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A qualified mortgage is a type of loan with certain more stable features that help make it more likely that a borrower will be able to repay their loan. This doesn’t necessarily involve more work for the borrower, but it does mean that lenders will take a deeper dive into a potential borrower’s finances. The lender will analyze factors such as a borrower’s ability to repay to better determine if the mortgage they applied for is considered affordable for them under the guidelines.

Created in an effort to clamp down on the excessive risk-taking in the mortgage industry prior to 2008, the rule is intended to protect consumers from harmful practices. However, it may also make it harder to qualify under certain loan programs.

How Qualified Mortgages Work

Qualified mortgages follow three basic tenets, outlined by the government’s Consumer Financial Protection Bureau (CFPB):

1.    Borrowers should be able to pay back their home loan.

2.    A qualified mortgage should be easier for the borrower to understand.

3.    The qualified mortgage should be a fair deal for the borrower.

Based on these ideas, the CFPB created stricter guidelines for loans that are not sold to Fannie Mae or Freddie Mac to ensure that borrowers could repay loans.

For these loans, there is a limit on how much of a borrower’s eligible income can go toward debt. In general, total monthly debts cannot exceed 43% of a borrower’s gross monthly income, a percentage referred to as a debt-to-income ratio (DTI). Limiting the amount of debt a borrower can take on makes the homebuyer a safer bet for banks and less likely to default on their mortgage. Keeping the loan within a reasonable DTI ensures that a borrower is not borrowing more money than they can repay.

Next, the loan term on a qualified mortgage must be no longer than 30 years. Once again, this is in place to protect the home buyer. A loan term beyond 30 years is considered a riskier loan because the extended term means longer payback and additional interest — both key considerations when it comes to how to choose a mortgage term.

In addition, a qualified mortgage is barred from having some other risky features, such as:

•   Interest-only payments: Interest-only payments are payments made solely on the interest of the loan, with no money going toward paying down the principal. When a borrower is only paying interest, they don’t make a dent in paying off the loan itself.

•   Negative amortization: With amortization, the amount of the loan goes down with each regular payment, as is illustrated when using a mortgage calculator. In the case of negative amortization, however, the borrower’s monthly payments don’t even cover the full interest due on the mortgage. The unpaid interest then gets added to the outstanding mortgage total, so the amount owed actually increases over time. In some cases, depending upon market conditions, a borrower could end up owing more than the home is worth.

•   Balloon payments: These are large, one-time payoffs due at the end of the introductory period of the loan, historically after five or seven years.

Additionally, qualified mortgages have certain limits on the points and fees that lenders are allowed to charge. A lender can only charge up to the following maximum fees and points on a qualifying mortgage; otherwise, it’s referred to as a high-priced mortgage, which carries additional guidelines:

•   For a loan of $100,000 or more: 3% of the total loan amount

•   For a loan of $60,000 to $100,000: $3,000

•   For a loan of $20,000 to $60,000: 5% of the total loan amount

•   For a loan of $12,500 to $20,000: $1,000

•   For a loan of $12,500 or less: 8% of the total loan amount

Alongside caps on points and fees, there are also limits on the annual percentage rate (APR) that can be charged on a qualifying mortgage. This threshold can vary depending on the loan’s size or type.

Lastly, lenders must verify a borrower’s ability to repay the loan, so they’re not immediately scrambling to figure out how to lower mortgage payments. The ability-to-repay rule encompasses different aspects of a borrower’s financial history that a lender must review. Specifically, a lender is likely to review items such as:

•   Income

•   Assets

•   Employment

•   Credit history

•   Alimony or child support, or other monthly debt payments

•   Other monthly mortgages

•   Mortgage-related monthly expenses (such as private mortgage insurance, homeowners association fees, or taxes)

Under some circumstances, however, lenders might not have to follow the ability-to-repay rule and the mortgage can still count as a qualified loan.

In addition to the protections provided to borrowers, the rule also grants lenders some protection. Qualified mortgages offer safe harbor to the lender if ability to repay rules were properly adhered to when qualifying the borrower(s) for the requested loan program. In these instances, borrowers can’t sue based on the claim that the institution had no basis for thinking they could repay their loans. The rules also make it harder for borrowers to buy more house than they can afford.

What Is a Non-Qualified Mortgage?

A non-qualified mortgage (non-QM) is a type of mortgage loan that does not meet the standards required for a qualified mortgage, outlined above.

However, a non-QM loan is not the same as the subprime loans that were available before the housing market crash. Typically, with a non-QM loan, lenders confirm that borrowers can repay their loans based on reasonable evidence. This can include verifying much of the same information as qualified mortgage loans, such as assets, income, or credit score.

Non-qualified mortgage loans allow lenders to offer loan programs that don’t necessarily meet the strict requirements of qualified mortgages. Because non-QM loans don’t have to adhere to the same standards, it means the underwriting requirements, like the qualified mortgage DTI limit, can be more flexible.

The upside is that this can provide eligible borrowers with more loan program choices. That being said, non-qualified loans can vary by lender, so borrowers who take this route should research their options carefully and take advantage of tools like a home affordability calculator to help ensure they don’t get in over their head.

Recommended: First-Time Homebuyer Guide

When Could a Non-QM Loan Be the Right Option?

While qualified mortgages have safeguards in place for both the lender and the borrower, in some circumstances, it can make sense for a borrower to choose a non-qualified mortgage.

Many lenders offer non-QM loan programs because they have more flexible loan features. In some instances, a borrower may opt for a non-QM loan because of property issues, such as a condo that doesn’t meet certain criteria or a certain property type.

This type of loan may be right for borrowers who can afford the mortgage but who don’t conform to additional qualified-mortgage requirements. Examples of borrowers who might seek a non-qualified mortgage are:

•   The self-employed: Borrowers with streams of income that might be difficult to document, like freelance writers, contractors, and others, might consider a non-qualified mortgage.

•   Investors: People investing in real estate properties, including flips and rentals, might choose to apply for a non-qualified mortgage. This could be because they need funding faster or have a challenging time proving income from their rental properties.

•   Non-U.S. residents: People who are not U.S. residents may find it challenging to meet the requirements for qualified mortgages because they may have a low or nonexistent credit score in the U.S.

While understanding the nitty-gritty of qualified mortgages vs. non-qualified mortgages might feel overwhelming, understanding the differences and other mortgage basics might make choosing the best loan fit for your needs easier. It’s important to do your research and ask lenders questions about the different loan programs available.

Recommended: How Does Mortgage Interest Work?

The Takeaway

A qualified mortgage must conform to strict guidelines that are designed to ensure that the borrower can pay back their loan. Qualified mortgages also have limits on the rates and fees lenders can charge. Qualified mortgages can provide peace of mind for both borrower and lender, but as always, it’s important to do your research and ask lenders questions about the different loan programs available.

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

FAQ

What is not permitted in a qualified mortgage?

Qualified mortgages generally do not permit a debt-to-income ratio above 43% or a loan term longer than 30 years. There can be no negative amortization, balloon payments, or interest-only payments. Qualified mortgages are designed to help ensure that the borrower can successfully repay the loan.

What is the maximum DTI for a qualified mortgage?

The highest a borrower’s debt-to-income (DTI) ratio can be for a qualified mortgage loan is 43%.

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

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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

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

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

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOHL-Q424-122

A no-closing-cost refinance sounds divine, but it’s important to understand that you will either roll the closing costs into the new mortgage or exchange them for a slightly higher interest rate.

Because you’ll either fatten your loan principal or pay an increased rate, your monthly payments and total interest paid will likely be higher than if you had paid the closing costs with cash.

Still, a no-closing-cost refinance can help some homeowners make their finances more manageable. Read on to decide if a no-closing-cost refinance is right for you.

No-Closing-Cost Refinance: How Does It Work?

You know how they say that if something sounds too good to be true, it usually is? Well, that’s true in this case, too.

When you undertake a mortgage refinance, you’re taking out a whole new loan, hopefully with a lower rate or shorter term.

The costs to do so are usually 2% to 5% of the total loan amount. For a refinance loan of $300,000, for example, that is $6,000 to $15,000, a big pill to swallow if the costs are to be paid upfront.

A no-closing-cost refinance means you get to take out a new mortgage without paying closing costs out of pocket or you accept a higher rate for the new loan.

Let’s break it down.

Closing Costs? What Closing Costs?

When a borrower signs mortgage documents, a variety of fees and expenses come along for the ride, which you probably remember from signing your mortgage the first time.

Right away or after a set number of months, depending on the kind of mortgage they have, homeowners can attempt to lower their mortgage rate and shorten their loan term with a refinance or, if they’re sitting on enough home equity, apply for cash-out refinancing. (While SoFi does not offer a no-closing-cost refinance at this time, we do offer traditional mortgage refinancing and cash-out refinancing.)

They may want to transition from an adjustable-rate mortgage to a fixed-rate mortgage — or a fixed-rate mortgage to an ARM.

Some may want to refinance their FHA or USDA loan into a conventional loan to get rid of mortgage insurance; others may be looking to refinance their jumbo loan.

If rates have fallen or if your creditworthiness has significantly improved since you took out your mortgage, those are among the signs it might be time for a mortgage refinance.

But there’s no free lunch when it comes to closing costs, even with a “no-closing-cost refinance.” The mortgage refinancing costs add up.

Here are expenses that might be rolled into the refinanced loan:

Lender fees. Borrowing money costs money! Your lender might assess an application fee, processing fee, credit report fee, and underwriting fee. Most but not all lenders charge an origination fee. Any points on the mortgage, aka discount points, may be rolled in.

Title insurance fees. A title search ensures that no one else can claim ownership of your home.

•   Appraisal fee. The home appraiser’s fee is usually charged early in the closing process, so you probably won’t be able to add it to the new loan

Other closing costs can’t always be rolled into the new loan. They include:

•   Prepaid property taxes

•   Homeowners insurance

•   Any homeowners association dues

If you compare no-closing-cost refinance offers, ensure that each lender is willing to cover the same items.

And be aware that a lender that will cover lender fees, third-party charges, and prepaid items will probably charge a higher rate.

The Cost of a ‘No-Cost Refinance’

Given the heft of closing costs, a no-cost refinance might be sounding better and better. But whether you opt to accept a higher rate or roll in the closing costs, you will likely still end up paying those costs over time.

And depending on their total expense, as well as the interest rate and mortgage term, closing costs can eclipse the savings you stand to gain by refinancing in the first place.

That’s why it’s important, given your anticipated new loan rate and term, to use a mortgage calculator and scour loan estimates you’ll receive after applying for a mortgage refinance to know the full amount you’ll pay over the life of the loan.

With any mortgage refinance that includes closing costs, it’s a good idea to look at the refinance break-even point: closing costs divided by the expected monthly savings. That will give you the number of months it will take to recoup the costs to refinance.

If a refinance adds $100 a month to your mortgage payment and your lender is covering $4,000 in closing costs, you’ll break even after 40 payments, or three years and four months.

Recommended: Mortgage Recast or Mortgage Refinance?

Pros and Cons of a No-Closing-Cost Refinance

So-called no-closing-cost refinances have upsides and downsides to consider.

Benefits of a No-Closing-Cost Refinance

•   This kind of refinance can help keep homeowners from owing a hefty bill all at once, making it possible to refinance if they don’t have a lot of cash on hand.

•   By rolling costs into a home loan, you can keep cash on hand to use for other purposes that may be more important to you.

•   If you opt for a higher rate, you won’t use up home equity on a no-closing-cost refinance.

Drawbacks of a No-Closing-Cost Refinance

•   The closing costs may be compensated for in the form of a higher interest rate, which can be costly over time.

•   If the closing costs are added to the principal loan balance, borrowers very likely will pay more interest over the life of the loan than they would have if they’d paid closing costs upfront.

•   If you are already close to a lender’s loan-to-value threshold, then adding in closing costs could push you to the very edge. You may even find that the new mortgage will require private mortgage insurance.

Recommended: Cash-Out Refinance vs. HELOC

Is a No-Closing-Cost Refinance Right for You?

If you stand to save money by refinancing your home — and if you’ll be in your home long enough that you’ll break even on the refinance — it might be worth footing the elevated interest rate or higher loan principal of a no-closing-cost mortgage refinance.

For those who don’t have the cash on hand to pay for closing costs upfront, this approach is the only feasible way to achieve a refinance at all.

If, however, you’re able to pay the closing costs upfront, doing so can help keep the loan less expensive over its lifetime.

The Takeaway

With a no-closing-cost refinance, closing costs are either added to the new mortgage or exchanged for a higher interest rate. A no-cost refinance can make refinancing possible for those who can’t pay the closing costs upfront, but it’s important to look at costs over the life of the loan and your plans as a homeowner to ensure that it makes financial sense.

SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.

FAQ

What is a free refinance?

“Free refinance” is just another name for a no-closing-cost refinance. While borrowers who choose this route will not pay closing costs, they may find that the costs are rolled into their loan, which can mean higher payments over the long term.

How much are refinance closing costs?

Refinance closing costs are typically from 2% to 5% of your loan amount — so your cost will depend on how much money you are borrowing. Lenders may have differing fee schedules, but 2% to 5% is a good rule of thumb.

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.
^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q424-123

Whether you’re buying a home or an investment property, it’s important to understand property ownership rights in real estate. Each type of real property has a classification of ownership that determines what can be done with that asset. A freehold estate refers to real property where the owner has full ownership rights, allowing the property to be passed down indefinitely.

In this guide, we’ll take a closer look at the definition of freehold estates and the implications for property owners.

Definition of Freehold Estate

What is a freehold estate? A freehold estate is an estate in land that has an undefined duration of ownership, while a non-freehold estate involves leased property rights with a specific termination date.

In other words, an owner of a freehold estate has exclusive and indefinite rights to the property. This means that it can be passed on to heirs or beneficiaries for any amount of time. The specifics depend on the type of freehold estate, which we’ll elaborate on below.

Types of Freehold Estates

There are three main types of freehold estates: fee simple absolute, fee simple defeasible, and life estate. Conditions for ownership and how the property may be used vary between each type.

•  Fee simple absolute: This is the most common type of freehold estate. It gives property owners complete rights to a property title in perpetuity and to use the land without restriction, as long as you pay property taxes and avoid violating any active easements and local land use regulations.

•  Fee simple defeasible: This type of freehold estate operates similarly to fee simple absolute but with more restrictions. For example, fee simple defeasible could require that a farm remain as agricultural land. If a buyer violates these conditions, even after closing, the property could legally revert back to the seller or a specified heir or third party. Keep these conditions in mind if making an offer on a home with a fee simple defeasible situation.

•  Life estate: This type of estate is a form of joint ownership that allows a grantee to receive the title to a property upon the grantor’s death, rather than going through probate. Life estates are often created by property owners who want to streamline the process of giving their home or land to a child or heir after they pass. The grantor may continue occupying their home, but selling the property or mortgage refinancing would require the grantee’s approval.

Rights Associated with Freehold Estates

A freehold estate is the highest degree of property ownership, giving the owner the right to use the land for any lawful purpose, unless otherwise restricted by an encumbrance or fee simple defeasible ownership.

With a freehold estate, the property owner has an unlimited duration of ownership. They have the right to sell their home or property, lease it to others, and pass it down to heirs.

Freehold vs. Leasehold Estates

There are non-freehold estate arrangements to become familiar with, too.

If you’ve ever rented an apartment, you’re likely familiar with the concept of a lease agreement. A leasehold estate operates on the same principles. Put simply, it refers to a tenant’s exclusive right to occupy a property for a specific period of time.

When comparing a leasehold and a freehold estate, the key difference is the duration of the occupant’s rights. Leasehold estates are temporary and dictated by the terms of the lease, while freehold estates grant an indefinite duration of ownership.

Recommended: Mortgage Calculator With Taxes

Creation and Transfer of Freehold Estates

If you own a home or property, you already are in possession of a freehold estate. How the property is transferred will depend on the type of freehold estate. One way to transfer ownership is through a life estate.

Setting up a life estate can be done through a life estate deed. This legal document is filed with your local recording office to ensure the other person, known as the remainderman, is added to the deed. Again, using a life estate helps an heir receive the property faster by avoiding probate. Creating a life estate is serious business, and it is not the only way to transfer property to avoid probate, so it’s wise to consult an estate planning expert before you sign anything.

Recommended: Mortgage Interest Deductions

Limitations on Freehold Estates

There are limitations to any type of property ownership, including freehold estates. Of note, there could be a legal claim against a property from a party other than the owner, known as an encumbrance.

There are multiple types of encumbrances, including easements, liens, and encroachment.

An easement grants land use rights or property access to a third party. For example, a utility may have an easement to run a gas line through a property, or an easement can grant access to a shared driveway. This might have an impact on how much a house is worth.

Properties may be encumbered by a lien, which gives another party the right to seize the property for nonpayment of a debt, such as home mortgage loans, property taxes, or homeowners association fees. Since the estate serves as collateral, the property can be sold if needed to recoup unpaid debts.

Encroachments can also limit the use of freehold estates. An encroachment occurs when a neighbor has built a structure that intrudes on a property, limiting its full use.

During the homebuying process, in addition to ordering a home inspection, buyers typically request a formal title search to make sure there aren’t any encumbrances or claims against the property, which could delay closing.

Freehold Estates in Different Jurisdictions

Freehold estates exist in different jurisdictions in the U.S. and abroad. In the U.S., they are dictated by state and local laws.

Local zoning outlines how a property can be used in a specific area, as well as building dimensions and characteristics. Some common types of zoning include residential, commercial, agricultural, and industrial. Residential zoning may also differentiate between single-family and multifamily properties.

Freehold Estates in Estate Planning

Freehold estates are often referred to as “estates of inheritance”, since the estate is transferred to the owner’s heirs upon death. Including freehold estates when doing estate planning can give peace of mind that loved ones will have fewer legal and financial hurdles to deal with. Otherwise, the transfer of property and other assets can get held up in probate court.

The Takeaway

Buying real estate is a major investment. Freehold estates provide owners with indefinite property rights, though there can be limitations depending on encumbrances and the type of freehold estate arrangement.

Unless you’re a real estate professional, some of these terms may go beyond your needs. However, understanding your rights as a property owner and if there are any claims against your property is essential for protecting your investment when you are buying a home or other property.

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

FAQ

How does a freehold estate differ from fee simple ownership?

Fee simple ownership is a type of interest that property owners can have in a freehold estate. Fee simple ownership lets you do as you wish with a property, barring any liens or local laws, while the other types of freehold estates carry more conditions for how a property is used and transferred.

Can a freehold estate be taken away by the government?

A freehold estate could be taken by the government through eminent domain, or when the owner dies if there aren’t any heirs or beneficiaries. Eminent domain allows governments to claim private property if it’s necessary for public use and after compensating the owner.

Are there any restrictions on selling a freehold estate?

A freehold estate can be sold or bequeathed as the owner sees fit, without conditions and restrictions. However, there may be specific restrictions for how the property is used if conditions were set by the seller. This is known as fee simple defeasible ownership.

Photo credit: iStock/Kirpal Kooner

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOHL-Q424-006

A 5.2% increase in the conforming loan limits for 2025 raised the baseline loan limit for a single unit to $806,500 in most counties in the United States.

The adjustment is a result of a change in the average price of a home nationwide from the third quarter of 2023 to the third quarter of 2024. Home prices increased an average of 5.21%, and the baseline conforming loan limit kept pace.

Conforming loans may be cheaper than nonconforming loans like jumbo mortgages, but jumbo loans have their place.

Conforming Loan Limits for 2025

The conforming loan limits set by the Federal Housing Finance Agency can vary based on area and the number of units in the property.

In most counties, that number increased to $806,500 in 2025 for a one-unit property. In high-cost areas, the limit is $1,209,750 for a one-unit property.

In general, here’s how the baseline conforming loan limits break down for 2025.

Recommended: The Cost of Living by State

Why Care About Conforming Loan Limits?

Staying under a conforming loan limit means you’ll most likely obtain a lower-cost mortgage. Mortgages that “conform” to the limits can be acquired by Fannie Mae and Freddie Mac, government-sponsored enterprises.

Because these mortgages can be bought by the agencies and then sold to investors on the secondary mortgage market, they represent a lower risk to the lender and a lower cost to the consumer.

If you need to finance more than the conforming limit, you’ll need to look at jumbo mortgage loans.

Getting a jumbo loan involves clearing more hurdles than a conforming loan. The rate will usually be similar to conforming loan rates, but sometimes it can be lower. How jumbo can a loan be for a primary residence, second home, or investment property? It’s up to each lender.

Government-backed mortgages are also nonconforming loans, and although they serve certain homebuyers, they also may be more expensive than conforming conventional loans because they usually come with additional fees.

Recommended: How to Get a Mortgage Loan

Notable Counties Above the Standard Loan Limits

Loan limits are higher in counties where the average home price is above 115% of the local median home value. The loan ceiling is 150% of the baseline value.

For 2025, the high-cost-area loan limit increased from $1,209,750 to $1,209,750 on a one-unit property. Alaska, Hawaii, Guam, and the U.S. Virgin Islands also have a baseline loan limit of $1,209,750.

The following is a chart of counties (and some cities) in high-cost areas with an increased baseline loan limit. The increased amount for high-cost areas maxes out at $1,209,750 in select areas.

Will Conforming Loan Limits Rise or Fall?

The baseline conforming loan limit is adjusted each year to reflect the change in the average home value in the United States.

The conforming loan limit has increased steadily for the past 10 years and has never declined. From 2006 to 2016, for example, the conforming loan limit remained at $417,000, despite declining home values across the country. If home values continue to rise, the conforming loan limit will also rise.

Conforming Loan Limits Over the Past 10 Years

The 5.2% increase in loan limits for 2025 is lower than the previous year’s increase of 5.5% and far lower than the 18% increase of 2022, which was the largest jump in the past 40 years. But it still represents an increase of $39,950 over the past year alone.

The Takeaway

Conforming loan limits are intended to keep costs low for homebuyers. This means competitive pricing on mortgages, no matter what the housing market looks like each year.

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

FAQ

Is a conforming loan a good thing?

Yes, generally speaking, staying under a conforming loan limit means you’ll most likely obtain a lower-cost mortgage.

Is a conforming loan the same as a conventional loan?

No, a conventional loan is one that is not backed by a government agency — it might come from a private lender such as a bank. A conforming loan is one in which the underlying terms and conditions adhere to the funding criteria, including loan amount limits, spelled out by Freddie Mac and Fannie Mae. Conventional loans can be conforming. Those that do not follow the conforming loan limits are considered “jumbo” loans.

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Signing on a knowledgeable mortgage lender is one of the first steps you’ll take on your journey to homeownership. A good lender could help you make a sound decision about a major commitment.

If you want to know what questions to ask a mortgage lender, these can help you feel more confident choosing a lender to navigate the complex homebuying process with you.

1. How Much Can You Borrow?

How much you can borrow is the question most buyers have on their minds when they start dreaming about real estate listings online. You may have come across a mortgage calculator tool that estimates how much a mortgage is going to cost.

But that’s just a starting point. A mortgage lender will evaluate the entire spectrum of a homebuyer’s financial situation and find the true amount they’ll be able to borrow. The lender may also make recommendations for programs or loans for each buyer’s unique situation.

When you get a loan, you’ll receive a mortgage note, a legal contract between the lender and you that provides all the details about the loan, including the amount you were approved to borrow.

2. How Much of a Down Payment Do You Need?

Another key question your lender can help answer for you is how much are down payments? You’ve probably heard about the ideal 20% down, but a lender may be able to help homebuyers get into a home with a much lower down payment, such as 3% or 5%. The lowest down payment option is often available only to first-time homebuyers. But anyone who hasn’t owned a primary residence in the last three years is often considered a first-timer.

A 20% down payment will enable you to forgo mortgage insurance on a conventional loan (one not insured by the federal government), but lower down payment amounts can help homebuyers obtain housing sooner. There are plenty of options to explore with your lender.

3. What Is the Interest Rate and APR?

Your mortgage lender may explain the difference between the interest rate and annual percentage rate.

•   Interest rate. The interest rate is the cost to borrow money each year. It does not include any fees or mortgage insurance premiums.

•   APR. The APR is a more comprehensive reflection of what you’ll pay for the mortgage, which will include the interest rate, points paid, mortgage lender fees, and other fees needed to acquire the mortgage. It’s usually higher than the interest rate.

The interest rate and APR must be disclosed to you in a loan estimate with the other terms and conditions the lender is offering. Pay particular attention to how the APR changes from loan to loan. When you’re looking at APR vs. interest rates for an FHA loan and a conventional mortgage, for instance, you’ll notice the numbers come out very different. (This is just a recent example.)

In this case, the interest rate on a 30-year FHA loan is lower than on a conventional loan; however, when accounting an upfront mortgage premium for the FHA loan and other fees, the APR is higher on the FHA loan than on the conventional loan.

4. What Are the Differences Between Fixed- and Adjustable-Rate Mortgages?

The main difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is whether or not the monthly payment will change over the life of the loan.

•   Fixed-rate mortgages start with a little higher monthly payment than an ARM, but the rate is secure for the term.

•   An adjustable-rate mortgage will start with a lower interest rate that may increase as the index of interest rates increases. This type of loan may be more appropriate for buyers who know they will not be keeping the mortgage for long.

The key to an ARM is to know how it adjusts. How frequently will your rate adjust? How much could your interest and monthly payments increase with each adjustment? Is there a cap on how high your interest rate could go? A good mortgage lender will help you consider all these variables when selecting a fixed-rate or adjustable-rate mortgage.

5. How Many Points Does the Rate Include?

What are points on a mortgage? Mortgage points are fees paid to a lender for a lower interest rate. Asking your lender how many points are included in the rate can help you compare loan products accurately.

6. When Can the Interest Rate Be Locked In?

Rate lock policies differ from lender to lender. Check at the top of the first page of your loan estimate to see if your rate is locked, and for how long.

You’ll want to ensure that any rate lock agreement gives you enough time to close on your loan. Many lenders have fees for extending a rate lock.

7. How Much Are Estimated Closing Costs?

One of the most important documents you’ll receive from your lender is called a loan estimate. The loan estimate gives a detailed breakdown of the interest rate, monthly payment, fees, and closing costs on the loan you’re applying for. When you ask about closing costs, your lender can provide this document to you.

Common closing costs include:

•   Appraisal fee

•   Loan origination fee

•   Title insurance

•   Prepaid expenses such as homeowners insurance, property taxes, and interest until your first payment is due

Expect to see 2% to 5% of the purchase price in closing costs.

8. Are There Any Other Fees?

Lenders are required to disclose all costs in the loan estimate. They’re also required to use the same standard form so you can compare costs and fees among different lenders accurately. Be sure to ask lenders about other fees and watch for them on your loan estimate.

9. When Will the Closing Happen?

The time to close on a house will depend on your individual circumstances, but the national average is 43 days.

An experienced lender with a digitized process may be able to close a loan more quickly. The time it takes a lender to approve and process the loan are also factors to consider.

10. What Could Delay the Closing?

In the August 2024 National Association of Realtors® Confidence Index survey, 14% of real estate transactions had a delayed settlement. Previous surveys have shown that the main reasons for a delay included appraisal issues, financing issues, home inspection or environmental issues, deed or title issues, or contingencies stated in the contract.
An experienced lender may know how to bring a home to the closing table despite the challenges with financing and appraisals. Be sure to ask upfront how these challenges would be addressed.

11. What Will Fees and Payments Be?

The neat part about obtaining a mortgage since 2015 is that the information is included in a standard form, the loan estimate. The form is used by all lenders and allows borrowers the opportunity to compare costs among lenders quickly and accurately. All fees and payments are required to be clearly outlined in this form.

Recommended: Guide to Mortgage Statements

12. How Good Does Your Credit Need to Be?

You’ll typically need a FICO^® credit score of at least 620 to get a conventional mortgage, but lenders consider a credit score just one slice of the qualification pie.

With a lower credit score, a lender may steer you in the direction of an FHA loan, which requires a score of 580 or higher to qualify for a 3.5% down payment. Credit scores lower than 580 require a 10% down payment for an FHA loan.

Borrowers with credit scores above 740 may qualify for the best rates and terms a lender can offer.

13. Do You Need an Escrow Account?

Your lender can set up an escrow account to pay for expenses related to the property you’re purchasing. These may include homeowners insurance and taxes. An escrow account can take monthly deposits from the borrower, hold them, and then disburse them to the proper entities when yearly payments are due. In some locations and with certain lenders, escrow accounts are required.

14. Do You Offer Preapproval or Prequalification?

Lenders have different processes for qualifying mortgage applicants so it’s important to understand prequalification vs. preapproval. Preapproval is a much more in-depth analysis of a buyer’s finances than prequalification.

A preapproval letter provided by the lender specifies how much financing the lender is willing to extend to you, and helps to show sellers you’re a qualified buyer. Getting preapproved early in the homebuying process can also help you spot and remedy any potential problems in your credit report.

15. Is There a Prepayment Penalty?

A prepayment penalty is a fee for paying off all or part of your mortgage early. Avoiding prepayment penalties is easy if you choose a mortgage that doesn’t have any. Ask lenders if your desired loan carries a prepayment penalty. It will also be noted in the loan estimate.

16. When Is the First Payment Due?

A lender will be able to help you get your first payment in, which is typically on the first day of the month after a 30-day period after you close. For example, if you closed on Aug. 15, the first mortgage payment would be due on the 1st of the next month following a 30-day period (Oct. 1).

Each mortgage statement sent every billing cycle includes current information about the loan, including the payment breakdown, payment amount due, and principal balance.

17. Do You Need Mortgage Insurance?

Your mortgage lender will guide you through the process of acquiring private mortgage insurance, commonly called PMI, if you need it. Mortgage insurance is required for most conventional mortgages made with a down payment of less than 20%, as well as for FHA and USDA loans.

It’s not insurance for the buyer; instead, it protects the lender from risk. A good mortgage lender can also help advise borrowers on dropping PMI as soon as possible. A home loan help center can help you learn more about PMI or any mortgage question.

Recommended: What is PMI & How to Avoid It?

18. How Much Is the Lender Making Off of You?

Lenders are required to be clear and accurate when it comes to the costs of the loan. These should be fully disclosed on your loan estimate and closing documents. If you want to know how much the lender is charging for its services, you’ll find it under “origination fee.”

The Takeaway

If you’re shopping for a home loan or thinking about it, you might have mortgage questions — about down payments, APR, points, PMI, and more. Don’t worry about asking a lender too many, because many buyers need a guide throughout the homebuying journey. Asking questions is a great way to get to the lender and loan terms that make the most sense for your financial situation.

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

FAQ

What should you not say to a mortgage lender?

The most important thing to remember when communicating with a prospective lender is that you should be truthful — about everything, but especially your finances.

What questions can a mortgage lender not ask?

Generally speaking, most of the topics that are off limits in a job interview are also off limits in a mortgage negotiation. A lender should not ask you about race, ethnicity, religion, or sexual orientation, for example. You also shouldn’t be asked your age (unless you are applying for an age-based loan), or about your family status (married vs. divorced, whether you are planning to have kids, etc.), or about your health.

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*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.

^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.
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.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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