property considered a commercial property?

Properties with five or more units are generally considered commercial real estate. Commercial real estate loans usually have shorter terms, and higher interest rates and down payment requirements than residential loans. They almost always include a prepayment penalty.

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Photo credit: iStock/jsmith

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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