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You likely already know it can be wise to save money every month. Whatever your income or age, putting money aside for the future can help you maintain financial stability and achieve your goals.

But how much of your paycheck should you save each month? Financial experts often recommend putting at least 20% of your monthly take-home income into savings for future financial goals, such as buying a home and funding your retirement.

Exactly how much you should save each month, however, will depend on your income, current living expenses and financial obligations, as well as your goals.

Here are some guidelines to help you figure out how much of your income you may want to set aside each month, plus some simple ways to jump start (or build) your savings.

Knowing What You’re Saving For

It can be difficult to know how much money you should save each month without having a sense of what you are saving for. Setting a few financial goals can also help motivate you to save, rather than spend all of your income.

There are some savings goals that can make sense for everyone. If you don’t already have at least three to six-months worth of living expenses stashed in an emergency fund, for example, that can be a good place to start.

Without a solid contingency fund, any financial set-back -– such as a job layoff, large medical bill, or costly home or car repair — can throw you off balance and cause you to rely on high interest credit cards.

Many people will also want to save for retirement. At the very least, savers may want to take advantage of company matches offered in their workplace retirement plan by contributing the maximum amount the company matches.

After emergency savings and retirement, goals may start to look different from person to person. One person may want to save up for a down payment on a home, another may want to save up to start a business, and yet another may be interested in college savings.

How Much to Save Each Month

A rule of thumb that is sometimes used in personal financial planning is a spending/saving breakdown of 50/30/20. Using this guideline, you would spend 50% of your take-home income on essentials (including minimum payments towards debts), 30% on nonessential (or “fun”) spending, and 20% on savings goals, including debt payments beyond the minimum.

To use the 50/30/20 method to determine how much you should save, you can simply calculate 20% of your monthly after-tax pay. For example, if you earn $3,000 each month after taxes, $600 would go towards savings or other short term financial goals.

You may want to keep in mind that your 20% savings goal can include the money you’re saving for retirement. You can determine how much you’re putting toward retirement each month by looking at your pay stub or electronic payment record. If your employer is automatically depositing money into your 401(k), you may be able to put less into savings each month.

While the 50/30/20 can be a helpful guideline, how much you should — and can afford — to save each month will ultimately depend on your individual circumstances, such as your current income, monthly expenses, and future goals.
If the cost of living is high in your area, for example, you may not be able to swing 20% savings each month.

On the other hand, if you make a significant amount more than you need to live on each month, you may want to put away more than 20%, especially if you’re working towards a large short-term savings goal, such as buying a home in the next couple of years.

Recommended: Cost of Living by State Comparison

Where Should You Put Your Savings?

The best account for building savings will depend on what you are saving for.

If you are saving up for retirement, for example, you’ll likely want to use a designated retirement account, like a 401(k) or IRA, since they allow you to contribute pre-tax dollars (which can help lower your annual tax bill).

You may want to keep in mind, however, that there are annual contribution limits to retirement funds.

For an emergency fund or other short-term savings goals (within three to five years), you may want to open a separate savings account, such as a high-yield savings account, money market account, or a checking and savings account. These savings vehicles typically offer more interest than a traditional savings account, yet allow you to easily access your money when you need it.

Easy Ways to Boost Savings

Below are some strategies that can help make it easier to start — and build — your monthly savings.

Automating Savings

One great way to make sure you stick to a money-saving plan is to automate the process. You may want to set up a recurring transfer from your checking into your savings account on the same day each month, perhaps the day after your paycheck clears. Even setting aside just a small amount of money each month now can, little by little, add up to a significant sum in the future.

Putting Spare Change to Work

There are apps that will automatically round-up any amount paid on a credit or debit card and then put that little bit of extra money into savings accounts or even invest it. This “pocket change” can add up over time.

Using Windfalls Wisely

If a lump sum of cash, such as a bonus or monetary gift, comes your way, you may want to consider funneling all or part of it right into savings.

Or, if you get a percentage raise on your salary, you might want to boost your automatic monthly transfer from checking to savings by the same percentage.

Reviewing Your Budget

If you feel like your budget is too tight to save anything at the end of the month, you may want to review your monthly and habitual expenses.

You can do this by combing through your checking and credit card statements and receipts for the past few months. Or, you may want to actually track your spending for a month or two.

You can then come up with a list of spending categories and determine how much you are spending on average for each.

Once you can see exactly where your money is going each month, you may find places where you can fairly easily cut back, such as getting rid of streaming subscriptions you rarely watch, quitting the gym and working out at home, or cooking more and getting take-out less often.

The Takeaway

The right amount to save each month will be unique to you and includes factors such as your financial goals, how much you earn, and how much you spend each month on essential expenses.

One of the most important keys to saving is consistency. No matter how much of your income you choose to set aside each month, depositing small amounts regularly can build to a large sum over time to achieve your goals.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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If you’re in the market for a mortgage, you may be overwhelmed by all the different options — conventional vs. government-backed, fixed vs. adjustable rate, 15-year vs 30-year. Which one is best?

The answer will depend on how much you have to put down on a home, the price of the home you want to buy, your income and credit history, and how long you plan to live in the home. Below, we break down some of the most common types of home mortgages, including how each one works and their pros and cons.

Fixed-Rate vs. Adjustable-Rate Loans

When choosing the best type of mortgage for your needs, it helps to understand the difference between adjustable-rate mortgages and fixed-rate mortgages. Each option has advantages and disadvantages. Here’s a closer look.

	Pros	Cons
Fixed-Rate Mortgage	Your monthly payment is fixed, and therefore predictable.	If rates drop, you have to refinance to get the lower rate.
Adjustable-Rate Mortgage	The initial interest rate is usually lower than a fixed-rate mortgage.	Once the intro period is over, ARM rates adjust, potentially raising your mortgage payment.

Fixed-Rate Mortgage

With a fixed-rate mortgage loan, the interest is exactly that — fixed. No matter what happens to benchmark interest rates or the overall economy, the interest rate will remain the same for the life of the loan. Fixed loans typically come in terms of 15 years or 30 years, though some lenders allow more options.

This type of mortgage can be a good choice if you think rates are going to go up, or if you plan on staying in your home for at least five to seven years and want to avoid any potential for changes to your monthly payments.

Pro: The monthly payment is fixed, and therefore predictable.

Con: If interest rates drop after you take out your loan, you won’t get the lower rate unless you’re able to refinance.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate home loan is the most common type of mortgage and the longest term length available for mortgages.

Monthly payments are generally lower than shorter-term mortgages because the loan is stretched out over a longer term. However, the overall amount of interest you’ll pay is typically higher, since you’re paying interest for a longer period of time. Also, interest rates tend to be higher for 30-year home loans than shorter-term mortgages, since the longer term poses more risk to the lender.

15-Year Fixed-Rate Mortgage

A 15-year loan allows you to build equity more quickly and pay less total interest. Loans with shorter terms also tend to come with lower interest rates, since they pose less risk to the lender.

On the flipside, the shorter term means monthly payments may be much higher than a 30-year mortgage. This type of loan can be a good choice for borrowers who can handle an aggressive repayment schedule and want to save on interest.

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) has an interest rate that fluctuates according to market conditions.

Many ARMs have a fixed-rate period to start and are expressed in two numbers, such as 7/1, 5/1, or 7/6. A 7/1 ARM loan has a fixed rate for seven years; after that, the fixed rate converts to a variable rate. It stays variable for the remaining life of the loan, adjusting every year in line with an index rate. A 7/6 ARM, on the other hand, means that your rate will remain the same for the first seven years and will adjust every six months after that initial period. A 5/1 ARM has a rate that’s fixed for five years and then adjusts every year.

Many ARMs have rate caps, meaning the rate will never exceed a certain number over the life of the loan. If you consider an ARM, you’ll want to be sure you understand exactly how much your rate can increase and how much you could wind up paying after the introductory period expires.

Pro: The initial interest rate of an ARM is usually lower than the rate on a fixed-rate loan. This can make it a good deal for borrowers who expect to sell the property before the rate adjusts.

Con: Even if the loan starts out with a low rate, subsequent rate increases could make this loan more expensive than a fixed-rate loan.

Recommended: First-Time Home Buyer’s Guide

Conventional vs. Government-Insured Loans

Mortgages can also be broken down into two other categories: conventional loans, which are offered by banks or other private lenders, and government-backed loans, which are guaranteed by a government agency. Here’s a breakdown of conventional vs. government-insured loans, including how each works, and their pros and cons.

Conventional Loan

This is the most common type of home loan. Conventional mortgages must meet standards that allow lenders to resell them to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. This is advantageous to lenders (who can make money by selling their loans to GSEs) but means stiffer qualifications for borrowers.

Pro: Down payments can be as low as 3%, though borrowers with down payments under 20% have to pay for private mortgage insurance (PMI).

Con: Conventional loans tend to have stricter requirements for qualification than government-backed loans. You typically need a credit score of at least 620 and a debt-to-income ratio under 36%.

Government-Insured Loan

If you have trouble qualifying for a conventional loan, you may want to look into a government-insured loan. This type of mortgage is insured by a government agency, such as the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA).

FHA Loan

FHA loans are not directly issued from the government but, rather, insured by the FHA. This protects mortgage lenders, since if the borrower becomes unable to repay the loan, the agency has to handle the default. Having that guarantee significantly lowers risk for the lender.

As a result, qualifying for an FHA loan is often less difficult than qualifying for a conventional mortgage. This makes an FHA mortgage a good choice if you have less-than-stellar credit scores or a high debt-to-income (DTI) ratio.

Pro: With a FICO® credit score of 500 to 579, you may be able to put just 10% down on a home; with a score of 580 or higher, you may qualify to put just 3.5% payment.

Con: FHA mortgages require you to purchase FHA mortgage insurance, which is called a mortgage insurance premium (MIP). Depending on the size of your down payment, the insurance lasts for 11 years or the life of the loan.

💡 Quick Tip: Check out our Mortgage Calculator to get a basic estimate of your monthly payment.

VA Loan

The U.S. Department of Veterans Affairs backs home loans for members and veterans of the U.S. military and eligible surviving spouses. Similar to FHA loans, the government doesn’t directly issue these loans; instead, they are processed by private lenders and guaranteed by the VA.

Most VA loans require no down payment. However, you’ll need to pay a VA funding fee unless you are exempt. Although there’s no minimum credit score requirement on the VA side, private lenders may have a minimum in the low to mid 600s.

Pro: You don’t have to put any money down or purchase mortgage insurance.

Con: Only available to veterans, current service members, and eligible spouses.

FHA 203(k)

Got your eye on a fixer-upper? An FHA 203(k) loan allows you to roll the cost of the home as well as the rehab into one loan. Current homeowners can also qualify for an FHA 203(k) loan to refinance their property and fund the costs of an upcoming renovation through a single mortgage.

The generous credit score and down payment rules that make FHA loans appealing for borrowers often apply here, too, though some lenders might require a minimum credit score of 500.

With a standard 203(k), typically used for renovations exceeding $35,000, a U.S. Department of Housing and Urban Development (HUD) consultant must be hired to oversee the project. A streamlined 203(k) loan, on the other hand, allows you to fund a less costly renovation with anyone overseeing the project.

Pro: If you have a credit score of 580 or above, you only need to put down 3.5% on an FHA 203(k) loan.

Con: These loans require you to qualify for the value of the property, plus the costs of planned renovations.

USDA Loan

A USDA loan is a type of mortgage designed to help borrowers who meet certain income limits buy homes in rural areas. The loans are issued through the USDA loan program by the United States Department of Agriculture as part of its rural development program.

Pro: There’s no down payment required, and interest rates tend to be low due to the USDA guarantee.

Con: These loans are limited to areas designated as rural, and borrowers who meet certain income requirements.

Conforming vs. Nonconforming Loans

Conventional loans, which are not backed by the federal government, come in two forms: conforming and non-conforming.

Conforming Loans

Mortgages that conform to the guidelines set by government-backed agencies (such as Fannie Mae and Freddie Mac) are called conforming loans. There are a number of criteria that borrowers must meet to qualify for a conforming loan, including the loan amount.

For 2023, the ceiling for a single-family, conforming home loan is $726,200 in most parts of the U.S. However, there is a higher limit — $1,089,300 — for areas that are considered “high-cost,” a designation based on an area’s median home values.

Typically, conforming loans also require a minimum credit score of 630­ to 650, a DTI ratio no higher than 41%, and a minimum down payment of 3%.

Pro: Conforming loans tend to have lower interest rates and fees than nonconforming loans.

Con: You must meet the qualification criteria, and borrowing amounts may not be sufficient in high-priced areas.

Nonconforming Loans

Nonconforming mortgage loans are loans that don’t meet the requirements for a conforming loan. For example, jumbo loans are nonconforming loans that exceed the maximum loan limit for a conforming loan.

Nonconforming loans aren’t as standardized as conforming loans, so there is more variety of loan types and features to choose from. They also tend to have a faster, more streamlined application process.

Pro: Nonconforming loans are available in higher amounts and can widen your housing options by allowing you to buy in a more expensive area, or a type of home that isn’t eligible for a conforming loan.

Con: These loans tend to have higher interest rates than nonconforming loans.

Reverse Mortgage

A reverse mortgage allows homeowners 62 or older (typically those who have paid off their mortgage) to borrow part of their home equity as income. Unlike a regular mortgage, the homeowner doesn’t make payments to the lender — the lender makes payments to the homeowner. Homeowners who take out a reverse mortgage can still live in their homes. However, the loan must be repaid when the borrower dies, moves out, or sells the home.

Pro: A reverse mortgage can provide additional income during your retirement years and/or help cover the cost of medical expenses or improvements.

Con: If the loan balance exceeds the home’s value at the time of your death or departure from the home, your heirs may need to hand ownership of the home back to the lender.

Jumbo Mortgage

A jumbo loan is a mortgage used to finance a property that is too expensive for a conventional conforming loan. If you need a loan that exceeds the conforming loan limit (typically $726,200), you’ll likely need a jumbo loan.

Jumbo loans are considered riskier for lenders because of their larger amounts and the fact that these loans aren’t guaranteed by any government agency. As a result, qualification criteria tends to be stricter than other types of mortgages. Also, in some cases, rates may be higher.

You can typically find jumbo loans with either a fixed or adjustable rate and with a range of terms.

Pro: Jumbo loans make it possible for buyers to purchase a more expensive property.

Con: You generally need excellent credit to qualify for a jumbo loan.

💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

Interest-Only Mortgage

With an interest-only mortgage, you only make interest payments for a set period, which may be five or seven years. Your principal stays the same during this time. After that initial period ends, you can end the loan by selling or refinancing, or begin to make monthly payments that cover principal and interest.

Pro: The initial monthly payments are usually lower than other mortgages, which may allow you to afford a pricier home.

Con: You won’t build equity as quickly with this loan, since you’re initially only paying back interest.

Recommended: What’s Mortgage Amortization and How Do You Calculate It?

The Takeaway

There are many different types of mortgages, including fixed-rate, variable rate, conforming, nonconforming, conventional, government-backed, jumbo, and reverse mortgages. It’s a good idea to research and compare different loan programs, consult with lenders, and, if needed, seek advice from a mortgage professional to determine the best type of home loan for your specific circumstances.

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 different types of mortgages?

There are several types of mortgages available to homebuyers, each with its own characteristics and requirements. Some of the most common types include:

•  Conventional mortgage This type of mortgage is not insured or guaranteed by a government agency.

•  FHA loan Insured by the Federal Housing Administration (FHA), FHA loans are popular among first-time homebuyers. They offer more lenient credit requirements and allow for a lower down payment (as low as 3.5%).

•  VA loan These loans are available to eligible veterans, active-duty service members, and eligible surviving spouses, and come with favorable rates and terms.

•  USDA Loan Issued by the U.S. Department of Agriculture, these loans are designed for low- and moderate-income homebuyers in rural areas. They offer low interest rates and may require no down payment.

•  Jumbo mortgage A jumbo mortgage is a loan that exceeds the loan limits set by Fannie Mae and Freddie Mac.

•  Fixed-rate mortgage The rate stays the same for the entire life of the mortgage.

•  Adjustable-rate mortgage (ARM) The interest rate is initially fixed for a specific period, then typically adjusts annually based on market conditions.

What are the 4 types of qualified mortgages?

Qualified mortgages are mortgages that meet certain criteria set by the Consumer Financial Protection Bureau (CFPB) to ensure borrowers can afford the loans they obtain. The four main types of qualified mortgages are:

•  General qualified mortgages These mortgages adhere to basic criteria set by the CFPB.

•  Small creditor qualified mortgages These loans have more flexible requirements for small lenders.

•  Balloon payment qualified mortgages These mortgages allow for a balloon payment at the end of the term.

•  Temporary qualified mortgages This type of qualified mortgage provides a transition period for loans that were eligible for purchase or guarantee by Fannie Mae or Freddie Mac but no longer meet those standards.

Which type of home loan is best?

The best type of home loan depends on your financial situation, goals, and preferences.

If you have a significant down payment and strong credit, you might consider a conventional mortgage. If, on the other hand, you have limited funds for a down payment and lower credit scores, you might consider a Federal Housing Administration (FHA) home loan.

VA loans benefit eligible veterans and service members, while USDA loans are for homebuyers in rural areas.

Whether to choose a fixed-rate or adjustable-rate mortgage will depend on your long-term plans and tolerance for risk.

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

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

*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.

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A first-time homebuyer isn’t just someone purchasing a first home. It can be anyone who has not owned a principal residence in the past three years, some single parents, a spouse who has not owned a home, and more.

If the thought of a down payment and closing costs put a chill down your spine, realize that first-time homebuyers often have access to special grants, loans, and programs.

‘First-Time Homebuyer’ Under the Microscope

To get a sense of who qualifies for a mortgage as a first-time homebuyer, let’s take a look at the government’s definition.

The U.S. Department of Housing and Urban Development (HUD) says first-time buyers meet any of these criteria:

•   An individual who has not held ownership in a principal residence during the three-year period ending on the date of the purchase.

•   A single parent who has only owned a home with a former spouse.

•   An individual who is a displaced homemaker (has worked only in the home for a substantial number of years providing unpaid household services for family members) and has only owned a home with a spouse.

•   Both spouses if one spouse is or was a homeowner but the other has not owned a home.

•   A person who has only owned a principal residence that was not permanently attached to a foundation (such as a mobile home when the wheels are in place).

•   An individual who has owned a property that is not in compliance with state, local, or model building codes and that cannot be brought into compliance for less than the cost of constructing a permanent structure.

For conventional (nongovernment) financing through private lenders, Fannie Mae’s criteria are similar.

💡 Recommended: The Complete First-Time Home Buyer Guide

Options for First-Time Homebuyers

First-time homebuyers may not realize that they, like other buyers, may qualify to buy a home with much less than 20% down.

They also have access to first-time homebuyer programs that may ease the credit requirements of homeownership.

Federal Government-Backed Mortgages

When the federal government insures mortgages, the loans pose less of a risk to lenders. This means lenders may offer you a lower interest rate.

There are three government-backed home loan options: FHA loans, USDA loans, and VA loans. In exchange for a low down payment, you’ll pay an upfront and annual mortgage insurance premium for FHA loans, an upfront guarantee fee and annual fee for USDA loans, or a one-time funding fee for VA loans.

FHA Loans

The Federal Housing Administration, part of HUD, insures fixed-rate mortgages issued by approved lenders. On average, more than 80% of FHA-insured mortgages are for first-time homebuyers each year.

If you have a FICO® credit score of 580 or higher, you could get an FHA loan with just 3.5% down. If you have a score between 500 and 579, you may still qualify for a loan with 10% down.

USDA Loans

The U.S. Department of Agriculture offers assistance to buy (or, in some cases, even build) a home in certain rural areas. Your income has to be within a certain percentage of the average median income for the area.

If you qualify, the loan requires no down payment and offers a fixed interest rate.

VA Loans

A mortgage guaranteed in part by the Department of Veterans Affairs requires no down payment and is available for military members, veterans, and certain surviving military spouses.

Although a VA loan does not state a minimum credit score, lenders who make the loan will set their minimum score for the product based on their risk tolerance.

💡 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.

Government-Backed Conventional Mortgages

Fannie Mae and Freddie Mac, government-backed mortgage companies, do not originate home loans. Instead, they buy and guarantee mortgages issued through lenders in the secondary mortgage market.

They make mortgages available that are geared toward lower-income, lower-credit score borrowers.

Freddie Mac’s Home Possible program offers down payment options as low as 3%. There are also sweat equity down payment options and flexible terms.

Fannie Mae’s 97% LTV (loan-to-value) program also offers 3% down payment loans.

A Mortgage for Certain Civil Servants

If you’re a law enforcement officer, firefighter, or EMT working for a federal, state, local, or Indian tribal government agency, or a teacher at a public or private school, the HUD-backed Good Neighbor Next Door Program could be a good fit. It provides 50% off the listing price of a foreclosed home in specific revitalization areas. In turn, you have to commit to living there for 36 months.

Homes are listed on the HUD website each week, and you have to put an offer in within seven days. Only a registered HUD broker can submit a bid for you on a property.

If using an FHA loan to buy a home in the Good Neighbor Next Door Program, the down payment will be $100. If using a VA loan to purchase a house through the program, buyers will receive 100% financing. If using a conventional home loan, the usual down payment requirements stay the same.

State, County, and City Assistance

It isn’t just the federal government that helps to get first-time buyers into homes. State, county, and city governments and nonprofit organizations run many down payment assistance programs.

HUD is the gatekeeper, steering buyers to state and local programs and offering advice from HUD home assistance counselors.

The National Council of State Housing Agencies has a state-by-state list of housing finance agencies, which cater to low- and middle-income households. Contact the agency to learn about the programs it offers and to get answers to housing finance questions.


💡 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 ($766,550 in most places, or $1,149,825 in many high-cost areas). If you have your eye on a pricier property, a jumbo loan could be a good solution.

Using Gift Money

First-time homebuyers might also want to think about seeking down payment and closing cost help from family members.

If you’re using a cash gift, your lender will want a formal gift letter, and the gift cannot be a loan. Home loans backed by Fannie Mae and Freddie Mac only allow down payment gifts from someone related to the borrower. Government-backed loans have looser requirements.

Want to use your 401(k) to make a down payment? You could, but financial advisors frown on the idea. Borrowing from your 401(k) can do damage to your retirement savings.

The Takeaway

First-time homebuyers are in the catbird seat if they don’t have much of a down payment or their credit isn’t stellar. Lots of programs, from local to federal, give first-time homeowners a break.

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

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

*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.

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

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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The increase in online lending since the 2000s has made unsecured personal loans more accessible to people seeking funding for things like home improvements, debt consolidation, or vacations, just to name a few.

Online lenders have been embraced particularly by Millennials and GenZers, generations that are no strangers to technology — financial technology in this case — and disrupting traditional industries. For prospective borrowers of any age group, the convenience of applying for a personal loan online can be an advantage over a more traditional process.

Read on to learn some of the key advantages of getting a personal loan from an online lender, as well as when a traditional bank might be a better option.

Convenience

The convenience factor is one of the biggest advantages of getting an online personal loan. Younger generations of consumers might be drawn to a process that incorporates the technology they’ve grown up with and are comfortable using. But online lenders often have a streamlined application process that might appeal to people of any generation who are comfortable with technology.

Online loan applications can be completed from anywhere a prospective borrower has an internet connection, preferably secure. In addition, online lending websites often have thorough lists of Frequently Asked Questions (FAQs) to give consumers as much information as possible without the need to travel to a brick-and-mortar bank branch.


💡 Quick Tip: SoFi lets you apply for a personal loan online in 60 seconds, without affecting your credit score.

Competitive Rates

The lack of brick-and-mortar locations is a reason that online lenders can often offer competitive rates on personal loans. Without physical bank branches to maintain, their overhead is likely to be less than a traditional bank’s.

Some online lenders, however, may try to generate profits by charging fees. When shopping around for personal loan rates, you’ll want to be sure to compare annual percentage rates (APRs), which includes any fees. This allows you to compare loans apples to apples.

Recommended: APY vs Interest Rate

Quick Turnaround

Some online lenders are able to offer preapproval to prospective borrowers with just a soft inquiry on their credit report that won’t affect their credit score. One benefit of knowing quickly what rate might be offered is being able to compare rates among multiple lenders to find the one that will be the best fit.

After the application and loan approval, some online lenders distribute loan funds in as quickly as a few days. For people who need access to funds quickly, this could be the determining factor in choosing a lender.

Recommended: What to Know Before You Borrow Money Online

Differing Criteria

Someone who has not built a credit history might have difficulty being approved for a personal loan. Some online lenders, however, are willing to look at factors other than credit score in determining approval for a personal loan and may have more flexible qualification criteria than a traditional bank.

There are also some online lenders that cater specifically to underserved populations.

Recommended: Typical Personal Loan Requirements Needed for Approval

What About Traditional Banks?

Even though online lenders are well established in the financial world, traditional banks still make sense for some people or some financial needs.

For people who prefer working with a lender in person, a traditional bank or a credit union can be a good choice. If there is already a relationship in place with a particular financial institution, it may be advantageous to build on that and get a personal loan rate quote from that lender.

In some situations, a personal line of credit (LOC) might be a better option than a personal loan. Though online lenders are beginning to offer LOCs, they are more likely to be offered by banks or credit unions.


💡 Quick Tip: Choosing a personal loan with a fixed interest rate makes payments easy to track and gives you a target payoff date to work toward.

From Disrupting to Redefining

Online lenders and traditional financial institutions are realizing that they can meet the needs of more consumers if they work together.

Today’s modes of banking may be less about disrupting the status quo of lending and more about finding a new definition of banking as a whole. Those same Millennials and GenZers who might have started a disruption in the financial industry may also be the ones to usher in new ways of doing business.

The Takeaway

If you’re thinking about taking out a personal loan, the great news is that you have plenty of lenders to choose from, including traditional banks, credit unions, and online lenders.

Online personal loans come with certain advantages — they make it easy to rate shop, and typically offer a fast and convenient application process. Online lenders also tend to be faster to fund than traditional institutions. However, you may want to go with a local bank or credit union if you have an existing relationship there, or you want to have the option of in-person customer service.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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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.

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Homeownership has long been a part of the American dream, and it opens the door to benefits like the mortgage interest deduction for those who itemize deductions on their taxes.

Itemizing typically makes sense only if itemized deductions on a primary and second home total more than the standard deduction, which nearly doubled in 2018.

Here’s what you need to know about the mortgage interest deduction.

What Is the Mortgage Interest Deduction?

The mortgage interest deduction allows itemizers to count interest they pay on a loan related to building, purchasing, or improving a primary home against taxable income, lowering the amount of taxes owed.

The tax deduction also applies if you pay interest on a condominium, cooperative, mobile home, boat, or recreational vehicle used as a residence. The deduction can also be taken on loans for second homes, as long as it stays within the limits.

States with an income tax may also allow homeowners to claim the mortgage interest deduction on their state tax returns, whether or not they itemize on their federal returns.

What Are the Rules and Limits?

The passage of the Tax Cuts and Jobs Act of 2017 was a game-changer for the mortgage interest deduction. Starting in 2018 and set to last through 2025, the law greatly increased the standard deduction and eliminated or restricted many itemized deductions.

For the 2022 tax year, the standard deduction is $25,900 for married couples filing jointly and $12,950 for single people and married people filing separately. For 2023, the standard deduction is $27,700 for married couples filing jointly and $13,850 for single people and married people filing separately.

If you itemize deductions, you’re good to go and can deduct the interest. There’s further good news, as you may also be able to deduct interest on a home equity loan or line of credit, as long as it was used to buy, build, or substantially improve your home.

The loan must be secured by the taxpayer’s main home or second home and meet other requirements. For tax purposes, a second home not used for income is treated much like one’s primary home. It’s a home you live in some of the time.

The IRS considers a second home that’s rented some of the time one that you use for more than 14 days, or more than 10% of the number of days you rent it out (whichever number of days is larger). If you use the home you rent out for fewer than the required number of days, it is considered a rental property—one that you never live in, and not eligible for the mortgage interest deduction.

Generally, your interest-only mortgage is 100% deductible, as long as the total debt meets the limits.

According to the Internal Revenue Service, you can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of debt. Higher limitations ($1 million, or $500,000 if married filing separately) apply if you are deducting mortgage interest from debt incurred before Dec. 16, 2017.

You can’t deduct home mortgage interest unless the following conditions are met:

•   You must file Form 1040 or 1040-SR and itemize deductions on Schedule A (Form 1040).
•   The mortgage must be a secured debt on a qualified home in which you have an ownership interest.

Simply put, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you can’t pay the debt, your home can then serve as payment to the lender to satisfy the debt.

A qualified home is your main home or second home. The home could be a house, condo, co-op, mobile home, house trailer, or a houseboat. It must have sleeping, cooking, and toilet facilities.

Know that the interest you pay on a mortgage on a home other than your main or second home may be deductible if the loan proceeds were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.


💡 Quick Tip: Don’t overpay for your mortgage. Get your dream home or investment property and a great rate with SoFi Mortgage Loans.

How Much Can I Deduct?

No doubt you want the answer to that question. In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.

The IRS says that if all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category.)

1. Mortgages you took out on or before Oct. 13, 1987 (called grandfathered debt).

2. Mortgages you (or your spouse if married filing jointly) took out after Oct. 13, 1987, and prior to Dec. 16, 2017, to buy, build, or substantially improve your home, but only if throughout 2020 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).

(There is an exception. If you entered into a written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and you purchased the residence before April 1, 2018, you are considered to have incurred the home acquisition debt prior to Dec. 16, 2017.)

3. Mortgages you (or your spouse if married filing jointly) took out after Dec. 15, 2017, to buy, build, or substantially improve your home, but only if throughout 2020 these mortgages plus any grandfathered debt totaled $750,000 or less ($375,000 or less if married filing separately).

The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.

What Are Special Circumstances?

Just like you need to understand your home loan options, you need to know the special situations where the IRS says you might or might not qualify for the mortgage interest deduction.

You can deduct these items as home mortgage interest:
•   A late payment charge if it wasn’t for a specific service performed in connection with your mortgage loan.
•   A mortgage prepayment penalty, provided the penalty wasn’t for a specific service performed or cost incurred in connection with your mortgage loan.

Recommended: Guide to Buying, Selling, and Updating Your Home

Is Everything Deductible?

The government is only so generous, and there are many costs associated with homeownership. Some of them are not tax deductible under the mortgage interest deduction, like homeowners insurance premiums.

One caveat: You might be able to write off a portion of insurance, as well as utilities, repairs, and maintenance, if you have a home office and deduct those expenses on Schedule C.

Also not on the list for inclusion in the mortgage interest deduction are title searches, moving expenses, and reverse mortgage interest. Because interest on a reverse mortgage is due when the property sells, it isn’t tax deductible.


💡 Quick Tip: Have you improved your credit score since you made your home purchase? Home loan refinancing with SoFi could get you a competitive interest rate with lower payments.

How to Claim the Mortgage Interest Deduction

An itemizer will file Schedule A, which is part of the standard IRS 1040 tax form. Your mortgage lender should send you an IRS 1098 tax form, which reports the amount of interest you paid during the tax year. Your loan servicer should also provide this tax form online.

Using your 1098 tax form, find the amount of interest paid and enter this on Line 8 of Schedule A on your tax return. It’s not a heavy lift but gets a tad more complicated if you earn income from your property. If you own a vacation home that you rent out much of the time, you’ll need to use Schedule E.

Furthermore, if you’re self-employed and write off business expenses, you’ll need to enter interest payments on Schedule C.

The Takeaway

You can take the mortgage interest deduction if you itemize deductions on your taxes. Keep in mind that it’s typically only worth taking if the write-offs exceed the standard deduction.

The mortgage interest deduction, though, can be a bonus of sorts, especially if you’re a homeowner with a second home.

As with all matters that affect your taxes, you’ll want to consult with your financial advisor about claiming the deduction.

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

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

*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.

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

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.

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.

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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