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A home equity loan is a secured loan, using your home as collateral, while a personal loan is unsecured, meaning you don’t put up any collateral. Beyond this key difference, these borrowing options are similar in that both are typically lump-sum, fixed-rate loans that you’ll repay over a specific length of time.

If you’re wondering which is the better choice for your current financial needs, it can be wise to take a closer look at how each one works and the pros and cons involved.

What Is a Home Equity Loan?

Sometimes referred to as a second mortgage, a home equity loan allows you to use your home as collateral when you need to borrow money. Here are a few key points to note:

•   With this type of loan, the amount you can borrow is based on the equity you have in your home. Your home equity is the difference between your home’s current value and what you currently owe on your mortgage. Lenders may require that you have a minimum amount of equity (typically, at least 15% to 20%) to qualify.

•   If you’re a new homeowner, you may not have built up enough equity to qualify for this type of loan. But if you made a substantial down payment, you’ve owned your home for a while, or your home’s value has increased substantially since you purchased it, a home equity loan could be an option worth considering.

•   Lenders typically offer more competitive terms for this type of secured loan because it’s a lower risk for them. To put it another way: If the borrower defaults, they can foreclose on the property and recover the amount they’re owed.

Recommended: Understanding Home Equity

How Does a Home Equity Loan Work?

Home equity loan funds are generally distributed in a lump sum with fixed-rate monthly payments, though variable-rate options are offered by some lenders. Repayment periods can vary from five to 30 years. Here’s a closer look at how they work:

•   When you apply, you can expect lenders to look at your personal creditworthiness, including your debt-to-income ratio (DTI) and credit score. In most cases, you will need a credit score of 680 or higher to unlock favorable terms. A higher three-digit score may help you get approved for a better rate.

•   Your lender will likely require a home appraisal to verify your home’s value. (This is one of the reasons why snagging a home equity loan can be a more time-consuming process than getting an unsecured loan.)

•   If you’re eligible, you may be able to borrow up to 80% or, in some cases, even 90% of your home’s equity. So, for example, if you have $150,000 in equity, you might qualify to borrow $120,000 to $135,000.

It’s important to note that a home equity loan is not the same thing as a home equity line of credit (HELOC). A HELOC is a type of revolving credit (you draw against your limit over time), while a home equity loan is an installment loan, paid out in a lump sum.

What Is a Personal Loan?

A personal loan is similar to a home equity loan in that it allows you to borrow a lump sum of money, and you’ll repay those funds — with interest — in regular installments over a set period of years.

To understand what defines a personal loan and distinguishes it from a home equity loan, consider these points:

•   Most personal loans are unsecured, which means you don’t have to use your home or any other asset as collateral to borrow the money.

•   Because the lender is taking more risk with this kind of loan than a home equity loan, interest rates may be higher.

•   Since you don’t need to have a home appraisal and other steps completed, you may find that securing a personal loan vs. a home equity loan is a significantly quicker process.

How Does a Personal Loan Work?

If you decide to go with a personal loan, you’ll likely have a number of options to choose from — they’re offered by many banks, credit unions, and other lenders. And because lenders’ terms can vary significantly, you may want to do some comparison shopping before you make a choice.

When applying, it’s wise to be aware of these points:

•   If you aren’t using an asset to secure your personal loan, you can expect lenders to put a high priority on your credit score, income, and DTI when you apply. The higher your credit score, the better in terms of getting approved and securing a favorable rate. Many lenders look for a FICO® score of at least 580, but applicants who have scores over 700 are likely offered the most favorable terms. (Personal loan rates are usually lower than credit card rates, however, even if the loan is unsecured.)

•   Pay attention to how the length of the loan affects your payments. Personal loans are typically repaid over a term of two to seven years. If you’re looking for smaller monthly payments, a longer term may suit your needs, but that may increase the overall cost of the loan. A personal loan calculator can help you compare your monthly payments and the total (principal plus interest and fees) to be repaid.

Comparing Home Equity Loans and Personal Loans

Both home equity loans and personal loans usually offer fixed-rate, lump-sum financing options with terms that can be tailored to fit the borrower’s needs. And both offer borrowers a certain amount of flexibility in how the money can be used.

But there are some questions you may want to consider when deciding between the two, including:

How Much Do You Plan to Borrow?

If you need to borrow a large amount and you’re looking for a lower interest rate, you may find a home equity loan is the right product for your needs. Your monthly payments may be smaller if you sign up for a longer repayment period.

If you need a smaller loan — a few thousand dollars, for example, or even just a few hundred — a personal loan may be the more practical choice. But even if you plan to borrow a large amount, you may choose a personal loan to avoid tying your home to your loan. Some lenders offer large personal loans — as much as $100,000 or more — to well-qualified borrowers.

What’s the Timeline?

One of the major drawbacks to a home equity loan is that the approval process can take weeks (say, two to six weeks). Lenders typically will require an appraisal to determine your home’s current value, and there’s usually more paperwork involved with this type of loan.

A personal loan application, on the other hand, can take just minutes to complete online, and some lenders offer same-day approvals. If you’re approved, it may take only two or three days until the money lands in your checking account.

What’s the Risk?

Home equity loans come with more risk for the borrower than a personal loan. If you default on your payments and the lender decides to foreclose, you could potentially lose your home. Also, if you decide to sell your property, you’ll have to pay back the home equity loan.

Personal loans also carry some risk for borrowers. If you default on a secured personal loan, the lender could take whatever asset (a car or bank account, for instance) you used for collateral. And whether your loan is secured or unsecured, late or missed payments could lower your credit score (this can be true for home equity loans as well). If the account goes to collections, you could be sued for what you owe.

How Do You Plan to Use the Money?

You can use funds from both types of loans for just about any (legal) purpose. Borrowers often use them to:

•   Consolidate debt (say, to pay off high-interest credit card debt)

•   Pay for wedding or vacation costs

•   Make home improvements

•   Pay off medical or dental bills

•   Finance car repairs or the purchase of a vehicle

•   Fund moving expenses

There may be benefits to one or the other loan type that makes it a better fit for your specific plans. For instance, with a home equity loan, you can deduct the interest on funds you used to “buy, build, or substantially improve” the home you used to secure the loan, according to the IRS. So if you’re hoping to make home renovations, one of the different types of home equity loans may be the right choice.

You typically can’t deduct the interest on a personal loan. But the ease and speed of getting a personal loan may make it the better pick if an unexpected expense comes up — say, if your refrigerator or air conditioning system goes out, and you need money quickly for a replacement or major repair.

Pros and Cons of Home Equity Loans vs Personal Loans

Here’s a look at some of the advantages and downsides of a personal loan vs. home equity loan:

Personal Loan Pros

•   Flexible borrowing amounts and terms

•   Often unsecured, meaning there’s no risk of losing your home

•   Convenient and fast access to funds

Personal Loan Cons

•   Interest rate may be higher if loan is unsecured

•   Depending on borrower’s creditworthiness, may require collateral

•   Lenders may charge a loan origination fee, late payment fees, and/or a prepayment penalty

Home Equity Loan Pros

•   Flexible borrowing amounts and terms

•   Interest rate may be lower than unsecured loans

•   Interest may be tax-deductible if used for home improvements

Home Equity Cons

•   If you default on the loan, the lender could foreclose on your home

•   Approval process can take longer (two to six weeks) and may include additional costs

•   Some home equity loans have prepayment penalties and/or other fees

•   Must have enough equity in your home to qualify for the amount you want

•   If you sell your home, you’ll have to repay the loan

Carefully considering the upsides and downsides of a personal loan vs. a home equity loan is an important step in making the financial decision that suits you best.

The Takeaway

Home equity loans and personal loans both typically offer lump-sum payments at a fixed rate for a specified term. Home equity loans use your property as collateral, while personal loans are often unsecured.

It’s important to look at how each one might sync up with your particular financial situation and your reasons for borrowing the money. If you’re a homeowner, tapping into your home equity might get you a lower interest rate and a possible tax break. But the loan process is typically quicker and easier for a personal loan — and you won’t have to tie the loan to your home and put your residence at risk.

If you think a personal loan might be right for you, see what SoFi offers.

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

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

FAQ

Can personal loans be used to consolidate debt?

Yes, debt consolidation is one of the top reasons borrowers choose to get a personal loan. You might use this kind of loan to pay off one or more high-interest loans or credit card accounts, potentially simplifying repayment and lowering your costs.

What credit score is needed for each loan type?

Here are how credit scores for home equity loans vs. personal loans typically stack up: Lenders typically like to see a credit score of 680 or higher for home equity loans and 580 or higher for personal loans. Borrowers with higher credit scores usually qualify for more favorable loan rates.

What is the downside of a home equity loan?

The biggest drawback to a home equity loan vs. a personal loan is that it’s tied to the home you use to secure the loan. This means that if you default on your payments, the lender could foreclose on your home. Also, if you decide to sell your home, you’ll have to pay back your home equity loan as well as your mortgage.

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Photo credit: iStock/milorad kravic

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.

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.

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

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

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.

SOPL-Q324-016

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A due-on-sale clause — also known as an alienation clause — is wording commonly found in the fine print of a mortgage agreement. It allows lenders to enforce being repaid for the balance of a home loan when the property is either sold or, in some instances, transferred to another owner. That’s a simple explanation, but there is more to it so let’s dig a bit deeper.

What Is a Due-on-Sale Clause?

Understanding how home loans work is an important part of the home-buying process. Here’s what to know about a due-on-sale clause before you sell or purchase a home:

Definition and Purpose

A mortgage due-on-sale clause or alienation clause requires that the loan be paid in full when the home is sold. You may have heard about assumable mortgages becoming more popular as a way for buyers to sidestep higher interest rates by taking over a seller’s mortgage at a lower-than-typical rate. The due-on-sale clause prevents one buyer’s mortgage from being assumed by whoever purchases the house next.

Lenders began using due-on-sale clauses in the 1970s as interest rates spiked and buyers assumed the seller’s loan instead of applying for a new one with a higher rate. While homeowners won several court battles against this rule during the time, the U.S. Supreme Court ultimately ruled in favor of the banks. Congress formally legalized the due-on-sale clause for mortgages with the Garn-St. Germain Federal Depository Institutions Act in 1982.

Where It’s Found in Mortgage Documents

A due-on-sale clause should be located in your loan agreement. If you can’t find it in your paperwork, it’s worth calling your lender, especially if you plan to sell your house soon. Most, if not all, conventional loans are not assumable, meaning there should be a due-on-sale clause in place.

Some mortgages are assumable, and don’t have this type of clause in the loan agreement. Assumable loans include:

•   FHA loans backed by the Federal Housing Administration

•   VA loans backed by the U.S. Department of Veterans Affairs

•   U.S. Department of Agriculture loans

Remember, though, that even if a loan is assumable, the new borrower still needs to qualify for the loan. In many situations, however, they don’t have to go through the whole mortgage process. They simply get to assume the existing mortgage from the original owner. Also note that there are unique FHA flipping rules that you may need to be aware of if purchasing a home that has been owned by the seller for a brief time is a part of your plan.

Recommended: Choosing a Mortgage Term

How the Due-on-Sale Clause Works

Now that you understand what an alienation clause or due-on-sale clause is, find out how it works so you can avoid lenders invoking this portion of your loan agreement.

Triggering Events

Lenders are notified when ownership of a property securing a loan is transferred. If the seller doesn’t automatically pay off the loan balance at closing, the lender may choose to invoke the due-on-sale clause.

There are a few other situations that would cause a lender to invoke the due-on-sale clause. These include:

•  Transferring the property to a family member without a death or divorce

•  Transferring the property into an irrevocable trust

•  Transferring the property into a lease of more than three years

•  Changing ownership from a personal property to an LLC or vice-versa

•  Creating a junior lien that would lower the lender’s stake in a property

Lender Rights and Actions

In these cases, the lender could require the recipient of the property to transfer the title back to the original owner. The recipient usually has a set amount of time to do this, such as 30 days.

Another option for lenders, however, is to foreclose on the home if the original borrower is unable to provide the remaining mortgage balance. In these situations, refinancing the property or possibly modifying the original loan are also possibilities. (To see how much your monthly payment would likely be after a refinance, use a mortgage calculator.)

Impact on Property Transfers

The due-on-sale clause makes it more difficult to transfer properties to new owners. After the Supreme Court ruling, those recipients must meet certain criteria. Plus, even if they do meet the criteria, they must still qualify for the loan.

Exceptions to the Due-on-Sale Clause

There are exceptions that cause the due-on-sale clause to not take effect. Those exceptions are:

•  Divorce: If the original borrower loses the house in a divorce settlement, the due-on-sale clause should not go into effect.

•  Inheritance: Should the primary borrower die, then their children or surviving spouse can inherit the house without triggering the due-on-sale clause. With the average mortgage length being 30 years, it’s understandable that unique rules had to be put in place to account for buyers dying before their mortgage was fully paid.

•  Joint tenancy: If two or more people jointly own a property, then the death of one owner doesn’t trigger the due-on-sale clause. Instead, whatever portion of the property was owned by the deceased borrower is transferred to the other remaining borrowers.

•  Living trust: When a property is transferred to a living trust, there are no legal ramifications. A living trust is when a trustee is designated by a property owner to manage an estate.

Implications for Buyers and Sellers

If you’re the seller, the due-on-sale clause simply means that whatever money you make in the sale of your house must be adequate to satisfy your remaining loan balance. If it doesn’t, you have to be able to pay off your remaining mortgage obligations with other funds.

For the buyer, the implication of the due-on-sale clause is that the seller will have a minimum price that needs to be met in order for them to sell the home. The original lender must receive the amount it is due, or the house will not be free and clear for sale.

Fortunately, the desire to transfer an existing mortgage to a new borrower who is unrelated to the seller doesn’t happen very often.

Legal Aspects and Enforcement

It’s important to remember that there are situations where the due-on-sale clause cannot be invoked. As noted above, a title transfer that occurs because of a divorce or death usually forbids lenders from seeking immediate repayment. And even if lenders are within their rights, they still must provide ample notification before invoking the due-on-sale clause.

Recommended: Active Contingent in Real Estate: What You Need to Know

The Takeaway

The due-on-sale clause (or alienation clause) limits who can take over an existing mortgage from a homeowner, and it essentially establishes a minimum sales price that a buyer would have to meet in order for a seller to be able to agree to a contract. This is because lenders must always receive any remaining money owed on a mortgage when a home is sold.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I transfer my property without triggering the due-on-sale clause?

It depends on the situation, but there are some situations where it can be done, depending on the original loan agreement. For example, it’s often possible to transfer a property during a divorce, and it’s also possible to transfer the property to an immediate family member after the death of the primary borrower.

What happens if I violate the due-on-sale clause?

If you violate the due-on-sale clause, the biggest thing that can happen is that your lender can demand immediate full repayment of your outstanding loan balance. If you are unable to pay, then you are at risk of foreclosure, which can damage your credit score for seven years.

Are there any mortgages without a due-on-sale clause?

It’s rare to find a conventional mortgage without a due-on-sale clause because it’s in the lender’s best interest. However FHA, VA, and USDA loans typically don’t have this clause.

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Photo credit: iStock/Perawit Boonchu

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency. This article is not intended to be legal advice. Please consult an attorney for advice.

SOHL-Q324-026

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If you’re buying a flipped property and are planning to use a loan backed by the Federal Housing Administration (FHA), you need to be aware of the FHA flip rule, also known as the 90-day FHA flip rule. It could prevent you from buying the property or cause delays.

The main thing to know is you can’t use an FHA loan for properties that have been owned for less than 90 days by the seller. This is to prevent fraud and to protect you and the lender.

We’ll explain everything you need to know about the rule, including:

•   What is property flipping and what to watch out for

•   The purpose of the FHA flipping rule

•   How timing of the purchase contract affects FHA financing

•   What exemptions there are

•   How to comply with FHA guidelines on flips

What Is Property Flipping?

Property flipping is where an investor acquires a property with the intent of quickly selling it for a profit. The investor can renovate, landscape, develop raw land, or complete other projects to improve the property and then put it right back onto the market. It’s also common to generate profit through rapid property appreciation in hot real estate markets.

None of the above activities is prohibited. But when a property is sold for a large profit soon after being acquired, it could potentially signal illegal activity. Illegal property flipping is where the investor sells the property at an artificially inflated price, usually through collusion with the appraiser. Overvalued properties can be a problem for legitimate buyers as well as mortgage lenders, including with FHA loans. Hence the flip rule the FHA has created to protect borrowers.

Reasons for FHA Flipping Rules

The purpose of the FHA flip rules is to prevent the FHA from taking on loans at inflated values, and in the process, protect buyers from being taken advantage of. The FHA states that most flipping occurs within days of the original purchase with little improvement taking place. (An FHA loan buyers guide details other important rules surrounding FHA loans.)

FHA Flipping Rules Explained

The FHA flip rules are primarily concerned with the amount of time the property has been owned prior to being resold. It was implemented in 2003 by the Federal Housing Administration to try and prevent the kind of illegal flipping mentioned previously. Lenders rely on information provided by an appraiser to follow the rule. The nitty gritty:

90-Day Flipping Rule

Under the FHA 90-day flip rule, you can’t finance property with an FHA loan if it was bought by the seller less than 90 days ago. Other requirements include:
The property must be sold by the owner of record
The lender must obtain documentation verifying the seller as such
The purchase can’t involve a sale or assignment of contract

The FHA counts 90 days from the seller’s day of settlement to the day the next contract is signed. There are some additional requirements for purchasing a flipped property from 91 to 180 days after the seller’s day of settlement.

How the FHA Flip Rules Work from 91 to 180 Days

If the property is sold between 91 and 180 days from the settlement date, a second, independent appraisal may be required to verify the value. The second appraisal is required if the value is more than 100% above the price the seller paid. The seller cannot require the buyer to pay for the second appraisal. For example, if the home was purchased by the current owner for $100,000 and the new value is $200,000 or more, a second appraisal would be required.

Exceptions to the 90-Day Rule

There are a few exceptions to the 90-day rule. A property may be eligible for an exemption from the FHA flip rule if it was acquired for its owner by an employer or a relocation agency or if it is:

•  HUD Real Estate Owned

•  Sold by local, state, or federal government agencies

•   Sold by Fannie Mae or Freddie Mac

•   Inherited property

•   In a presidentially declared disaster area

•   An initial builder sale

Property Eligibility Requirements

There are no property requirements with the FHA flip rule — the rule applies equally to all properties with the exception of those noted above. The only factor the FHA is concerned with when it comes to this rule is the amount of time the seller has owned the property. If it’s less than 90 days, you can’t finance it with an FHA loan. And if you’re between 91 and 180 days and the amount is 100% more than what the property previously sold for, two appraisals may be required.

Recommended: Minimum Down Payment for FHA Loan

Complying with FHA Flipping Guidelines

It’s easy to comply with FHA flipping guidelines. That’s because your lender can’t give you an FHA loan if the property has been owned less than 90 days.

The onus falls to the FHA appraiser to properly document the date and amount of prior transactions in the appraisal report. The lender submits this information to the FHA when making your application.

Documenting Property Acquisition

The appraiser is tasked with documenting the date of acquisition for the seller and will also verify that the seller is the owner of record. Verification may include documents such as the property sales history, a copy of the recorded deed, a copy of the property tax bill, and a title search.

Appraisal Requirements

Appraisers must include all transactions in the previous three years on their Uniform Residential Appraisal Report (URAR) to submit to the lender. They must also consider and analyze the comparables used to determine the value of the property being sold.

Consequences of Not Following the FHA Flip Rules

The main consequence for not following the FHA flip rules is that your mortgage application may be denied.

Alternatives to FHA Loans

If you have your eye on a flipped property that has miraculously been significantly improved in less than 90 days, there are other roads you can take to acquire it. These include:

•  Waiting to write the contract until the seller has owned it 91 days (and getting that second appraisal if necessary)

•  Financing with a conventional loan, or applying for a VA loan if you are eligible

•  Arranging seller financing

No other loan type has a flip rule like the FHA, so if you’re really intent on buying that flip, you can also explore another loan type. Read up on FHA loans vs. a conventional mortgage, then talk to a lender, ideally one that offers both FHA and conventional loans.

The Takeaway

For the most part, the FHA flip rules are simple to understand and follow. Basically, you won’t be able to get an FHA loan on a property that the seller purchased less than 90 days ago. The lender is the one who is required to follow the rule.

Documentation requirements fall on the appraiser and the lender, so it’s important to start with a lender you trust. There’s nothing more steadying than a lender that can be there for you every step of the way.

SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can down as little as 3.5%. Plus, the Biden-Harris Administration has reduced monthly mortgage insurance premiums for new homebuyers to help offset higher interest rates.

Another perk: FHA loans are assumable mortgages!

FAQ

What qualifies as a property flip under FHA rules?

It’s not the property that has requirements, it’s the timeline. Any property can be considered a flip if it’s owned for fewer than 90 days.

Can FHA borrowers purchase a recently flipped property?

FHA borrowers are allowed to purchase a recently flipped property as long as the owner of record has owned the property for at least 90 days. The amount they’re purchasing it for has a limit of 100% of the original value if purchased between 91 and 180 days after the original owner’s purchase, or else they’ll need an additional appraisal. After 180 days, the extra appraisal is asked for at the FHA’s discretion.

How is the 90-day flipping period calculated?

The FHA counts 90 days from the settlement date of the current owner to the day the new purchase contract is executed.

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Photo credit: iStock/warrengoldswain

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency. ^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

SOHL-Q324-024

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40-year mortgages aren’t exactly what you think they are, and we’re here to clear up the confusion. Yes, a 40-year mortgage is only 10 years longer than the traditional 30-year mortgage, but the increased time to amortize interest makes it significantly more expensive. Though it may seem more affordable on a month-to-month basis, the increased amount of interest you’ll pay over the entire loan makes it hard to pay off the principal and build equity.

Additionally, 40-year mortgages are not backed by the federal government, so it can be hard to find a lender that originates them.

Here’s a deep dive on exactly what they are, how to qualify for one, how much they cost, how they compare with other loan terms, and what factors you’ll want to consider if you’re thinking about a 40-year mortgage.

Understanding a 40-Year Mortgage

To understand a 40-year mortgage, it’s important to look at how the mortgage market works and where a 40-year mortgage fits. With a traditional 30-year mortgage, the loan is typically sold on the secondary mortgage market to be bundled into securities by government-sponsored enterprises Fannie Mae and Freddie Mac.

To be eligible for sale, the loan must meet certain criteria to be considered a “qualified” mortgage. One of these criteria is that the loan term must not be longer than 30 years (the average mortgage term length in the U.S. is three decades). So a 40-year loan isn’t considered a qualified mortgage. You might also see it referred to as a “nonconforming loan.”

Because a 40-year mortgage can’t be backed by the government, it’s harder and more expensive to originate. As a result, this type of mortgage often doesn’t make sense for borrowers or lenders.

Recommended: What Is Mortgage Curtailment?

How a 40-Year Mortgage Works

When lenders do offer 40-year mortgages, there are a number of different ways these loans can be structured.

•  ARM: The 40-year mortgages can be adjustable-rate mortgages (ARMs) where the interest rate adjusts every five or ten years.

•  Interest-only for 10 years + 30-year term: They can also operate like a 10-year interest-only loan tacked on to the front of a traditional 30-year mortgage.

•  Fixed 40-year term: They can also work as a 40-year fixed loan, much like a 30-year fixed-rate loan.

Most 40-year loans require that the property be owner occupied. But the biggest hurdle you’ll encounter in the mortgage process is finding a lender that offers 40-year mortgages. Qualification works as it does with a 30-year loan, but because the lender has to keep the loan on its books, it will be extra judicious about lending when it comes to a 40-year mortgage.

40-year Loan Modification

If you’re reading up on 40-year mortgages, you may run across the term as it relates to home loan modifications. Borrowers with FHA loans (from the Federal Housing Administration) who got into financial trouble during the COVID-19 pandemic may have the opportunity to have their loans modified (or “recast”) into 40-year loans.

Advantages and Disadvantages

With a typical 40-year mortgage, it’s clear what the advantage is because there’s only one: a lower monthly payment. A lower monthly payment may make buying a home possible for some borrowers, so it’s tempting to look at a 40-year mortgage despite the drawbacks.

The lone pro, as well as the risks and drawbacks of a 40-year mortgage, can be summarized as follows:

Pros	Cons
Lower monthly payment	Pay more in interest over a 40-year term
	May have a higher interest rate
	Builds equity more slowly
	Hard to find a lender who offers this loan type

Qualifying for a 40-Year Mortgage

Qualifying for a 40-year mortgage is similar to qualifying for other types of mortgages. In addition to the loan type and interest rate the lender can offer you, other mortgage qualification factors may include:

•  Credit score. There is no minimum score required specifically for 40-year mortgages but generally, the better the score, the better your rate.

•  Income verification. The lender will examine your employment history and how reliable your source of income is.

•  Debt-to-income ratio. How much debt you have affects how large a mortgage you can take on. Higher debt equals less borrowing power.

•  Down payment. The down payment affects the loan-to-value ratio, which affects how much the lender is willing to lend and what rate it will offer.

Recommended: How to Get a Home Loan

Comparing 40-Year Mortgage to Other Loan Terms

When you look at the costs on a 40-year mortgage, it becomes very clear what the tradeoff is. Here is an example using interest rates available in August 2024. Note that the 40-year example has a rate that adjusts every five years, so the total interest paid is an estimate.

	Mortgage amount	Interest rate	Monthly payment (principal and interest only)	Total interest paid over the term
40-year 5/5 adjustable rate mortgage	$450,000	6.625%	$2,674.73	$833,870.52
30-year fixed mortgage	$450,000	6.500%	$2,844.31	$573,950.20
15-year fixed mortgage	$450,000	6.250%	$3,858.40	$244,512.52

For a 40-year loan, you’ll pay $833,870.52 in interest for a $450,000 mortgage. In total, that’s $1,283,870.52 you’ll pay for the $450,000 loan.

The monthly payment on a 40-year mortgage is only about $200 less for a $450,000 mortgage. All told, you would save nearly $300,000 by choosing a mortgage term of 30 years vs. a 40-year mortgage. Borrowers who opt for the lowest payment with an idea that they would pay off the mortgage early would be wise to make sure they understand whether there are prepayment penalties before signing on the loan.

Factors to Consider with a 40-Year Mortgage

Because of how much more you’ll pay for a 40-year mortgage vs. 30-year mortgage, a 40-year loan comes with some serious considerations.

Long Repayment Period

A 40-year mortgage loan will take much longer to pay off. And because you’re paying a greater percentage of interest in the beginning of your loan, it will be hard to pay down the principal for quite some time.

Building Equity Is Difficult

As noted above, a 40-year mortgage loan makes building equity more difficult because of the increased interest costs. Difficulty building equity can make it harder to move because you may not have adequate profits from the home sale to make a down payment on your next home. It can also make refinancing challenging.

Interest Costs Are High

When you look at a mortgage calculator, you may be quite shocked at how much more interest you’ll pay on a 40-year mortgage when compared to a 30-year mortgage, as illustrated previously.

When a 40-Year Mortgage Makes Sense

A 40-year mortgage could make sense if:

•  You plan to refinance to a different mortgage term in the future. If you need to keep monthly costs as low as possible and refinance at a later date, such as when you’re renovating your home, then you may want to consider a 40-year mortgage.

•  It makes a difference in home affordability. If the difference between buying a home and not buying a home is a 40-year mortgage, you’re probably thinking about the 40-year mortgage. Hopefully, you could refinance down the line and save yourself a large chunk of money.

As mentioned previously, the high cost of a 40-year mortgage is a major drawback. The total amount of the mortgage works out to be hundreds of thousands more when compared with a traditional 30-year mortgage. Be sure you’re aware of the increased costs and risks before committing to a 40-year mortgage.

The Takeaway

The 40-year mortgage isn’t common and there are few scenarios where it makes sense. When you compare a 30-year mortgage with a 40-year mortgage, you’ll only pay a couple hundred dollars more per month on a 30-year mortgage, but you’ll save hundreds of thousands of dollars over the life of the loan. If you’re considering a 40-year mortgage, consult a lender you trust. They will have many tools at their disposal for helping you afford a home of your own.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Are 40-year mortgages widely available?

No, 40-year mortgages are not common because they aren’t considered conforming, qualified mortgages. Qualified mortgages follow guidelines set by the government so they’re less risky and able to be bought by Fannie Mae and Freddie Mac. A 40-year mortgage falls outside the maximum allowable 30-year term for a qualified mortgage.

Can I refinance a 40-year mortgage later?

Yes, you can refinance a 40-year mortgage at a later date, provided you can qualify for the new loan you’re applying for.

Is a 40-year mortgage a good option for first-time homebuyers?

There are serious downsides to a 40-year mortgage. It may have a more affordable monthly payment than a 15- or 30-year mortgage, but you’ll have a hard time building equity (which is important for first-time homebuyers) and you’ll pay much more in interest over 40 years than you would 30 years.

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Photo Credit: iStock/gradyreese

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

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Half a million dollars may seem like a lot, even for a nice house — but in many American cities these days, it’s close to the norm. For example, in Portland, Oregon in July 2024, the average home value hovered around $540,000. The good news? These days many mortgage programs allow qualified first-time homebuyers to put down as little as 3%, which means your down payment could be a relatively reasonable $15,000 on a $500,000 home.

Below, we’ll dive into the details about how to afford a $500,000 house.

How Much Income Do I Need to Afford a $500K Home?

Before you start to think about saving up a down payment, you may be wondering — do I make enough money to make the mortgage payments in the first place? Spoiler alert: There’s not one easy answer to the question, “How much should I be making to afford a $500,000 house?” But there is some quick math we can do to help figure out your ballpark.

For starters, keep in mind that many financial experts recommend spending no more than 30% of your gross monthly income — the amount you make before taxes are deducted — on housing. That’s about a third.

With that in mind, you can use a mortgage payment calculator to get a sense of what your monthly mortgage payments might look like. If you put $15,000 down on a $500,000 house for a 30-year home loan at a 7% interest rate, you’d pay about $3,200 per month toward your mortgage. That means you’d want to be making about three times that amount, or $9,600 per month, to comfortably afford the mortgage. That’s a yearly income of about $115,000.

Keep in mind that the $3,200 per month figure does not include expenses like mortgage insurance, homeowners insurance, or property taxes. So you would probably need a higher annual income to fully support your home purchase. If you apply the 28/36 rule, which states that your annual housing costs should be no more than 28% of your annual income, you would have about $3,500 to apply to housing. Assuming you don’t have a lot of debt eating away at your paycheck, you would need to earn around $150,000 each year to afford a $485,000 mortgage on a $500,000 home when insurance and taxes are factored in.

Recommended: The Average Monthly Expenses for One Person

How Much Is the Down Payment for a $500K House?

How much of a down payment you’ll be required to put down on a $500,000 house depends on what kind of mortgage you take out — and your creditworthiness as a borrower. The lowest down payment a first-time homebuyer would likely be able to get away with is 3%, or $15,000, while a full 20% down payment would be $100,000. That’s quite a range!

What Are the Down Payment Options for a Home Worth $500K?

Here’s the breakdown of the various down payment options for a home worth $500,000, depending on the type of mortgage you look into (and qualify for as a first-time homebuyer).

•   Those taking out a conventional home loan and wanting to avoid paying mortgage insurance would need to come up with $100,000 for a 20% down payment.

•   However, these days, qualified borrowers can get a conventional mortgage with a down payment as low as 3%, or $15,000 in this case. Other buyers may need to pony up 5%, or $25,000.

•   Government-backed FHA loans (Federal Housing Administration loans) are specifically designed for first-time homebuyers, and their minimum down payment is 3.5%, which works out to $17,500 for a $500,000 house.

•   Those who qualify for loans backed by the U.S. Department of Veterans Affairs (VA loans) may be able to buy a home without any required down payment at all, though putting down something can help you build equity faster. You can also look into down payment assistance programs.

What Does the Monthly Mortgage Payment Look Like for a $500K Home?

There’s not one set formula for what your specific monthly mortgage payment will look like for a $500,000 home — because each loan is individually written based on your credit score, debt-to-income ratio (DTI), and other pieces of your financial profile. The size of your down payment, the length of the loan’s term, and other factors will also influence the final figure.

That said, if you put down $15,000 toward a $500,000 home on a 30-year fixed-interest home loan at 7.00%, you could expect to make monthly payments of about $3,200. Given that the median household income in the U.S. is just over $75,000, that payment may be tough for many Americans to make. If your income can’t support a $500,000 home, you could consider looking for more affordable places to live in the US.

On the other hand, if you were able to save up the full $100,000 down payment, the $500,000 house would cost closer to $2,700 per month. Or if you could score an interest rate just one percentage point lower, your payments would be $2,900 per month — even if you put down only the same $15,000.

What to Do Before You Apply for a $500K Home Mortgage?

A mortgage on a $500,000 home is a substantial amount of debt to go into. You stand to save a lot of money by ensuring you get the very best loan terms you possibly can.

That’s why it’s a good idea to ensure you’re in the best financial standing possible before you put in your application. That means lowering your overall debt level (focusing especially on high-interest debt like credit card balances), carefully tending your credit score, and ensuring your income is both ample and reliable.

Should I Get Preapproved Before Applying for a Mortgage?

Getting preapproved for a mortgage gives you a leg up in a busy housing market. If you see a home you like and you’ve already got a preapproval letter in hand, you’ll be better able to swoop in before other prospective buyers.

That said, the mortgage preapproval process does usually entail a “hard” credit check (unlike a prequalification), so this step is best left for those who are very serious and ready to move if the right house shows up.

How to Get a $500K Home Mortgage

Applying for a mortgage — even a big one — is easy. Most of it can be done from the comfort of your home, online. You’ll be required to upload documentation proving your income and assets, but once you’ve gathered all the materials, the actual application is unlikely to take more than an hour to complete.

However, given the potential cost of a mortgage on a $500,000 home — whose interest could easily add up to hundreds of thousands of dollars over its three-decade term — it’s worth shopping around to ensure you’re getting the very best deal you can. Even just half a percentage point of interest can make a big difference over such a long span of time.

Recommended: The Cost of Living by State

The Takeaway

The full 20% down payment for a $500,000 home comes out to $100,000. That said, depending on your creditworthiness, you may be able to get away with putting down a much lower payment — as little as $15,000 if you’re a first-time homebuyer.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How much should I make to afford a $500,000 house?

You need an income of $115,000 per year to cover the costs of a mortgage and closer to $150,000 to afford a mortgage plus expenses such as mortgage insurance and property taxes on a $500,000 house. The more debt you have, such as a car payment or student loan, the greater your income will need to be. The size of your down payment is also a factor. The greater the down payment, the lower your income would need to be to cover your monthly costs.

What credit score is needed to buy a $500,000 house?

Each mortgage lender has its own algorithm for qualifying borrowers. That said, many mortgage lenders look for a score of at least 620, and if you’re taking out a larger mortgage, the higher your score, the better the terms you’ll likely qualify for.

How much is a $500K mortgage per month?

The answer to this question depends on the loan’s term and the interest rate you qualify for. For those with a lower interest rate, the payment might be about $2,700 per month, while for those with a higher interest rate, the mortgage might top $3,200. Remember this is for principal and interest only. After homeowners insurance, mortgage insurance, and property taxes your expenses will be higher.

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Photo Credit: iStock/ Credit:Eleganza

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency. ^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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