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Most businesses report information to the credit bureaus every 30 to 45 days. Each on-time payment you make may barely affect your score, while a missed payment can have a significant effect.

But how often does your credit score update? Let’s find that answer, and learn how to keep an eye on your credit history and credit score.

When Do Credit Reports Update?

Whenever consumers take some sort of action relating to their credit, their score — usually a number between 300 and 850 — will fluctuate.

For instance, if they apply for a loan or miss a credit card payment, their score could change.

There is no set date for a credit score update because a lender or creditor may send information to the three main credit bureaus at different times: Experian one day, Equifax five days after that, and TransUnion a week later.
An update, though, will occur at least every 45 days.

Rather than constantly checking for updates, you might want to focus on long-term goals that can help you build credit, like paying off debt, always sending payments on time, and ensuring that your scores are going in an upward direction.

Need help managing your finances? With an online budget planner, you can set budgets, organize spending, and spot upcoming bills.

Recommended: Which Credit Bureau Is Used Most?

What Is a Good Credit Score?

Lenders most often use FICO® Score, but the credit bureaus introduced the VantageScore® in 2006 to provide a score that was more consistent among the three credit agencies.

This is how the FICO Score and the latest VantageScore models break down:

People with high scores typically have access to higher lines of credit and lower interest rates. Those with low credit scores may not be approved for certain credit cards and loans. And if approved for, say, a mortgage, they will usually pay a much higher mortgage interest rate.

How to Check a Credit Report

Under federal law, consumers are entitled to one free copy of their credit report every week from each of the main credit reporting agencies: TransUnion, Experian, and Equifax.

AnnualCreditReport.com is the only authorized website for free credit reports, according to the Federal Trade Commission.
Consumers can also call 1-877-322-8228 and provide their name, address, Social Security number, and date of birth to verify their identity.

If you want to check your credit history more frequently, you can ask one or all three credit reporting bureaus for another copy. They may charge you a small fee for the service.

Why check your credit report periodically? Mainly:

•   To make sure the information is accurate and up to date before you apply for a home or car loan, buy insurance, or apply for a job.

•   To help guard against identity theft.

Recommended: How to Read A Credit Report

How to Check a Credit Score

The free credit reports do not include your credit score — or more accurately, scores. Your credit score from each of the credit bureaus will vary based on the information each has. Lenders also use slightly different credit scores for different kinds of loans.

How to get your credit scores then? Here are a few ways:

•   Buy a score directly from the credit reporting companies or from MyFICO.com.

•   Look at a loan statement or a credit card statement. Some financial companies provide credit scores for customers as a perk.

•   Use a credit score checker. Some services give consumers access to their credit scores but charge for premium services like checking a score daily. Other sites may require that you sign up for a credit monitoring service with a monthly subscription fee in order to get your “free” score.

•   Sign up for a money tracker app like the one from SoFi. It provides free weekly updates on your credit score and tracks all of your money in one place.

When signing up for credit score checking websites, it’s important for consumers to look at the terms of service and ensure they’re not being charged for premium services they do not want.

Also, it’s best to avoid an “educational” credit score vs. a score that a lender would use. For some, there will be a meaningful difference, according to the Consumer Financial Protection Bureau.

What Makes Up a Credit Score?

Learning about what factors make up a credit score can help consumers raise their scores. Main factors that contribute to the score include:

Payment History

Payment history is the most important factor when calculating a score, so it’s critical to always repay debts on time.

Credit Utilization

The credit utilization ratio is the amount that is owed in relation to how much credit a person has overall. Keeping your credit utilization ratio below 30% is commonly recommended.

Length of Credit History

For the length of the credit history, consumers can increase their score by not closing cards. The longer someone’s credit history is, the better.

New Credit

Applying for a new credit card and loan that requires a hard inquiry could ding your credit score. But rest assured, the drop is temporary. It’s multiple hard inquiries on a credit report in a short period that can cause damage. Then again, if someone is shopping for a mortgage or auto loan, both FICO and VantageScore account for multiple hard inquiries in a grace period of 14 to 45 days.

Credit Mix

Credit mix refers to credit cards, student loans, auto loans, personal loans, and mortgages. By having a mix, consumers show that they can manage all kinds of debt.

Why Credit Scores Matter

Having a high credit score can help consumers in a number of scenarios. For starters, it can help consumers qualify for better interest rates, which in turn can lower the cost of borrowing.

Consumers with a strong credit score can often reach their financial goals quicker and utilize better products. For example, they may get approved for a credit card that offers perks like bonus travel rewards or cash-back rewards. They might also be able to use a card with a 0% introductory APR or 0% balance transfer rate for a certain period.

But the benefits extend beyond borrowing. People with a high score may be able to rent a better apartment or home since landlords often check prospective tenants’ credit. They may also gain access to better car insurance rates and be able to avoid paying deposits to utility companies and cellphone providers.

The Takeaway

How often does your credit score update? All the time, really, but once every 30 to 45 days is a good barometer. While it can be tempting to constantly check your score — especially if you’re getting ready to make a major purchase — you may instead want to focus on strategies that build up your credit. Some steps include paying bills on time, paying down revolving debt, and keeping older accounts open.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

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

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.

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.

SORL-Q225-012

Underwriters are a bit like jurors: They soberly weigh the evidence and render a verdict. Unlike jurors, underwriters sometimes reach out to those they’re, well, judging to obtain additional information, clarify a matter, or otherwise help the case for mortgage approval.

If the underwriter finds that you’re fiscally fit enough to take on a mortgage and that the amount you want to borrow is a manageable size, you’re on your way to a home purchase. So you want to put your best foot forward where the underwriter is concerned. By learning about underwriting, you’ll be prepared for the document-gathering and hurdles ahead.

What Is Mortgage Underwriting?

Underwriters protect a bank, credit union, or mortgage company by making sure that they only give loan approval to aspiring homeowners who have a good chance of paying the lender back.

If you’re wondering what is the underwriting process, here are some of an underwriter’s tasks:

• •   Verify documents and financial information, and make sure that there’s enough savings to supplement an applicant’s income or contribute toward the down payment.
• •   Check an applicant’s credit score and history, and note any bankruptcies, late payments, significant debts, or other red flags.
• •   Calculate the debt-to-income ratio by adding up monthly debt payments and dividing that number by monthly pretax income.
• •   Request additional documents and ask questions if necessary. For example, if a homebuyer has had more than one job over the past year and their income isn’t consistent, an underwriter may want to see more assets.

5 Steps of the Mortgage Underwriting Process

The mortgage-seeking journey is a winding path that eventually arrives at the underwriter. Automated underwriting may approve your loan application, though a human underwriter will verify your application and documentation. If the software refers your application to manual underwriting, that’s usually a slower process.

Here are common steps leading to underwriting:

1. Explore Your Budget

Prequalifying for a mortgage is a quick move that will provide a ballpark budget for your home purchase, based on self-reported financial info. And you can use a home affordability calculator to get a feel for your top price.

Think, too, about lending questions you’ll have during the mortgage process.

2. Get Preapproved for a Loan

Shop around for the best deal and best-fitting loan with a mortgage broker or direct lender. This is the time to submit documentation of your income, employment, assets, and debts and allow a hard pull of your credit score. What credit score is needed to buy a house? It depends on whether you plan to use a conventional or government-backed mortgage loan (an FHA loan is more lenient).

A mortgage preapproval letter, often good for 30-90 days, indicates the lender’s willingness to lend you a particular amount at a tentative or locked interest rate. A preapproval letter also lets you act quickly in a seller’s market.

3. Find Your Home

Once you find a home that meets your needs, you’ll need to agree on a price. Ideally, it should be within the amount you’ve budgeted and been preapproved for.

4. Apply for the Loan

You may choose one of the lenders that preapproved you, or another lender, to apply for the mortgage. You’ll receive a loan estimate within three business days from each lender you apply with.

If you go with one of the former, you’ll have already submitted documents in order to get preapproved. Still, the lender will likely ask for further documentation now that you’re ready to act on a purchase and take another look at your credit.

5. Wait for the Underwriting Verdict

A loan processor will confirm your information, and then it’s time for the underwriter to review your credit scores and history, employment history, income, debts, assets, and requested mortgage amount.

The underwriter will order an appraisal of the chosen property and get a copy of the title insurance, which shows that there are no liens or judgments. Finally, the underwriter will consider your down payment.

Then comes the decision on your mortgage application: approved, suspended (more documentation is needed), or denied. How long does underwriting take? The verdict could come in as little as a few days.

Required Information for Underwriting

Lenders are going to request a lot of documents from mortgage loan applicants:

• •   Income verification: The lender will want to see W-2s from the past two years, your two most recent bank statements, and your two most recent pay stubs. If you’re self-employed, you’ll need documentation of stable work and payments and ideally have a business website. You’ll typically need to show evidence of at least two years of self-employment income in the same field.
• •   Any additional income: Pension, Social Security, alimony, dividends, and the like all count.
• •   Proof of assets: This can include checking and savings accounts, real estate you own, retirement savings, and personal property. A lender might want to see that a down payment and closing costs have been in your account for a while.
• •   Debts: Your debt-to-income ratio matters greatly, so list all monthly debt payments, each creditor’s name and address, account numbers, loan balances, and minimum payment amounts.
• •   Gift letter: If you’ve received money from a family member or another person to put toward your home purchase, the lender will request a gift letter for the mortgage and proof of that funding in your account.
• •   Rent payments: If you’re currently renting, you’ll likely need to show evidence of payments for the past 12 months and give contact information for landlords for two years.

Recommended: Valuable Tips for First-Time Homebuyers

How Long Does Underwriting Take?

Underwriting may take from a couple of days to more than a week. It all depends on how complicated someone’s finances are and how busy an underwriter is. Thankfully, underwriters typically do everything online these days, so you can upload documents to a website or simply email them.

Can You Speed Up the Mortgage Underwriting Process?

Most of the methods used to speed up the underwriting process aren’t in the hands of the borrower but rather methods lenders can use to accelerate their review. An applicant can help ensure an efficient underwriting process by making sure they submit all the requested information and documents the first time around, thereby lessening the likelihood an underwriter will have questions.

How You Can Improve Your Chance of Being Approved

Before you try to get a mortgage, you can take a number of steps to improve your chances of getting approved.

• •   Lighten the debt load: It’s critical to pay off as much debt as possible and to try to keep your credit utilization ratio below 30%, though some lenders like to see a ratio below 25%. You can pay off debt faster by making a budget (and sticking to it), using cash instead of credit cards to make purchases, and negotiating interest rates with creditors.
• •   Look at credit reports: You should also scour your credit reports and fix any mistakes so that your score is as high as possible. Federal law guarantees the right to access credit reports from each of the three major credit bureaus annually for free. The reports show only credit history, not credit scores. There are ways to monitor your credit scores and track your money at no cost.
• •   Attempt to boost income: You may want to apply for higher-paying jobs or get to know the benefits of a side hustle so you can save more money.
• •   Ask for a gift or loan partner: You could also ask a family member for a gift to put toward the down payment, or you could ask a relative with a stable credit history and income if they would apply for the loan as a co-borrower or cosigner.

With an underwriter extending a hand, you can find a solution that leads to approval.

The Takeaway

Ready to apply for a mortgage? Prepare for a probing look at your private life — the financial one — by an underwriter, who’s gauging the risk of lending you a bundle of money. The underwriter looks at a homebuyer’s finances and history, the loan amount, and the chosen property and renders a verdict.

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.

FAQ

How long does it take for the mortgage underwriter to make a decision?

Underwriting can take anywhere from a couple days to a few weeks, depending in part on the complexity of a mortgage applicant’s financial situation and how thorough applicants are in submitting requested documents.

Is underwriting the last step before closing?

Not quite. After the underwriter signs off on the loan, it’s likely that your lender will want to do a final verification of your employment status, credit score, income, or all of the above. You’ll then be sent closing documents to review, and you’ll need to arrange payment of the closing costs, usually via a cashier’s check or bank transfer. At that point, you should be headed to a closing.

How often do underwriters deny loans?

About one in 10 loan applications are denied, according to the Consumer Finance Protection Bureau. Denials are less common for conventional loan applicants than for those applying for FHA loans. Denial rates tend to be higher for refinance applicants than for home purchasers.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.

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.

SOHL-Q126-266

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 total more than the standard deduction. Let’s get into the details about itemizing and other steps you can take to benefit from 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 or second home against taxable income, reducing the amount of federal income 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 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, the law greatly increased the standard deduction and eliminated or restricted many itemized deductions.

For the 2026 tax year (taxes filed in 2027), the standard deduction is $32,200 for married couples filing jointly and $16,100 for single people and married people filing separately. If you add up all your potential deductions (including mortgage interest) and the total doesn’t exceed the standard deduction, there may be no points in itemizing.

But if you itemize deductions, you’re good to go and can deduct your mortgage interest. There’s further good news: 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 home equity loan or HELOC must be secured by the taxpayer’s main home or second home and meet other requirements. For tax purposes, a second home is one not used for income that is treated much like the owner’s primary home. It’s a home you live in some of the time.

If you rent out your second home, it is considered a residence if you use it for your own purposes for more than 14 days, or for 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. It isn’t eligible for the mortgage interest deduction, but it may be eligible for other deductions related to maintaining the property as a business.

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 of debt ($375,000 if married filing separately). 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.

Many homeowners pay for mortgage insurance on home loans, whether their loans are issued by banks or backed by the U.S. government. Starting with the 2026 tax year, these mortgage insurance costs are also deductible. (The last time these costs were deductible, in the 2021 tax year, the average deduction was more than $2,000, so this change could be a boon to some taxpayers.)

💡 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?

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 the tax year 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 the tax year 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.

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 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 have one or more mortgages and itemize deductions on your taxes. Keep in mind that it’s typically only worth taking if the write-offs you qualify for exceed the standard deduction.

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.

FAQ

Do you get a bigger tax refund if you have a mortgage?

Having a mortgage won’t necessarily help your taxes, though it might. When you have a mortgage, you may be able to deduct the interest you pay on that mortgage if you itemize on your federal income tax return. However, for itemizing to be worthwhile, your combined items would have to exceed the amount of the standard deduction, and your mortgage interest deduction, even in combination with other potential deductions, may not reach that threshold.

Is mortgage interest 100% deductible?

For loans taken out before December 16, 2017, qualifying mortgage interest may be deductible up to interest on a loan of $1,000,000. For loans on or after that date, the limit is up to interest on a loan amount of $750,000. The exception is that if you signed a legally binding mortgage contract on or before December 15, 2017, with the intention of closing by January 1, 2018, you can also deduct up to $1,000,000 (as long as you closed by April 1, 2018).

Can I deduct mortgage interest if I take the standard deduction?

You can’t deduct mortgage interest if you take the standard deduction. If you want to deduct your mortgage interest, you must itemize your federal income tax and file a Schedule A.

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.

SOHL-Q126-149

Borrowing money from family members (or lending it to them) can be risky. Though all debt is chancy, family loans pose different risks.

While family lenders don’t have to worry about pulling (or affecting) anyone’s credit score, private loans may put a strain on otherwise strong relationships. Depending on the loan amount, there may also be tax implications to consider.

That said, there are ways to thoughtfully issue and receive family loans. Here are our best tips for lending with family and keeping your relationships intact.

What Are Family Loans?

Family loans are those given and received within a family group, rather than in a typical lending situation, such as a bank or credit union, or even a payday lender.

Someone who may not qualify for a traditional loan might be inclined to ask a family member for a loan. A family loan can be in both parties’ interests. For example, the borrower might receive a better interest rate than they would from a bank, and the lender might realize a higher interest rate than they would from a savings account.

Reasons someone might ask a family member for a loan are similar to those for considering a personal loan: They might need cash for emergency medical expenses, unexpected home repairs, or adoption or fertility treatment costs.

💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

How Do Family Loans Work?

At a basic level, family loans work similarly to traditional loans: One person requests a loan, and another approves it. While that’s an oversimplification, the concept is the same. There is usually less paperwork involved in a family loan, with no application or credit check necessary, although experts recommend a formal contract detailing each party’s rights and responsibilities.

Terms for the Lender to Include in a Family Loan

•   Amount loaned

•   Interest rate, if the lender charges interest

•   Payment amount (often monthly)

•   Penalties for non-payment

Terms for the Borrower to Include in a Family Loan

•   Amortization schedule, with principal and interest amounts clearly stated

•   Ability to pay the loan off early without penalty

•   Periods of payment suspension in cases of hardship

Risks and Benefits of Family Loans

There are risks and benefits to family loans, no matter which role you’re assuming. However, while both the borrower and lender may put a strain on the family relationship involved, the lender is likely to bear the greater financial risk — after all, it can be difficult to recoup your losses when you have no official financial authority.

Risks of Family Loans

One of the biggest dangers of family loan arrangements is the potential for conflict within the relationship. People tend to have strong emotions tied to money. However, some risks lie solely with the borrower or lender.

Risks for the Borrower

•   The relationship may be endangered if the loan repayment plan falls through.

•   Although avoiding a credit check — and possible negative credit consequences — is a plus, family loans also fail to help borrowers build their credit history since they’re not reported to credit bureaus.

Risks for the Lender

•   The relationship may be in jeopardy if the loan repayment plan falls through, which puts the lender into a particularly tricky situation if they need the cash back for their own finances.

•   It’s easy for family lenders to lose their money outright if the borrower constantly defers to an IOU.

•   It can be difficult to recoup losses or enforce any substantial consequences for borrowers who go into default since family lenders don’t have any financial authority or backing.

•   If the loan is interest-free and for an amount in excess of the IRS gift tax exclusion, it may trigger the need to file a gift tax return (and potentially pay taxes on the gift).

Benefits of Family Loans

Despite the risks, family loans do have some attractive qualities.

Benefits for the Borrower

•   Family loans present a potentially low-cost alternative to traditional credit options. Family lenders usually don’t assess fees and may not charge interest.

•   Family loans can carry much easier approval standards than their traditional counterparts. At a financial institution, borrowers are subject to credit checks, employment history verification, income verification, and more. A family member is unlikely to run those checks.

•   Family loans often employ more flexible repayment standards than traditional loans do, and family lenders may be more lenient if the borrower faces extenuating circumstances that make it difficult to make payments.

•   Failure to pay private family loans promptly — or at all — won’t impact the borrower’s credit score the way such behavior would with a traditional loan.

Benefits for the Lender

•   It can be rewarding to help out a family member in need, particularly if they’re putting the money toward a major life goal such as home ownership.

•   If the lender chooses to charge interest on the loan, they can earn interest as the borrower repays the loan.

Tax Implications of Family Loans

It may be surprising to learn that loaning money to a family member could be consequential enough to land on the IRS’s radar.

Fortunately, most family loans fall outside the IRS’s purview. It’s only when they exceed IRS-defined amounts and are interest-free that lenders must report them on their tax returns.

If a family lender offers an interest-free loan to a family borrower, the IRS still treats the transaction as a loan and assumes the interest that should have been charged counts as a gift to the recipient. The government publishes minimum interest rates every month.

That’s no big deal if the loan is for, say, $300. But if the unpaid interest — or unpaid loan balance — exceeds the annual gift-giving exclusion (which is $19,000 ($38,000 for married couples) for 2026), the lender might be responsible for filing a gift tax return and potentially paying taxes on the gift.

The IRS might also count the should-be (imputed) interest toward the lender’s gross income, even if they don’t charge or receive interest. Again, this isn’t a big deal on loans of just a few hundred dollars, but a large enough loan could impact the lender’s finances.

Making a Family Loan Legitimate for Tax Purposes

The main thing that makes a family loan legitimate to the IRS is a family loan agreement that specifies repayment terms. If an agreement is not in place, the agency may treat it as a gift rather than a loan.

The federal government sets minimum interest rates (as noted above) that lenders can charge on private loans, such as family loans. If the lender charges less than the minimum interest rate, the IRS may assess taxes on any unpaid interest that is deemed payable.

Keeping records of payments made will also show the IRS that the lender was tracking the debt and that there is an expectation of repayment.

Recommended: Paying Taxes on Personal Loans

Tips to Successfully Borrow From or Lend Money to Family

If you’re considering lending money to or borrowing money from a family member, adding some structure to your loan can help minimize risks while still allowing everyone involved to reap the benefits.

Planning Your Family Loan-Out

A family loan frequently takes place in a single, impromptu transaction: The borrower asks for some money, and the lender gives it.

A better idea is to make a concrete plan together that specifies all the loan’s terms, such as repayment installments and timing. Lenders might want to consider charging interest, especially on large loans, due to the tax implications outlined above. Even a low family loan interest rate can motivate a borrower to take repayment seriously.

Recommended: What Happens If You Default on a Personal Loan?

Making a Family Loan Official

Clear communication and boundary-setting skills make pulling off a family loan a positive experience for all involved, and oftentimes, the best way to achieve those goals is to write things down.

Drafting a formal money-lending contract also makes your loan official in the eyes of the IRS, which can help prevent it from being classified as a gift for tax purposes.

Terms to incorporate in your family loan agreement include:

•   The amount loaned

•   The loan’s repayment terms, such as frequency and amount, as well as a due date for when the borrower must repay the loan in full

•   The loan’s interest rate and fees, if any (for instance, the lender may decide to charge late fees if the loan repayment terms are not honored)

•   Clauses concerning what happens if the loan is repaid early, such as a prepayment penalty, or what happens if the borrower goes into default for any reason.

Family Loans vs Gifts

If a family lender has the financial ability and willingness to make a monetary gift rather than a loan, they can do so without tax implications for amounts of up to $19,000 in 2026.

There are various reasons someone might choose to give a gift rather than make a loan, or vice versa.

Alternatives to Family Loans

If all these caveats and warnings make family loans sound like a less-than-prudent idea, consider alternatives before asking family members for a loan. Remember, if a family member asks you to borrow money, you’re allowed to say no and steer them in a different direction.

Obviously, the ideal financial strategy for making a big purchase is to save money so you don’t have to go into debt. Although this isn’t always possible or realistic, it might be worth taking a second look at your budget, working on a promotion, or starting a side hustle to generate cash.

Unsecured personal loans are available from certain banks and financial institutions, and you can use them to fund a wide variety of expenses upfront. Of course, these may come with higher interest rates and more stringent qualification requirements than family loans.

You might also consider asking a family member to cosign on a loan with you instead of loaning you the money. They would be responsible for making the loan payments if you, the primary borrower, default, but they wouldn’t have to immediately withdraw money from their own bank account to help you.

If you need to borrow money for business purposes, a small business loan may be an option. The Small Business Administration is an excellent resource for business loans. The agency works with lenders to help small business owners find funding for a wide range of amounts and terms, with competitive interest rates.

💡 Quick Tip: Generally, the larger the personal loan, the greater the lender’s risk and the higher the interest rate. As a result, one way to lower your interest rate is to try downsizing your loan amount.

The Takeaway

While borrowing or lending money to a family member can be tempting, it can have long-lasting effects on interpersonal relationships and the lender’s finances. Drafting a structured family loan agreement can help, but you may also want to explore a traditional personal loan from a bank, credit union, or online lender.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is a loan from a family member called?

A loan from a family member is often called a family loan, an intra-family loan, or a friends-and-family loan.

Can family loans help your credit?

Since a family member is not likely to formally check your credit report or provide payment information to the credit bureaus, a family loan probably won’t help (or hurt) your credit.

Are family loans considered debt?

Yes, a loan from a family member is considered debt, but it’s unlikely to be reflected on your credit report. For tax purposes, a family loan is treated as debt if it meets certain criteria.

Photo credit: iStock/Ridofranz

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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.

SOPL-Q126-028

Being self-employed offers many perks, including freedom and flexibility. What it doesn’t offer is an employer-sponsored retirement plan. But when you don’t have access to a 401(k) at work, opening a solo 401(k) can make it easier to stay on track with retirement planning.

Before you establish a solo 401(k) for yourself, it’s important to understand how these plans work and the pros and cons involved.

What Is a Solo 401(k)?

A solo 401(k) is a type of 401(k) that’s designed specifically with self-employed individuals in mind. This retirement savings option follows many of the same rules as workplace 401(k) plans in terms of annual contribution limits, tax treatment, and withdrawals. But it’s tailored to individuals who run a business solo or only employ their spouses.

It’s one of several self-employed retirement options you might consider when planning a long-term financial strategy.

Definition and Overview

A solo 401(k) is a tax-advantaged retirement account that’s for self-employed individuals and business owners who have zero employees, or no employees other than their spouse. This type of 401(k) plan is also known by a few other names:

•   Solo-k

•   Uni-k

•   One-participant plan

Traditional solo 401(k) contributions are made using pre-tax dollars. However, it’s possible to open a Roth solo 401(k) instead. In the case of a Roth solo 401(k), you’d make contributions using after-tax dollars and be able to withdraw the money tax-free in retirement.

A self-employed 401(k) plan works much the same as a regular 401(k). For instance, you may be able to take loans from your savings if needed. Catch-up contributions are also allowed. The biggest difference is that there is no matching contribution from an outside employer.

You can start investing in a solo 401(k) for yourself through an online brokerage. There’s some paperwork you’ll need to fill out to get the process started, but once your account is open you can make contributions year-round.

At the end of the year, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if the account has $250,000 or more in assets.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Contribution Limits in Solo 401(k) Plans

Much like workplace 401(k)s, there are annual contribution limits that apply to solo 401(k) plans.

The IRS caps total contributions to a solo 401(k) account at $70,000 for 2025 and $72,000 for 2026 That doesn’t include catch-up contributions for those age 50 and over.

As both the employee and employer of your own business, you can contribute both elective salary deferrals and employer nonelective contributions (you are both the employer and the employee in this scenario). Each has different contribution caps.

Annual Contribution Limits

As an employee, you can contribute up to 100% of your earned income up to the annual contribution limit: $23,500 in 2025 and $24,500 in 2026, plus an additional $7,500 for those age 50+ in elective salary deferrals in 2025 and $8,000 in 2026. In 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500 and $8,000 respectively.

Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their catch-up contributions into a Roth solo 401(k) account. With Roths, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

In addition, you can make employer nonelective contributions. These come directly from the “employer” (aka you) and are not deducted from the employee’s (your) salary. As an employer, you can contribute up to 25% of your self-employment income (business income – ½ self-employment tax and elective salary deferrals), in pre-tax dollars.

Setting Up a Solo 401(k) Plan

If you’re interested in setting up a solo 401(k) for yourself, you can do so through an online brokerage. Here’s a step-by-step guide for how to open a solo 401(k).

Steps to Establish Your Plan

1. Choose a Plan Administrator

A plan administrator is the person responsible for managing your solo 401(k). It’s their job to make sure the plan is meeting reporting and other requirements established by the IRS. If you’re self-employed, you can act as your own plan administrator or you could choose your accountant instead.

2. Choose a Brokerage

Once you know who’s going to manage the plan, the next step is deciding where to open it. A number of brokerages offer solo 401(k) plans so you may want to spend some time comparing things like:

•   Account setup process

•   Investment options

•   Fees

You may be able to start the solo 401(k) account setup process online, though some brokerages require you to call and speak to a representative first. And you may need to finalize your account opening by mailing or faxing in any supporting documents the brokerage needs to complete the application.

3. Fill Out a Solo 401(k) Application

Before you can start a 401(k) account for yourself, you’ll need to give your brokerage some information about your business. A typical solo 401(k) application may ask for your:

•   First and last name

•   Employer Identification Number (EIN)

•   Plan administrator’s name and contact information

•   Social Security number

•   Mailing address

•   Citizenship status

•   Income information

You’ll also need to disclose any professional associations or affiliations that might result in a conflict of interest with the brokerage. In completing the application, you’ll be asked to name one or more beneficiaries. You may also be asked to provide bank account information that will be used to make your initial contribution to the plan.

4. Choose Your Investments

Once you’ve returned your solo 401(k) account application and it’s been approved, you can choose your investments. The type of investments offered can depend on the brokerage and the plan. But typically, you may be able to choose from:

•   Target-date funds

•   Index funds

•   Actively managed funds

•   Exchange-traded funds (ETFs)

Whether you have access to individual stocks, bonds, CDs, or alternative investments such as commodities can depend on the platform that’s offering the plan.

5. Decide How Much to Contribute

You may choose to schedule automatic investments or make them manually according to a schedule that works for you.

Choosing Between Traditional and Roth Solo 401(k)s

You can opt for a traditional solo 401(k), which is made with pre-tax dollars, or a Roth solo 401(k), which is made with after-tax dollars. Which plan is better for you may depend on what you expect your income to be in retirement.

If you believe your income will be higher in retirement than it is now, in general, a Roth could be a better choice since you can take the distributions tax-free at that time. But if you think your income may be less in retirement than it is now, you might be better off with a traditional solo 401(k), which allows you to take the tax deduction now and have your distributions taxed in retirement.

Advantages and Disadvantages of Solo 401(k) Plans

When considering retirement account options, it can be helpful to look at the pros and cons to determine what works best for your personal situation.

Benefits of Having a Solo 401(k)

There are different reasons why opening a 401(k) for self employed individuals could make sense.

•   Bigger contributions. Compared to other types of self-employed retirement plans, such as a SEP IRA or SIMPLE IRA, solo 401(k) contribution limits tend to be more generous. Neither a SEP IRA or SIMPLE IRA, for instance, allows for catch-up contributions.

•   Roth contributions. You also have the option to open a Roth solo 401(k). If you anticipate being in a higher tax bracket when you retire, you may prefer being able to withdraw contributions tax-free with a Roth.

•   Flexible withdrawal rules. A solo 401(k) can also offer more flexibility with regard to early withdrawals than a SEP IRA, SIMPLE IRA, traditional IRA, or Roth IRA. If your solo 401(k) plan allows it, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. An IRA-based plan wouldn’t allow for loans.

Considerations and Potential Drawbacks

There are also a few potential downsides of investing in a solo 401(k).

•   Eligibility restrictions. If you run a small business and you have at least one employee other than a spouse, you won’t be able to open a solo 401(k) at all.

•   Complicated reporting. Calculating contributions and filing can be more complicated with a solo 401(k) vs. a SEP IRA or SIMPLE IRA. If your plan has more than $250,000 in assets you’ll need to file Form 5500-EZ with the IRS each year.

•   Administrative costs. Depending on where you open a solo 401(k) plan, the cost of maintaining it year to year may be higher compared to other self employed retirement plans. And an early 401(k) withdrawal can trigger taxes and penalties.

It’s important to consider the range of investment options offered through a solo 401(k). What you can invest in at one brokerage may be very different from another. The individual cost of those investments can also vary if some mutual funds or exchange-traded funds offered come with higher expense ratios than others.


💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Withdrawals and Loan Provisions

There are certain requirements for withdrawals and/or loans from a solo 401(k).

Rules for Withdrawing Funds

You can make withdrawals from a solo 401(k) without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability, but you may owe a 10% penalty as well as income taxes on the withdrawal.

Loan Options and Conditions

Some solo 401(k) plans may be set up to allow loans. If yours does, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. Just be sure to find out the loan terms and conditions, which can vary by plan.

Testing and Compliance for Solo 401(k)s

Unlike workplace 401(k)s, solo 401(k)s have no testing compliance requirements involved.

Alternatives to Solo 401(k) Plans

Instead of a solo 401(k), self employed individuals can consider another type of retirement account. Here’s how different options stack up.

Comparing a Solo 401(k) to a SEP IRA and Other Retirement Options

A SEP IRA is designed for small businesses. However, unlike a solo 401(k), a SEP IRA allows no catch-up contributions and there is no Roth version of the plan.

A SIMPLE IRA is for businesses with no more than 100 employees. It has much lower contribution limits than a solo 401(k) and once again, there is no Roth option.

Pros and Cons of a Solo 401(k)

A solo 401(k) has advantages and disadvantages. Here’s a side-by-side comparison of the benefits and drawbacks.

The Takeaway

A solo 401(k) can be a worthwhile investment vehicle for self-employed people who want to save for retirement. It has more generous contribution limits than some other retirement options. In addition, there is a Roth version of the plan, and a solo 401(k) plan may also offer flexibility in terms of early withdrawals. For individuals who are self-employed, opening a solo 401(k) is one potential way to start saving for their golden years.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

Can I contribute 100% of my salary to a solo 401(k)?

As an employee, you can contribute up to 100% of your earned income to a solo 401(k) up to the annual contribution limit, which is $23,500 in 2025, and $24,500 in 2026 plus, for those 50 and up, an additional $7,500 in 2025 and $8,000 in 2026 in elective salary deferrals. For both 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500 and $8,000 respectively. Be aware that as of January 1, 2026, however, individuals aged 50 and older whose FICA wages exceeded $150,000 in 2025 are required to put their catch-up contributions into a Roth solo 401(k) account.

Is a solo 401(k) taxable income?

You will pay taxes with a solo 401(k), but the type of plan you open determines when you’ll pay those taxes. If you have a traditional 401(k), your contributions are tax-deferred, and they reduce your taxable income for the year in which you make them. However, you will pay taxes on distributions when you take them in retirement. If you have a Roth 401(k), you pay taxes on your contributions when you make them, but your distributions in retirement are tax-free.

What is the average return on a solo 401(k)?

The return on a solo 401(k) depends on the investments in your portfolio. However, in general, a solo 401(k) invested in a mix of bonds, stocks, and cash assets can have an average rate of return ranging between 3% and 8%. But again, it depends on what your investments are, and how much you allocate to those different assets. You may want to compare your plan’s performance to plans with similar funds to get a general sense of what the average return might be.

Who qualifies for a solo 401(k)?

To be eligible for a solo 401(k), you must be self-employed or a small business owner with no employees other than a spouse. To open a solo 401(k) you will need an Employee Identification Number (EIN), which is available from the IRS.

Photo credit: iStock/visualspace

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.