A Guide to Gift Letters for Mortgages

A Guide to Gift Letters for Mortgages

If you’re fortunate enough to have a family member or close friend who is giving you funds to put towards a down payment, congratulations. But in this scenario, a gift letter can be an important part of validating money given to you for the down payment or closing costs on a home.

Approximately 22% of first-time homebuyers received gift funds to help with the purchase of a home, according to a 2022 National Association of Realtors® (NAR) survey.

Properly documented gift funds will help the mortgage loan to pass underwriting so your loan may be approved. In this guide, you’ll learn the story on gift letters, how they differ for various types of mortgages, plus other important details.

What Is a Gift Letter?

A mortgage gift letter is a legal document whose primary purpose is to state that down payment funds given to the borrower are not expected to be repaid. The lender wants to ensure that the borrower is not taking on more debt to help finance the mortgage, even if it is money from family or friends. The letter is required to pass underwriting.
It’s essential that a gift letter include all the necessary elements to be considered in your loan application.


💡 Quick Tip: You deserve a more zen mortgage loan. When you buy a home, SoFi offers a guarantee that your loan will close on time. Backed by a $5,000 credit.‡

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


What Should Be Included in Gift Letters?

Lenders usually provide a standard gift letter for you and the donor to complete, but it’s helpful to know what needs to be stated. Gift letters should include the following details:

•   Dollar amount of the gift

•   Name of the donor, address, phone number, and details of the account from which the money will be or was drawn

•   Relationship to the borrower

•   Name of the borrower, address, and phone number

•   Address of the home associated with the down payment

•   The donor’s signed statement saying the funds will not need to be repaid by the borrower

•   Language saying the funds were not made available to the donor by any party interested in the sale of the property

•   The dated signatures of borrower and donor.

Note: Along with a gift letter, the lender may want to see proof of funds in the donor’s account and evidence the money was deposited into the borrower’s account.

Does Timing and Amount of a Gift Matter?

When it comes to gift letters, when and how much you received may need to be documented.

Amount

There typically is no limit on the amount of gift money, but when a deposit is more than half of your monthly household income, lenders usually will want an explanation.

Note: SoFi does not offer USDA loans at this time. However, SoFi does offer FHA, VA, and conventional loan options.

For USDA loans and FHA loans, you’ll need to explain any amount over 1% of the purchase price or appraised value of your home that was deposited in your account recently. There are exceptions, including tax refunds and bonuses, that do not need to be “seasoned” or explained.

Timing

A lender will look at bank statements for the past 60 to 90 days. Amounts that existed in your account before this time are considered seasoned, and you may not need to provide a gift letter for that money. The amount of a deposit inside that time frame may need a letter of explanation.

If you have money in other places, you’ll want to deposit it into your bank account for proper seasoning.

Who Can Give Down Payment Gifts?

Down payment gift regulations vary by loan type, but generally, gift funds are allowable on many mortgage types from close family members or friends. There are some key differences between regulation for down payment gifts for conventional and government home loans (USDA, VA, and FHA mortgages).

FHA Loans

Under Federal Housing Administration guidelines, gift funds for the down payment are allowable from the following donors:

•   Relatives of the borrower

•   The borrower’s employer or labor union

•   A close friend with a clearly defined and documented interest in the borrower

•   A charitable organization

•   A government agency or public entity that provides homeownership assistance to low- and moderate-income families or first-time homebuyers.

The gift must not come from an entity that has an interest in the sale of the property, such as the seller, the builder, the real estate agent, or the broker.

Buying a fixer-upper? This guide to FHA 203(k) loans and options could be a good read.

Conventional Loans

Under conventional loan guidelines (meaning non-government), gift funds are allowable from these sources:

•   A relative, which Fannie Mae defines as someone related by blood, marriage, adoption, or legal guardianship

•   A domestic partner or fiance.

The donor may not be anyone with an interest in the transaction, such as the builder, developer, or real estate agent.

USDA or VA Loans

With loans backed by the Department of Agriculture or Veterans Affairs, the only people who cannot provide gift funds are those who would benefit from the sale, such as the seller, lender, real estate agent, or developer. The gift funds must be properly sourced, which means the lender wants to see a paper trail from the bank account of the donor to that of the borrower.


💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.1

Are There Limits on Gifts?

No, but some loans may require borrowers to come up with a portion of the down payment. This is what’s known as a minimum borrower contribution, and it applies to conventional loan financing. It is different based on what type of real estate is being purchased, be it a primary residence, second home, or investment property.

Primary Residences

For primary residences, there is no minimum borrower contribution. All of the money needed to complete the transaction can be a gift. This is true whether the loan-to-value ratio is above or below 80% for conventional financing.

Second Homes

For second homes, if the loan-to-value is above 80% (meaning the down payment was less than 20%), borrowers must make a minimum contribution of 5% from their own funds. This is also true on principal units with two to four units.

Investment Properties

Gift funds are not allowed on conventional mortgages for investment properties. Fannie Mae also states that gift funds are not to be used for investment properties.

Recommended: How to Buy a House From a Family Member

How Does This Affect Taxes?

Taxes may affect the donor of the funds, unless the home purchaser makes special arrangements to pay taxes on the gift funds.

The money gifted may be excluded from tax as per the annual exclusion amount. The IRS says the annual exclusion for gifts is $17,000 for 2023. This is per person, so if buying real estate with a partner, the amount doubles to $34,000.

If the gift is from a set of parents, each parent can gift that amount to each of the borrowing partners. This allows for $68,000 to be gifted before triggering the gift tax. In other words:

•   Parent 1: $17,000 for borrowing partner 1, $17,000 for borrowing partner 2 = $34,000

•   Parent 2: $17,000 for borrowing partner 1, $17,000 for borrowing partner 2 = $34,000

Adding the amount for both parents contributing for both borrowers equals $68,000.

If that amount is exceeded, each donor can also claim it as part of the lifetime exclusion on estate taxes, which has a limit of $13.61 million for 2024.

Gift Equity Letters vs Gift Letters for Mortgages

A gift of equity is when the seller gives a portion of the home’s equity to the buyer. It is transferred to the buyer as a credit in the transaction and may be used to fund all or part of the down payment on principal or second homes.

If there is a gift of equity, a gift of equity letter is required. A signed gift letter and settlement statement with the equity gift will be retained in the loan file.

While there are similarities, there are also some differences.

Gift of Equity

Gifts for Mortgages

Must be applied as a reduction in purchase price or credit Gifts can be an unlimited amount but are not accepted for investment properties
Borrower may not receive cash back at closing for gift equity Borrower can receive funds back at closing
Required to notify appraiser of equity gift Appraiser doesn’t need to know about it
Is from the seller, who can be a relative. For FHA loans, only equity gifts from family are acceptable Is from a donor related to the borrower
Can be used to fund the down payment and closing costs Can be used to fund the down payment and closing costs
Permitted for principal and second homes Permitted for principal and second homes

Whether you’re fortunate enough to receive a gift or you’re making your own way toward homeownership, this mortgage calculator may come in handy.

Recommended: Mortgage Loan Help Center

The Takeaway

A gift letter ensures that the money, or equity, you receive when buying a home is validated when your mortgage loan goes through underwriting. It’s a necessary step on your way to loan approval that a good mortgage lender may be able to help you with.

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.


Photo credit: iStock/Pictac


*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.

SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
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.

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.


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


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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What Credit Score Do You Need to Buy a House

What’s your number? That’s not a pickup line; it’s the digits a mortgage lender will want to know. Credit scores range from 300 to 850, and for most types of mortgage loans, it takes a score of at least 620 to open the door to homeownership. The lowest interest rates usually go to borrowers with scores of 740 and above whose finances are in good order, while a score as low as 500 may qualify some buyers for a home loan, but this is less common.

Key Points

•   A credit score of at least 620 is generally needed to buy a house, but FHA loans may accept scores as low as 500 with a higher down payment.

•   Paying attention to credit scores before applying for a mortgage can lead to lower monthly payments.

•   A higher credit score can save borrowers money by securing lower interest rates over the loan’s term.

•   When two buyers are purchasing a home together, lenders look at both buyers’ credits scores.

•   Credit scores are not the only factor; lenders also evaluate employment, income, and bank accounts.

Why Does a Credit Score Matter?

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

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

Do I Have One Credit Score?

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

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

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

•   Exceptional: 800-850

•   Very good: 740-799

•   Good: 670-739

•   Fair: 580-669

•   Poor: 300-579

Here’s how FICO weighs the information:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   New credit: 10%

•   Credit mix: 10%

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

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

Recommended: 8 Reasons Why Good Credit Is So Important

A Look at the Numbers

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

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

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

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

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

Credit Scores Are Just Part of the Pie

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

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

Other typical conventional loan requirements a lender will consider include:

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

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

Most lenders require a DTI of 43% or lower to qualify for a conforming loan. Jumbo Loans may have more strict requirements.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


How to Care for Your Credit Scores Before Buying a House

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

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

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

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

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

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

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

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

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

Recommended: 31 Ways to Save for a House

The Takeaway

What credit score is needed to buy a house? The number depends on the lender and type of loan, but most homebuyers will want to aim for a score of 620 or better. An awesome credit score is not always necessary to buy a house, but it helps in securing a lower interest rate.

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.


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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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


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.

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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Beginner’s Guide to Homeowners Associations

Perhaps the idea of home ownership sounds appealing, but the thought of all the maintenance involved — inside and out — doesn’t sound so great. Dealing with snow removal or tending to your lawn might be the last thing you want to add to your already full plate.

If that resonates, buying a home that has a homeowners association, or HOA, might be the right move. Whether you’re shopping for a condo or a 3-bedroom house in a new development, an HOA could be a valuable thing. These organizations, funded by dues, take care of many of those maintenance responsibilities, run shared facilities (like a pool), and create guidelines (and enforce them) for the community of homeowners.

That said, interacting with an HOA and following its guidelines may not be for everyone. Read on to learn:

•   What is an HOA, or homeowners association

•   How do HOAs work

•   How much are HOA dues

•   What are the pros and cons of HOAs

•   How will HOA fees impact your costs as a homeowner

What Is an HOA (Homeowners Association)?

An HOA is typically a non-profit volunteer group that manages aspects of homeownership in certain planned unit developments (PUDs), condos, and other housing communities. The HOA collects fees from each member of the community and uses them to handle maintenance duties and amenities. These may include:

•   Landscaping and maintenance of walkways and the like

•   Pest control

•   Maintenance and utilities of shared spaces, such as lounges and pool areas

•   Garbage pickup

•   Parking

•   Security

Another answer to “What is an HOA?” should mention that these associations typically make enforceable rules about the look and feel of the community. There may be guidelines about, say, the size of pets one may own, or the color schemes permissible for a townhome’s exterior. The existence of an HOA will be an important consideration when you are shopping for a place to live and HOA fees need to be built into a homebuyer’s financial plan, just like home loan payments.

Recommended: Condo vs. Townhouse: 9 Major Differences

How Does an HOA Work?

HOAs can be staffed in different ways. They can be run by people owning property within its boundaries, run by a board of directors, or through a similar arrangement, with board designees elected to oversee and enforce HOA rules.

Many HOAs are incorporated, which makes them subject to the laws of the state and may require them to file annual reports with the corporation commission, in order to remain in good standing.

People who purchase properties within an HOA jurisdiction become members of that organization, and they must abide by the rules contained within that organization’s bylaws and Declaration of Covenants, Conditions, and Restrictions (CC&Rs).

HOA rules, fees and restrictions vary. Some bylaws and CC&Rs are strict, while others are looser, typically focusing on how residents must keep properties maintained according to stated specifications. In a planned unit subdivision of single-family homes, for example, rules may include what types of landscaping are permitted, or exterior colors of paint, what kinds of fencing is allowed, and more.

They can include usage rules for common property, such as a pool, and typically outline penalties for rule violations, ranging from forcing a homeowner to comply to fees and, sometimes, litigation.

How Common Are HOAs?

Here are some recent statistics that will help you get an idea of how common HOAs currently are in the U.S.:

•   Approximately 75.5 million Americans live in HOAs, cooperatives, or condominium units.

•   30% of all U.S. homeowners live in HOA communities.

•   28.2 million housing units in America are part of HOA communities.

As you see, HOAs are quite popular.

What Is an HOA Fee?

Now that you know a bit about what is a homeowners association, let’s look at those fees they charge. People who buy property in an HOA-governed condo or community usually must pay dues — also known as HOA fees — typically due monthly. These fees help to maintain common areas of buildings, such as lobbies and patios, and perhaps community clubhouses. These fees can cover maintenance on elevators or swimming pools, if applicable, or could be used for landscaping expenses, and so forth. Additional special assessments may be charged for major repairs, such as roof repairs.

Some studies suggest that average HOA fees range from $200 to $400 per month, although they can be as low as $50 and as high as $2,500 or more. It depends on the HOA complex, where it is, what amenities the project maintains, and sometimes on how the individual HOA is managed.

What’s most important when shopping for a new home is that you are clear about what fees would be assessed on your individual unit and whether that fits your budget.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


When Considering an HOA Property

When considering whether or not to buy a property within a homeowners association, it makes sense to understand what you’d be committing to if you bought this property.

To get an understanding of how the organization operates, you can ask the board of directors if you could read minutes from meetings — if you have a real estate agent, they should be able to help you access records. This may give you a good overview of any challenges the organization is facing, and insights into how solutions are brainstormed and implemented.

Questions to investigate can include:

•   What are the HOA fees each month? What do they cover?

•   If the fees seem low, does it appear as though enough funds are collected to maintain general areas? What about meeting rooms, the gym, pool area, and so forth?

•   If the HOA fees are higher than expected, do they seem excessive for what you’d get in return?

•   Are homeowners also being charged special assessments to cover other costs? If so, how often and what are they?

•   How many units are not paying their HOA fees? What are the consequences for that? Are penalties being imposed?

•   If certain units don’t pay their HOA fees, can these unpaid costs be imposed upon other owners to make up the difference?

•   If desired, will you be allowed to sublet your unit? Over what term and with what restrictions?

•   Are you allowed to have a pet? If so, what restrictions exist? Ask to read a copy of the CC&Rs which is recorded public information.

•   Does pending litigation exist against the HOA? If so, of what type? Does it involve, say, damage to one unit, or does it affect the entire organization?

If you have friends or family members who are part of this HOA, consider asking them what they like about living there, and what they don’t. If you have a friend or family member who owns housing under a different HOA, chat with them as well. Their insights can be valuable in regards to what questions to ask and issues to explore before buying.

You can also review the bylaws, which usually share voting rights of members, budget and assessment rules, meeting requirements, and so forth. Check to see what actions can be taken without a member vote — if they include raising assessments or creating rules, this could have an impact on your buying decision.

Recommended: Mortgage Servicing: Everything You Need to Know

Pros vs Cons of HOAs

There are several benefits of buying a property that’s part of an HOA. Consider these upsides:

•   Guidelines to help maintain the look of the community, settle issues, and create harmony among residents.

•   Enhanced quality of life and property values.

•   Maintenance services so homeowners don’t need to do the work themselves or hire freelance help.

That said, there are also possible drawbacks to being part of an HOA. These can include:

•   The cost of the HOAs fees can be prohibitively expensive, and the possibility of assessments can be financially challenging.

•   Potentially restrictive guidelines that inhibit your freedom over your property (that is, you may not be allowed to have a certain kind of pet or put in solar panels).

•   Those who run the HOA may be volunteers vs. skilled real estate professionals, which could lead to inefficiencies.

Can You Afford to Buy into an HOA?

When shopping for a new home or condo, one key consideration is how much you can afford for a house — with the true cost being more than just principal, interest, and homeowners insurance. If you are considering properties that have HOA charges, it’s vital to factor those in to make sure your budget is manageable.

You’ll need a down payment on the home. There are also property taxes, insurance, closing costs (which can run from 3% to 5% of the home’s cost, paid by the buyer and/or seller according to the contract). And there are expenses other than closing costs such as moving expenses, furniture costs, and more that should be considered as you grapple with how much you can afford.

Plus, you might want to have an emergency fund established for unexpected expenses, whether unanticipated housing repairs, or medical expenses, or something else entirely.

To help you figure out that affordable house payment number, you could check out our mortgage calculator.

Recommended: What Credit Score Is Needed to Buy a House?

What to Know About Mortgages and HOAs

There’s one more wrinkle to the topic of what is a homeowners association and should you buy into one: the impact it may have on securing your mortgage.

When you buy a property that is part of an HOA, you may need additional documentation for your lender. If your bid is accepted, the lender will likely request a homeowners association certification, called an HOA cert for short. This document provides your lender with a snapshot of how the HOA is being run, and may provide information such as:

•   How old the project is

•   Whether a condominium development was converted from an apartment building or specifically built as condo units

•   How many units exist in the project

•   How many units are occupied

•   How many occupied units are owner occupied and how many are rented to someone else

•   How much HOA fees are

•   The amount of insurance on the project

If this information is requested, it will likely be reviewed to confirm that this property meets the lender’s loan eligibility guidelines. Because guidelines can vary from lender to lender and loan program to loan program, it makes sense to check with your lender of choice as soon as possible to determine if this financial institution considers your condo to be eligible for financing.

The HOA cert may also be obtained by the escrow/title company and provided to your lender, along with the relevant CC&Rs. This provides insight into any property restrictions and other aspects that may affect a home’s lendability and marketability.

Recommended: Home Loan vs. Mortgage: What You Should Know

The Takeaway

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

Why do HOAs exist?

Homeowners associations exist to manage and maintain common areas, to enforce community rules, and to collect and manage the finances used for community upkeep. Many people who participate in HOAs expect the association to help enhance their property values.

How much are HOA fees?

HOA fees vary widely based on the amenities offered by the development but most people can expect to pay at least $200 to $300 per month.


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.

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How Does a Realtor Get Paid When You Buy a House?

Real estate agents — both on the seller’s side and the buyer’s side — typically get paid at closing from the seller’s proceeds. The majority of real estate agents are paid via a commission vs. a set fee, which means the higher the sales price, the more money the agent gets paid.

Commissions are split evenly between the buyer’s and seller’s agents. The brokerage each real estate agent or Realtor® works for snags a portion of the commission as well. (Realtors are real estate agents who belong to the National Association of Realtors, requiring them to adhere to a certain code of ethics; we’ll use the terms interchangeably here.) Here’s an example of how a Realtor gets paid.

Real Estate Commission: An Example

Let’s say a home sells for $500,000 with a typical commission of 6%:

Total commission fee: $500,000 X 6% = $30,000

The commission is split evenly between the two sides:

•   Listing agent side = $15,000

•   Buyer’s agent side = $15,000

Real estate agents share their commissions with the brokers representing them. (A broker is an agent who also has an additional license to supervise other agents.) Let’s assume that the broker fee is 1% of the sales price (the broker’s split can go up to 50%, but we’ll use an easy 1% split here).

•   $500,000 sale price X 1% broker’s fee = $5,000

Subtract the broker fee from the total commission and the agent ends up with the rest.

•   $15,000 total commission – $5,000 broker’s fee = $10,000 agent commission

Typically, four people get paid from the seller-paid real estate commission. It may look something like this:

•   Listing agent = $10,000 (2% of sales price)

•   Listing agent broker = $5,000 (1% of sales price)

•   Buyer agent = $10,000 (2% of sales price)

•   Buyer agent broker = $5,000 (1% of sales price)

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


A Real Estate Agent’s Responsibilities

To earn their commission, real estate agents often have a lot of responsibilities. Their duties include:

•   Providing market data and helping to set a listing price

•   Placing ads and putting up yard signs

•   Photographing the property

•   Listing the property in the MLS, a listings database

•   Scheduling showings

•   Placing lock boxes

•   Guiding first-time home buyers

•   Smoothing over difficult relationships

•   Navigating offers and counter offers

•   Negotiating home contracts

Making a living through commissions can be challenging for real estate agents, but it can also be very rewarding.

Recommended: How to Find a Real Estate Agent

Who Pays the Realtor Commission?

It is expected that the seller pays the real estate agent commission fee for both the buyer’s and seller’s agents. At settlement (also called the “closing”), the money for the commission comes out of the seller’s proceeds. If the sales price of a home is $500,000 and the sellers owe $250,000 on their mortgage, then the commission and other fees would be subtracted from the $250,000 that remains after the sellers pay off their mortgage.

How Much Are Realtor Fees?

It is common to see real estate agent commission fees between 5% and 6%. This includes both the seller’s and the buyer’s real estate agents’ fees. The money is usually split evenly between the two sides. If the commission is 6%, for example, 3% would go to each side.

Can You Negotiate Who Pays the Real Estate Agent?

The Realtor fee is negotiable, though it is extremely rare for a buyer to pay it. Some ideas to help reduce your fee if you are selling your home:

•   Barter. Do you have a photographer friend who can take photos of your home? Offer up skills in exchange for a lower commission.

•   Hire a newer agent. A newer agent may accept a lower commission to gain experience.

•   Pay attention to market conditions. If homes aren’t moving in your market, you may be able to negotiate a lower commission.

Take time to interview potential Realtors using these suggested questions. When you’re buying a home, look for an agent with a strong network. (These agents may be the first to hear about so-called “whisper listings.”) Be sure the commission outlined in the listing agreement you sign matches what you agreed on.

How Is an Agent’s Commission Determined?

An agent’s commission is determined by the compensation agreement they have with their brokerage. As noted above, after the commission is split between the buyer’s and the seller’s agents, it’s then split again between the agent and the broker.

When Do Agents Receive Their Commission?

Agents usually receive their commission after the home mortgage loan has been funded and the sale closes. Their brokerage receives a wire with the funds and the agent’s portion of the commission is released to them shortly thereafter.

How Do the Agents Share Their Commission?

It is customary for agents to share the commission 50/50. If the listing has a 6% commission on it, 3% would go to the buyer’s agent and 3% would go to the seller’s agent.

What Is Dual Agency?

Dual agency is when a real estate agent represents both the seller and the buyer in a transaction. It must be disclosed to both parties because real estate agents are bound by a fiduciary duty to serve their clients. An agent who represents both seller and buyer will earn more commission.

Is Paying a Real Estate Commission Worth It for the Seller?

For many sellers, it’s painful to look at the closing documents and see how much of the sales price goes to different agents, title insurance companies, concessions, and so forth. But a lot of sellers like having someone to guide them through the complexities of real estate law, and sensitive issues that the sale of a home creates.

Recommended: How to Buy a House Without a Realtor

Alternatives to a Percentage-based Commission

There are real estate brokerages that advertise services for a flat fee. Usually, the flat fee is very low and may only include a listing on the MLS with photos. They usually don’t offer to schedule showings or manage the listing in any other way.

The Takeaway

Working with a real estate agent who earns a commission isn’t painful when you’re a buyer because the fee is almost always covered by the seller, and you will have an agent on your side to help you negotiate.

Another way to be money-smart when you’re buying is to get a good rate on a home loan. SoFi Mortgages offer competitive interest rates, low down payment options, and a guaranteed on-time close* (which you and your Realtor will love).

See your home loan rate in minutes.

FAQ

Do sellers pay realtor fees?

Yes, sellers pay realtor fees for both the buyer and the seller.

Do buyers pay Realtor fees in Texas?

No, the seller pays the realtor fees in Texas, with very few exceptions.

Do buyers pay Realtor fees in Washington state?

No, the seller usually pays realtor fees in Washington state, but it is negotiable.

How much does a new Realtor make in Illinois?

According to ZipRecruiter.com, the average pay for a first-year real estate agent in Illinois is $82,481. The range for first-year salaries is between $18,866 and $153,998.


Photo credit: iStock/RyanJLane

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


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



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.

*SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.

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Condo vs Apartment: What Are the Differences?

Condo vs Apartment: What Are the Differences?

Both apartments and condominiums share quite a number of traits but differ in ownership. Apartments are often found in large residential complexes owned by a company. These complexes are often operated by professional property managers. Condos are also usually located in large residential complexes, but each condo unit is typically owned by an individual owner.

If you’re browsing the market for a rental, you’ve likely encountered a dazzling array of condos and apartments, and you might rent either type of property. The question of condo vs. apartment gets more complex if you’re debating whether to buy a condo or rent an apartment.

What Is a Condo?

A condo is a residential unit within a collective living community, where each individual condo is owned by a private owner, but the cost of maintaining communal areas is shared by all owners. While condos are often located in high-rise buildings, they can also take the form of a collection of standalone properties, each designated a “condo unit.”

One benefit to renting a condo is that you can deal directly with your landlord rather than a management office, which may mean more personalized attention for your needs.

For buyers, the purchase price for a condo can be significantly lower than the cost of most single-family homes.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


What Is an Apartment?

An apartment is a rental unit within a building, complex, or community. Often, an apartment complex is managed by a property management company, which serves as both landlord and leasing agent for all of the units on the premises. In big cities, “apartment” is sometimes used as shorthand for a condo or co-op unit. If you’re choosing between a co-op and a condo to rent or buy, you’ll want to know how they differ, and whether you’re ready to buy an apartment.

Rental apartments may be located in high-rises but can also be found in larger homes that have been subdivided into separate units.

Renting an apartment offers greater mobility than buying a property, which makes it a flexible option if you’re only planning on staying in an area for a couple of years. A full-time management office or private landlord takes care of leasing, rent payments, and repairs.

Where They Differ

Now that we’ve covered the condo vs. apartment basics, let’s dive deeper into some key dimensions in where they differ.

Ownership

Each unit in a condo development is usually owned by a private homeowner. Unless the condo owner retains the services of a property manager, prospective renters can expect to deal with the condo owner directly when it comes to rental applications, monthly rent payments, and any maintenance issues that arise over the course of their lease.

Apartments are often managed by a property management company that may also own the apartment complex. Effectively, this makes the company the landlord for the entire property. Prospective apartment tenants will usually submit their application and rent payments through the apartment leasing office, while full-time maintenance staffers are on call to deal with any repairs. Of course, some apartments are in smaller buildings owned by individuals. In that case, a renter might deal directly with the property owner just as a renter in a condo does.

In either case, landlords may be amenable to your desire to negotiate rent in order to take you on or keep you. Paring the rent is the main goal in such a negotiation, but you can always ask for other benefits in lieu of a rent reduction.

Property Taxes

Renters aren’t responsible for paying property taxes, making them a non-issue in the apartment vs. condo choice. However, if you’re deciding whether to purchase a condo, understand that you’re responsible for paying property taxes for your unit every year. If you decide to rent your condo out, you should also expect to be taxed on any rental income you collect.

Design

Regardless of structure type, condo owners retain the right to make cosmetic adjustments to the interior of their properties. So if you’re interested in renting in a particular condo complex and you don’t like the design choices an owner has made, consider looking at other units that are available for rent — you may find a very different look and feel in another unit. Apartments within a rental complex, in contrast, typically share similar, if not identical, layouts and designs regardless of which unit you choose.

Amenities

The amenities of both apartments and condos vary widely and often depend on when and how they were built. Generally speaking, condos are more likely to offer customized amenities, like state-of-the-art appliances and granite countertops, that reflect the tastes and habits of their owners.

Fees

Apartments and condos of similar quality and in the same area should rent for around the same cost. Both condos and apartments often charge the following fees:

•   Application fee

•   First and last month’s rent

•   Security deposit

•   Credit and background check fee

•   Pet fees and deposit

•   Parking fee

Renters may find that condo owners are more willing to negotiate on things like fees than apartment management teams, as these are private owners trying to keep their units rented out for income purposes.

Buying a condo will mean paying monthly maintenance fees that cover insurance for and upkeep of common areas, water and sewer charges, garbage and recycling collection, condo management services, and contributions to a reserve account.

Community

Condos usually have a greater sense of community than apartment complexes, given that their residents are likely to stay around longer. In many cases, residents consist of the condo owners themselves.

By contrast, renters living in apartments often intend to stay for only a couple of years. While that’s not to say that there aren’t occasional resident get-togethers at some apartment complexes, you’re less likely to encounter the same faces over several months.

If you’re renting a condo, expect to abide by rules set by the homeowners association. These can sometimes be fairly strict. Apartments have their own set of rules that may be less stringent.

Renting and Financing

Renting an apartment involves one monthly rent payment, in addition to any utilities you’re responsible for. Of course, when you leave the apartment, you leave with just your security deposit, assuming all payments have been made and no damage has been done.

Financing a condo and purchasing the property allows you to lock in your monthly mortgage payments at a steady long-term rate and gives you the chance to start building equity. In exchange, you’ll be required to make a down payment and be responsible for any taxes, insurance, and maintenance fees, among other costs.

Deciding whether it’s better to buy a condo or to rent — or to get a house or condo — is a complicated decision that depends on your personal finances and your lifestyle. If you’re thinking about settling down, have a stable job with steady income, and have enough saved up for a down payment with an emergency fund to spare, buying a condo or house may be the right choice for you. However, if you’re still exploring the area or have variable income with limited savings, it may be best to continue renting. For those trying to decide between renting an apartment and financing a condo or house, a mortgage help center can help provide answers.


💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

Maintenance

Most apartment complexes have an on-site building supervisor who can address maintenance issues. Given that the owner of a large apartment complex oversees all of the units, they’re incentivized to employ someone full time to attend to the day-to-day affairs. This often means that apartment owners can react faster than condo owners, who sometimes don’t even live on the premises.

By contrast, condo units are usually owned by landlords, and most of them hire a third-party contractor to come in and make repairs as necessary. In some cases, condo owners may be handy and handle the repairs on their own.

If you buy a condo, you’ll have a regular maintenance fee that covers the shared parts of the property, but because condo owners typically own just the interior of their unit, any repairs in the condo unit will be separate. (It’s a good idea to pore over the covenants, conditions, and restrictions to see exactly what is part of your unit or part of the common elements.)

Condominium vs Apartment: A Side-by-Side Comparison

To help sum it all up, here’s a quick guide to the condo and apartment traits discussed above.

Condo

Apartment

Ownership Private owner Property management company, if a large complex; private owner if a smaller building
Property taxes Paid by condo owner Paid by building owner
Design Customized by owner Uniform across all units
Fees

First and last month’s rent

Security deposit

Credit and background check

Application fee

First and last month’s rent

Security deposit

Pet fees

Community Typically condo owners and long-term residents Typically shorter-term renters
Renting & Financing

Condo renters:

Monthly rent

Utilities

Condo owners:

Mortgage payment

Utilities

Property taxes

Maintenance fees

Property insurance

Monthly rent

Utilities

Renter’s insurance

Maintenance Private owner hires third-party contractors for repairs and maintenance On-site maintenance staff

Condo vs Apartment: Which One May Be Right for You?

Whether a condo or apartment is right for you depends on your preferred rental experience. If you’re looking for something that feels a little more akin to home and don’t mind dealing directly with your landlord when discussing repairs and rent payments, a condo (or an apartment in a small privately owned apartment building) may be the better option for you.

On the other hand, if you prefer dealing with a full-time staff of property managers, want something more structured, and don’t mind cookie-cutter corporate apartments, an apartment may be the better rental option for you.

Prospective condo buyers will want to keep their finances and monthly budget in mind when deciding if they want to rent or buy. While the idea of building equity is appealing, settling down and committing to a mortgage isn’t for everyone. You’ll want to thoughtfully evaluate your ability to make monthly payments and whether you want to stick around an area.

The Takeaway

In the condo vs. apartment comparison, you’ll pay similar costs when renting properties of similar quality. Things get more complex if you’re debating whether to buy a condo or rent an apartment, as there are myriad added costs for condo owners in exchange for the chance to build equity.

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

Why are condos more expensive than apartments?

In general, condos and apartments of comparable quality cost around the same amount to rent. A condo owner, however, will likely face higher monthly costs than an apartment renter, thanks to the added costs that come with owning a property, including mortgage payments, taxes, insurance, and maintenance fees. Over time, the added expense may be offset by the equity built through mortgage payments.

Which retains more value, condos or apartments?

Over the long run, both a condo and an apartment in a co-op building can lose or gain value. Whether your specific property appreciates will depend on local market factors and on upkeep of your unit as well as of the larger complex.

Can I get a loan to buy a condo or co-op apartment?

A qualified buyer can finance a condo with a government-backed or conventional mortgage loan. Getting a loan for buying into a housing cooperative can be more difficult. The buyer is purchasing shares that give them the right to live in the unit — personal property, not real property. That’s one reason that some lenders do not offer financing for co-ops.


Photo credit: iStock/Michael Vi


*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.

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.



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.

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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