SoFi

A mortgage loan officer helps borrowers determine if they qualify for a home loan, and, if so, find the right type of mortgage and best interest rate and terms for them.

Throughout the home-buying process, your mortgage loan officer will review your information, collect necessary documentation, and track important milestones leading up to closing.

Mortgage loan officers, also called mortgage loan originators, typically work for a specific bank, credit union, or mortgage company.

In this piece, we’ll discuss:

•   What a mortgage loan officer is and does

•   How to find a mortgage loan originator

•   The differences between a mortgage broker and a loan officer

•   The qualifications of a mortgage loan officer

What Is a Mortgage Loan Officer?

The mortgage loan process can be nerve-wracking, even if it’s not your first go-around.

A mortgage loan officer serves as a guide. This individual, sometimes licensed and certified, helps potential homebuyers determine if they qualify for a loan and, if so, which type of home loan is right for them.

A mortgage loan officer is a type of mortgage loan originator (MLO), a regulatory term. An MLO may also refer to a company that does mortgage originations, like a mortgage broker.

What Does a Mortgage Loan Officer Do?

A mortgage loan officer has two main responsibilities:

1.    Accept and review mortgage loan applications from prospective homebuyers

2.    Work with borrowers to determine loan terms, including interest rates

Of course, mortgage loan officers’ day-to-day duties include much more than these two tasks. In a given week, they might meet with potential borrowers to review their options and explain basic loan definitions, work with underwriters to process loan applications, coordinate with home appraisers to ensure a house is worth what a borrower is offering, and monitor important deadlines for various clients to ensure everything is moving along correctly ahead of closing.

Mortgage loan originators charge a fee for their services. Homebuyers can typically expect to pay this fee as part of their closing costs.

Recommended: How Rising Inflation Affects Mortgage Interest Rates

How to Find a Mortgage Loan Originator

Do you need a mortgage loan officer for a home purchase or refinance? Here are some tips for finding a mortgage lender and loan officer, whether you’re an experienced or first-time homebuyer.

Reading Reviews

Reading about other borrowers’ experiences with particular loan officers and lenders can help weed out the ones you should avoid. Sites like the Better Business Bureau are good resources for customer reviews.

Asking Family and Friends

Online reviews aren’t your only source for feedback. You can talk with friends and family who have recently purchased a home to see if they would recommend their loan officer. If you belong to special groups on social media, like a neighborhood group, you can survey a larger group for recommendations for a mortgage loan originator near you.

Talking with Your Real Estate Agent

Real estate agents work closely with a wide range of loan officers. Your agent may be able to recommend a mortgage loan officer with a good reputation.

Shopping Around

Whether you’re interested in a local bank or an online lender, you have multiple options available. Researching multiple lenders online can help give you an idea of the right mortgage loan originator for you.

Interviewing Multiple Mortgage Loan Officers

When you have narrowed down your list, it’s a good idea to interview a few mortgage loan officers. If you let them know that you’re considering multiple options, they may even feel incentivized to offer you a better deal.

Checking Their License

In some cases, mortgage loan officers must receive formal education, register with the government, pass a licensing test, and take continuing education classes to maintain their license.

You can check a license number through the Nationwide Multistate Licensing System & Registry (NMLS) consumer access site.

Mortgage loan officers at covered financial institutions (those that are highly regulated) are not required to be licensed; they only need to be registered.

Mortgage Broker vs Direct Lender

If you’re thinking about mortgage shopping, you’ll want to understand the difference between a mortgage broker vs. direct lender.

A loan officer typically works for a specific bank or lender and can thus only offer you loan options from that institution. At bigger banks, you may only be able to access their loan options through their own mortgage loan officers. Working directly with a loan officer may yield discounts on closing costs or access to better rates.

A mortgage broker, on the other hand, does not directly lend you money. Instead, for a fee, brokers shop around to find you the best deal given your financial situation (credit score, down payment, income, etc.).

Because brokers aren’t tied to a specific lender, they might be able to find you a better deal. But brokers do not have access to every lender, so you still might be missing out on the best deal available.

The fees charged by mortgage brokers may be higher than those charged by direct lenders. If you’re deciding whether to work with a broker or direct lender, ask about all the fees associated with loan generation.

Recommended: Can You Roll Closing Costs Into Home Loans?

What Are the Qualifications to Become a Mortgage Loan Originator?

MLOs may follow multiple career paths, each of which may require different levels of education and licensure.

Education

At a minimum, MLOs need to be at least 18 years old with a GED. Many officers at least obtain a bachelor’s degree, often in business, finance, or mathematics.

License vs Registration

If you wish to work independently, for a broker, or for a nonbank, you must obtain licensure. A license is also a value proposition to potential homebuyers: It tells them that you have passed a difficult test and commit to continuing education.

If you work for a “covered financial institution,” you will not be required to obtain a license. You’ll simply need to register every year. The financial institution that employs you will likely coordinate this.

To earn your MLO license, you will need to:

•   Complete 20 hours of courses, as required by the NMLS.

•   Take and pass a state license test.

•   Pass the SAFE MLO test. (SAFE stands for the Secure and Fair Enforcement Act, which established guidelines for MLOs after the housing crisis in 2008.)

•   Keep up with NMLS requirements, including registration and continuing education.

Characteristics

Beyond the registration or license, a good mortgage loan officer will typically need the following qualities:

•   Good with numbers

•   Interpersonal skills

•   Strong decision-making and organization

•   An eye for detail

Recommended: What Are Subprime Mortgages?

The Takeaway

A mortgage loan officer helps potential homebuyers find a fitting mortgage, apply for the loan, and meet deadlines. You can interview several mortgage loan originators to see what they offer.

Are you starting to shop for a home mortgage loan? SoFi offers competitive rates and requires as little as 3% down for qualifying first-time homebuyers.

FAQ

What are the job responsibilities of a mortgage loan officer?

A mortgage loan officer reviews mortgage loan applications and determines which loans and rates to offer potential homebuyers. The officer works with underwriting on loan approval, then helps the homebuyer through the process until closing.

What is the difference between a loan officer and mortgage broker?

A loan officer, aka mortgage loan originator, typically works for a lender and has access to the best deals of that particular lender. A mortgage broker helps homebuyers shop for the best deal, though they don’t have access to every possible loan.

How do you find a mortgage lender?

To find a mortgage lender, it’s a good idea to read online reviews, ask friends and family for recommendations, talk to your real estate agent about a referral, and shop around online.

Photo credit: iStock/Paperkites

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

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

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.

SOHL0922025

Before signing your closing documents and walking away with the keys to your new home, it’s important to reexamine the final details of the mortgage. Your lender is required to provide this information ahead of closing in the form of a mortgage closing disclosure.

Paperwork fatigue aside, the closing disclosure deserves careful review, as it outlines the mortgage terms and conditions you’re agreeing to.

What Is a Closing Disclosure?

You may have weighed the different mortgage types and then homed in on one that suited you best.

Maybe you got mortgage pre-approval before zeroing in on a property you couldn’t live without (for a while, at least). Now the deal is almost buttoned up.

Here comes the closing disclosure, a five-page form from your lender outlining the mortgage terms, including the loan principal, interest rate, and estimated monthly payment. It also lays out how much money is owed for closing costs and the down payment.

Lenders are required by federal law to provide the mortgage closing disclosure at least three business days ahead of the closing date.

Recommended: Understanding Mortgage Basics

Why the Closing Disclosure Is Important

The mortgage closing disclosure contains all the final terms of your home loan, like how much you pay each month and over the life of the loan. Other conditions, such as your ability to refinance or pay off the loan early, are detailed here, too.

These specifics can have a significant impact on your personal finances. Just one percentage point difference in the interest rate can cost you thousands in the long run.

When you receive the closing disclosure from your lender, this is a final chance to review the fine print and compare everything with the loan estimate, the three-page document with the loan amount, interest rate, and other key information provided by your lender after you applied for a mortgage.

You may have obtained multiple loan estimates when shopping for a mortgage, but you’ll only get a closing disclosure from the lender you chose to finance with.

Recommended: 18 Mortgage Questions for Your Lender

What’s in the Closing Disclosure?

Visual learners, rejoice: The Consumer Financial Protection Bureau maintains a sample closing disclosure with an accompanying checklist and tips on how to read a closing disclosure.

Here’s a breakdown of the components in the closing disclosure.

Loan Terms

The terms include the loan amount, interest rate, and the monthly principal and interest you’ll pay. This section notes if the loan has a prepayment penalty for paying off the mortgage early (a rarity these days) or a balloon payment, a one-time fee due at the end of the loan (ditto).

The closing disclosure will note with a “yes” or “no” whether the amount for any of these items can increase after closing.

Projected Payments

This section shows the factors used for the payment calculation, including the principal and interest, any mortgage insurance, and estimated escrow to pay property taxes, homeowners insurance, and any flood insurance. These add up to estimated total monthly payment for the mortgage.

If you don’t use an escrow account, the bottom of this section will show the monthly costs for property taxes, homeowners insurance, and homeowners association dues, if applicable.

Checking these numbers against the original loan estimate from your lender is good practice.

Costs at Closing

Top of mind for many borrowers is the amount of cash needed to close. Usually, you can expect closing costs to be 2 to 5% of the home purchase price.

This section identifies the “cash to close,” which represents the closing costs plus the down payment owed by the borrower.

Loan Costs

Flipping to Page 2, this section provides a summary of expenses associated with taking out the loan. The costs consist of the origination fee, application fee, underwriting fee, and mortgage points if you’ve chosen to purchase any.

Additional costs are categorized under “services borrower did not shop for” and “services borrower did shop for.” The former includes services arranged by the lender, like the appraisal fee, while the latter refers to services the borrower had a choice in procuring, such as the title search and pest inspection fee.

Other Costs

There are other costs that may be due at signing, such as taxes and government fees, prepaids, escrow payments, and HOA fees.

Ensure that each amount is accurate and correctly entered as either borrow-paid or seller-paid.

Calculating Cash to Close

The table in this section shows a side-by-side comparison between the loan estimate and final dollar amount needed to close.

The calculation will account for any deposits paid by the borrower and seller credits negotiated as part of the deal.

Summaries of Transactions

This section provides a detailed look at what the borrower and seller are paying at closing. Costs prepaid by the seller, such as property taxes and HOA fees, may be adjusted to show what portion is owed by the borrower.

Loan Disclosures

Your mortgage comes with conditions, which are outlined on Page 4 of the closing disclosure. You’ll see which apply based on the box that’s checked for each.

Loan Calculations

On the final page, there are loan calculations showing the total amount you’ll pay over the life of the loan, as well as the finance charge, amount financed, annual percentage rate, and total interest percentage.

If you’re just looking into home loans, a mortgage calculator can estimate your monthly payments and total interest paid over the loan term.

Other Disclosures

The lender must disclose other characteristics of the mortgage, if applicable. They include the appraisal, contract details, liability after foreclosure, ability to refinance, and tax deductions.

Contact Information

Refer to this section if you need to contact the lender, brokers, or settlement agent involved with your mortgage.

Confirm Receipt

Signing the mortgage closing disclosure indicates that you received the form, not that you agree to the terms and accept the loan.

What Is the Three-Day Waiting Period?

As of 2015, the Consumer Financial Protection Bureau’s “Know Before You Owe” mortgage rule requires lenders to provide the mortgage closing disclosure at least three business days before closing.

This aims to give borrowers plenty of time to review the final loan terms, ask their lender any clarifying questions, and prevent unexpected costs at closing.

There are a few scenarios that could change the closing disclosure timeline. Your lender must provide another closing disclosure, thus granting three more days, if one of the following issues occurs:

•  A change in the loan APR (one-eighth of a percentage point or more for a fixed-rate loan or one-quarter of a percentage point for an adjustable-rate mortgage)

•  Addition of a prepayment penalty

•  A change in the loan product

How to Check Your Closing Disclosure

All five pages of the closing disclosure contain key information for the borrower to review. It may be helpful to go line by line with your loan estimate in hand to compare the final terms against what the lender previously provided.

Here are a few important items to pay attention to:

•  Review your name and the property information

•  Check that the loan description and amount match the loan estimate

•  Make sure that the interest rate is unchanged if you locked it

•  Ensure you understand all the fees and any changes to them

What Can and Can’t Change on the Closing Disclosure

There are some costs that can’t be changed on the closing disclosure, while others may increase by a certain percentage or by any amount.

Unless there’s a change in circumstances on the loan, changes can’t be made to the following:

•  Transfer taxes

•  Fees paid to the lender for a required service

•  Fees paid for a required service that the borrower wasn’t allowed to shop separately for

Recording fees and costs for required services from a lender’s written list of providers may not increase by more than 10%.

There are other costs that can change by any amount at any time, including:

•  Prepaid interest, property insurance premiums, or initial escrow deposits

•  Fees for required services by the lender that the borrower shopped separately for

•  Fees for optional third-party services

•  Note that your interest rate can fluctuate if it’s not locked or due to changes on your mortgage application.

What to Do if There’s an Error on the Closing Disclosure

It’s important to notify your lender or settlement agent of any errors on the closing disclosure.

Redoing the closing disclosure could delay the closing and affect your interest rate if your mortgage rate lock expires.

The Takeaway

The mortgage closing disclosure gives a detailed overview of your loan terms and closing costs. If you’re uncertain of any information, reach out to your lender to go over the closing disclosure.

For information about the home buying process, check out SoFi’s mortgage help center.

If you’re looking for a home mortgage loan, consider getting a mortgage with SoFi. Rates are competitive, and mortgage loan officers are available to help you along the way.

FAQ

Does a closing disclosure mean I’m approved?

The loan is approved before you receive the closing disclosure, but a significant change to your credit, income, or debt before closing could affect your approval.

Can you waive the three-day closing disclosure?

You can waive the three-day closing disclosure in the case of a personal financial emergency, such as losing the home if the mortgage doesn’t close in time.

How long after the closing disclosure do you close?

You can close three business days at the earliest after receiving the closing disclosure. Errors on the closing disclosure could delay the process.

Can you be denied after the closing disclosure?

Yes. A dramatic change in your personal finances could cause a lender to reject your mortgage. It’s a good idea to try to avoid changing jobs or taking on new debt near the end zone.

Photo credit: iStock/Khosrork

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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

SOHL0222018

When looking for a property to buy, you might consider a single-family detached home, a townhouse, a condo, a co-op apartment, or something else.

Let’s look at the pros and cons of buying a townhouse vs. a condo.

What Is a Townhouse?

At first glance, a townhouse might look like a detached multifloor home, but a closer look will show that it’s attached to at least one similar unit.

Townhouses are often found in urban areas where space is at a premium. They often come with a front or back yard. Owners own the inside and outside of their unit and the land it sits on.

The townhome community may have a homeowners association and maintenance fees.

Benefits of Buying a Townhouse

There are at least three upsides to purchasing a townhouse.

Owner Rights

Because people who buy a townhouse own the land it’s on, they have more freedom in how to use the yard. A yard or patio can open possibilities for a grilling spot or dog or child play area.

They also have at least some freedom of choice about the appearance of the inside and outside of the structure.

Price

In communities with high home prices, townhouses may be an affordable alternative for first-time homebuyers.

House hunters from millennial homebuyers to empty-nesters may also find a townhouse a sweet spot between a condo and a traditional detached home with yard.

Plus, because lots tend to be smaller than ones with detached homes on them, property taxes are usually lower as well.

Low Maintenance

Smaller yards mean less yardwork, ideal for busy people and those who are downsizing their home and responsibilities.

The townhouse complex may be gated and have security, and some have pools, gyms, and other shared recreational spaces whose maintenance is covered by homeowner fees.

Disadvantages of Buying a Townhouse

When you think of townhouse living, keep in mind the close quarters with neighbors and possible HOA fees and rules.

HOA

Townhouse communities are less likely to have an HOA than condominiums are, but if they do, the resident-led board will collect ongoing fees to cover common areas and any community perks such as a pool. The HOA will also enforce community rules.

Lack of Privacy

Because of the shared walls, a townhouse provides less privacy than a detached home (although more than many condo buildings, where you may have a unit above and below yours. Townhouse living may therefore create some challenges for families with young children.

What Is an Apartment?

An apartment is a room or set of rooms within a building. In major cities, some people refer to buying a condo or co-op shares as buying an apartment.

Condo owners own everything within their unit and have an interest in the common elements. “Buying a co-op apartment” really means holding shares in the housing cooperative that owns the property.

Then there are people and companies that buy a multifamily property like an apartment building and rent out the units. An owner could decide to live in one of the units and serve as an on-site landlord.

Benefits of Living in an Apartment

Let’s look at some benefits of buying a condo.

Low Maintenance

You won’t typically need to make many repairs, mow the grass, or paint. That’s covered by the monthly or quarterly fees you’ll pay.

Low Utilities

First, condos tend to be smaller than single-family homes, which can reduce the cost of heating and cooling the space, and take less electricity to keep it well lit.

HOA

If the building has an HOA, the association will take care of property maintenance and enforcement of rules.

Disadvantages of Living in an Apartment

Apartment life can come with disadvantages, too. Here are a few.

Parking

You may or may not have a parking space set aside for you, and street parking isn’t always a given in busy locales. Even if you have a parking spot, if people come to visit, they may not easily find anywhere to park.

Noisy or Nosy Neighbors

If you appreciate quiet calmness, you may not find all you’d like in condo living. Neighbors are nearby and they may appreciate louder and more frequent interactions than you’d prefer. If you’re in a crowded city, surrounding events can contribute to the jostling and noise.

Limited Space

If you’re used to living in a house, you could find a more compact apartment to be challenging as you try to fit in your belongings. Plus, it isn’t unusual not to have yard space or a patio, which further limits the amount of space you have to use and enjoy.

Differences Between a Townhouse and an Apartment

When comparing apartment or condo vs. townhouse, keep in mind these differences.

3 Home Loan Tips

1.    Traditionally, mortgage lenders like to see a 20% down payment. But some lenders, such as SoFi, allow home mortgage loans with as little as 3% down for qualifying first-time homebuyers.

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

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

FAQ

Do townhomes appreciate as much as houses?

In general, townhomes do not appreciate as quickly as single-family detached homes, thanks to the amount of land that comes with traditional stand-alone homes.

Are townhouses a bad investment?

In some circumstances, a townhouse may be a good investment. The price, current market conditions, and location are factors.

Are fees higher for a townhouse or condo?

Condo HOA dues are typically a lot higher than townhouse fees (if the townhouse community even has an HOA). Condo communities usually have many more amenities to maintain.

Photo credit: iStock/Auseklis

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

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

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.

SOHL0222009

Investing in single-family homes is often a good way to build wealth and generate monthly cash flow.

Real estate has proven to be an economic bellwether even when stocks and bonds experience downturns. Of course 2020 and 2021 saw a housing boom unlike any in decades, and Redfin reported that home prices were up nearly 8% year-over-year in late 2022, despite rising interest rates.

Single-family rental homes have lots of upsides for an investor, but there are also a few reasons to look before you leap.

What Is a Single-Family Home?

The popular image of a single-family home is a stand-alone, one-dwelling structure with its own utilities, entrance, exit, and access to the street. The owners own both the building and land it sits on, so condos do not count.

Some government agencies expand this definition to include properties of up to four units, such as duplexes and townhouses.

Why Invest in Single-Family Homes?

Buying investment property offers two key benefits to long-term investors:

•   the potential for capital appreciation

•   immediate cash flow

Let’s walk through some of the key motivators for investing in single-family homes.

Financing

Single-family homes are typically easier to obtain financing for than multifamily homes of five or more units.

A multifamily property meeting that criterion requires a commercial loan, which usually has a higher interest rate and shorter term than a residential mortgage.

Lenders often require at least 20% down for an investment property. It could be higher, depending on the borrower’s credit score and savings. Then again, there are creative ways to buy a multifamily property with no money down.

Less Volatility

The market for single-family homes is relatively stable and tends to grow more smoothly over the long run compared with other types of homes.

Unlike commercial real estate and apartments, the demand for single-family homes tends to remain relatively strong at all stages of the economic cycle.

Steady Income

Single-family homes may be rented out for longer terms than apartments and usually sit vacant for less time thanks to the steady demand for single-family housing.

Some contend that single-family rentals feel more like proper homes for tenants and therefore are better cared for than apartments.

You’re also more likely to find more families renting single-family homes than individuals. Families may be more likely to extend the lease if they end up loving the neighborhood and schools, as in a coveted suburb.

Tangible Asset

Many people seek to diversify portfolios with different types of investments. Unlike stocks and bonds, which represent shares of ownership and rights to debt payments from a company, real estate is a tangible asset.

The tangible factor gives you something physical to hold on to that’s unlikely to disintegrate over the long term. Stocks, bonds, and other intangible investments require the underlying company to remain a going concern.

Inflation Hedge

Inflation is the creeping impact of price increases, and when there are concentrated bouts of it over a short period of time, it can rapidly erode the purchasing power of your assets.

Housing has often been touted as an inflation hedge because it has historically held its real value during inflationary markets. This could be because of the following reasons:

1.    Most homebuyers lock in their purchase price through a mortgage.

2.    Rental agreements typically last one or two years, which allows homeowners to gradually raise rents to keep pace with inflation.

3.    Home values typically appreciate over the long run thanks to the intrinsic value of the house and land.

Return on Investment

Thanks to steady demand, single-family homes can match or even exceed the return on investment (ROI) of bigger multifamily properties, with lower volatility than stocks or bonds.

Potential ROI across different real estate properties can be compared using a capitalization rate (cap rate) calculation: net operating income divided by current market value.

Net operating income is your gross annual income from the property minus operating expenses (like repair costs, groundskeeping, property taxes, insurance, utilities not paid by tenants, and any property management fees). Home mortgage loan payments are not included in the net operating income formula.

Diversification

Single-family homes could be a good addition to a portfolio of stocks and bonds, but why does portfolio diversification matter anyway? Because by diversifying assets, you may offset a certain amount of risk and improve returns.

When stocks or bonds fall, real estate prices can take much longer to follow.

Things to Know Before Investing in Single-Family Rentals

Because of the high acquisition cost of single-family homes, you’ll want to conduct proper due diligence on your local housing market and target property before you buy.

As with all investments, be cautious when investing a significant portion of your cash in one place.

Your Numbers

While the projected rental income on a property looks attractive at a glance, bear in mind that maintenance costs and surprises should be factored in.

Vacancy rates, legal issues with tenants, and unexpected repairs can sap your returns over time.

It’s smart to factor in a cash buffer to ensure that money is available on short notice.

Your Target Rental and Housing Market

While the rental income streams of New York and California offer much higher revenue potential, keep in mind that the costs of owning real estate in those areas is enormous as well.

Income is only one side of the rate of return calculation, so make sure you have a good handle on the expenses as well. You can only do that by thoroughly investigating your target housing market and relying on the home appraisal.

The local job market, its dominant industries, and the dependability and growth of local businesses also will shed light on how stable a given market will be over time.

Good schools, safe cities, and proximity to workplaces and attractions matter to many renters.

If you’re looking to use the property as a short-term rental, check out the local ordinances, which may prohibit you from doing so.

The 1% and 50% Rules

The 1% rule is a back-of-the-envelope calculation to estimate whether your rental income strategy will be profitable. If the estimated rental income on the property is at least 1% of its purchase price, you should theoretically be able to generate cash flow.

If your purchase price was $300,000, for example, the monthly rent should be at least $3,000, according to the rule.

The 50% rule states that you should expect the expenses on your real estate investment to make up approximately 50% of the gross income generated. That’ll give you a quick and dirty estimate to help you start ballparking your net returns.

Obviously, the exact numbers are more complicated. When you have time, you’ll want to run a full comparison of revenues vs. potential costs of your venture.

Your Strategy

This one’s a little more nuanced, as it depends on your goal amount, the time horizon, and your risk tolerance.

Are you looking to build a rental home empire or are you just looking for a little extra income to supplement your retirement?

Do you intend to tap home equity to buy one or more investment properties? Do you plan to flip or hold the home?

How to Invest in Single-Family Homes

If you’re confident that buying a single-family home is the right choice for you, there are a few ways you can invest:

Buy It Yourself

This is the most capital intensive and least liquid route. Buying a single-family home in the neighborhood of your choice will net you reward as well as the risk that comes with any property.

If you’re handy, you can buy a fixer-upper or a HUD home (bidding opens to investors after owner-occupants are given a chance) and renovate it into turnkey condition.

The expense of any contractors or property managers will need to be factored in.

Invest Through a Crowdfunding Platform

If you don’t have copious amounts of capital, you can still fund real estate investment projects through online crowdfunding platforms like Fundrise.

These allow you to diffuse risk while taking part in more aggressive investments than you might have been willing to by yourself.

Keep in mind that you’ll need to share the benefits with all investors who partake in the process. Another shortcoming is that your funds may be tied up for an extended period of time, which varies by project.

Invest in a Real Estate Investment Trust

REITs are corporate entities that specialize in purchasing and financing pools of real estate investments on behalf of their clients. They sell shares that are publicly traded and can specialize in any number of sectors or strategies.

The big benefit of REITs is that they’re one of the most liquid real estate investments out there, as you can buy or sell your shares at almost any time on the open market. However, the market value of each share will fluctuate daily.

In the realm of investment opportunities, REITs often provide better returns than fixed-income assets like bonds, but REITs carry higher risk.

There are REITs that specialize in buying and operating single-family rentals. These REITs pay out a major portion of their cash earnings to shareholders.

Explore SoFi’s Home Financing Options

When done right, your single-family home investment can offer growth and income and diversify your portfolio. You can start with lower levels of capital by investing in REITs or crowdfunding platforms, but the gains will be diluted.

Looking at single-family home rentals or other investment property? SoFi offers financing for one- to four-unit owner-occupied residences, second homes, and investment properties.

FAQ

Is renting out a single-family home worth it?

It can be. Appreciation and rental income have made single-family homes attractive to investors. Multifamily properties provide more rental income streams but also require more property and tenant management.

How do you value a single-family home rental?

There are a few ways. One is to look at recent comparable sales. Another is to calculate the capitalization rate (net operating income divided by property price or value). A third is to use the gross rent multiplier approach (property price divided by gross rental income).

How fast does the value of single-family homes appreciate?

It depends on the market. Lately, appreciation has decelerated. But the national median single-family existing-home price had risen 8.6% in a year, the National Association of Realtors® reported in late 2022.

Photo credit: iStock/Phynart Studio

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

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

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.

SOHL0122006

Investing in a duplex can be a good idea if you can pony up the cost and don’t mind being a hands-on landlord. A key advantage is the ability to live in one of the units or rent both out.

If the purchase will be strictly a rental, duplexes offer the capacity to double your cash flow for less than the cost of two single-family homes. You also have the freedom to make half your home.

Buying a duplex for investment is a popular investment strategy used for breaking into real estate, and they’re in demand in every major city.

What Is a Duplex?

A duplex consists of two living units on top of each other or side by side, along with the land.

Each unit has its own entrance and exit, kitchen, bedrooms, and bathrooms. The two units are conjoined by a wall or a floor/ceiling.

Regardless of their layout, the units share the same plot and deed, and are sold as a single property. Unlike a twin home, a duplex has one owner.

A duplex is technically a multifamily property but qualifies — as does any building with up to four units — for the same kind of favorable financing that a single-family home does if you make the property your address.

The units may share the same utilities but otherwise operate as separate residences. This allows you to avoid doubling expenses over time when you need to replace a water heater, for instance.

Advantages of Investing in Duplexes

The advantage of buying a duplex, with the freedom to live in half and rent out the other (or not), speaks for itself.

There are other pros. Here are the major ones.

Cash Flow

Whether you’re trying to build or buy a duplex, a key advantage is the cash flow potential by renting out both units.

Alternatively, you can live in one of the units, which will ultimately reduce the risk if the other half sits vacant for an extended period.

The rent from the other unit may cover part or all of your mortgage costs, depending on how much you put down on the property.

Financing If Owner-Occupied

Eligible duplex owner-occupants have financing choices:

•   FHA loans

•   VA loans

•   Conventional mortgages

Each of those calls for a low down payment or none at all.

The government-insured loans can be used for properties with up to four units as long as the buyer plans to live in one of the units. FHA loans are favored by first-time homebuyers — those who have not owned a principal residence in the past three years — and buyers with lower credit scores.

For an FHA or VA multifamily loan, the owner is to live onsite for at least a year.

Investors who plan to rent out both units must use conventional mortgage loans. They should expect to put down at least 20%. The mortgage rate will likely run a bit higher than for a loan for an owner-occupied property.

A duplex buyer can use both current passive income and projected rental income to qualify for an FHA loan and conventional mortgage loan but not a VA-backed loan.

Faster Portfolio Building

Unlike starting with a detached single-family home and working your way up, buying a duplex lets you double the number of rentable units you own upfront for less than the cost of two single-family rental homes in most markets.

This cuts down on the amount of time you need to find suitable properties to purchase and the closing costs you need to pay.

Buying a duplex also will give you a chance to enhance your real estate portfolio diversification.

Tax Breaks

Owner-occupants can deduct mortgage interest and property tax on their half.

If they have a renter, they can write off expenses for that half: repairs, insurance, any utility bills, advertising, management fees, and so on. And they can depreciate the rented half of the property.

Risk Mitigation

If you’re living in one of the units, you’re still getting some use out of the property if the other remains vacant. You can even bide your time if you need to make home improvements to the other unit.

Comparatively, if you own a single-family property that sits vacant, that’s cash every month out of your pocket that it remains empty.

Additionally, lenders view the risk to be more diffused for duplexes, particularly if the owner’s living in one unit. From their perspective, it’s much less likely that borrowers would default on a duplex that serves as their primary residence than the owner of a comparable investment property.

Lower Overhead Cost

The same furnace, AC unit, and hot water heater may serve both units in a duplex. If that’s the case, you may only need to worry about maintaining a single set of utilities for both dwellings.

Disadvantages of Investing in Duplexes

Like all rental properties, the primary disadvantage of duplex is the risk that it remains vacant for an extended period of time, although the risk is mitigated if you’re living in the other unit.

Here are other possible downsides when investing in a duplex.

Possibly Cost Intensive

While it may be more efficient than buying two detached single-family homes, a duplex still might cost more than if you had bought a single stand-alone property.

You’ll have twice the number of kitchens and bathrooms to contend with, which will increase costs if you intend to renovate both units.

The cost of building a duplex may exceed the cost of building a house.

Finally, property insurance for a duplex is usually higher than for a single-family home.

Risk of Vacancies

If one or both of the units in your duplex remain vacant, the opportunity cost and negative impact on your bottom line as property manager could be enormous.

If the average person is spending a lot on rent, that’s either a great sum to put in your pocket or a terrible one to lose.

Make sure you properly research your target market. Just because you stumble on a duplex that looks great doesn’t necessarily mean it’ll rent from day one.

Proximity to Tenants

If you intend to live in one unit and rent the other out, the coziness with your tenants is a double-edged sword. On the other hand, you’ll be able to monitor the coming and goings of your neighbor, but on the other, you’ll be right next door if any issues arise.

Where to Find Duplexes and How to Buy One

If a stream of rental income and capital appreciation sound good, it’s smart to start scoping out what’s on the market.

You also can seek prequalification and preapproval for financing.

Don’t expect an easy hunt, as serviceable duplexes in great locations are in demand. When you find one, expect competition, true of any good investment property.

Like all real estate investments, asking prices for prime duplexes have spiked over the past few years due to low supply and record demand.

Start by browsing online listings for duplex owners and filtering for properties with two units. It’s also a good idea to find a reputable real estate agent and specifically request to view duplex properties.

Time is of the essence when making offers. A preapproval letter can carry a lot of weight.

Explore SoFi’s Home Financing Options

Buying a duplex can be a smart move: You’re getting two potential rental streams under one roof typically for less than two single-family homes. Financing is especially attractive if you plan to live onsite.

If you’re shopping for a duplex, keep SoFi in mind. SoFi offers home mortgage loans for owner-occupied primary residences, second homes, and investment properties.

FAQ

What should I look for when investing in a duplex?

Make sure it’s legally zoned as a duplex. Know the neighborhood. See if the numbers would make sense by researching comparable rents and factoring in any repairs. Gauge noise transfer and privacy if you plan to live there and rent the other unit out.

How do I buy a duplex?

Know whether you plan to live at the property, which will affect your financing. Getting preapproved for a mortgage is a good idea. Look at prices in your area, scour online listings, and consider hiring a good buyer’s agent. In most markets, expect competition.

Is it profitable to own a duplex?

Because a duplex usually does not come with HOA fees and consists of two rentable units, it can be profitable. A duplex also might be more appealing to renters than apartments are. And maintaining a duplex costs less than managing two individual rental units.

Do duplexes increase in value?

They often do, but appreciation tends to be lower for duplexes than stand-alone single-family homes.

Photo credit: iStock/aluxum

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

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

SOHL0122004