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If you’re into real estate investing, and you’re thinking about expanding your portfolio to include multiple rental properties, you may have seen the acronym BRRRR and wondered what it means.

BRRRR — which stands for Buy, Rehab, Rent, Refinance, Repeat — is kind of like house flipping, but on steroids. Instead of reselling a newly rehabbed home for a one-time profit, a BRRRR investor keeps the property and rents it with the goal of generating income while also building equity to make another purchase, and another, and so on.

Read on to learn more about this complicated investing strategy, how it works, and some pros and cons.

Understanding the BRRRR Method

Don’t let the “cool” and easy-to-remember acronym fool you: Successfully executing each step of the BRRRR method can require time and effort, and knowledge about how to invest in real estate, especially in your local market. Here are some BRRRR real estate basics:

BRRRR Meaning

BRRRR is a strategy real estate investors use to keep adding rental homes to their property portfolio. Each of the five letters stands for a step in the process:

•  B – Buy a property that you expect to gain significant value but that may need a substantial amount of work.

•  R – Rehab that property to gain equity and make it appealing to renters.

•  R – Rent the property to provide an income source.

•  R – Refinance the property with a cash-out refinance to provide money for your next investment property.

•  R – Repeat the process with another property that needs help and keep building your portfolio.

Origin and Evolution of the Strategy

Investors have been following these steps for years in an effort to maximize the profits from their rental properties. But podcaster and blogger Brandon Turner of BiggerPockets.com gets credit for the catchy BRRRR acronym, which is now a common term in the real estate lexicon.

Breaking Down the BRRRR Method

Each step in the BRRRR process presents its own challenges, which may become easier as you develop your own systems and go-to sources. Here’s a look at what to expect.

Buy

Finding the right property to purchase is critical to making the whole strategy work. Many experienced BRRRR investors recommend buying a distressed property that’s in need of renovations, so you can get in cheap and secure the biggest return on your investment. If you have the wherewithal to manage this type of project without getting in over your head, you may be able to quickly add to your equity. And if the property is in a sought-after area, you may find you can charge more for rent.

Rehab

A distressed property may be a good buy, but major repair costs can cut into your profit. And unless you plan to do the work yourself, you’ll need a reliable contractor to help you renovate. Budgeting is a big factor at this stage. It can help to know the market, so you don’t over- or under-improve the property. And since you may be the person who gets the calls when things need to be repaired or replaced, you’ll want to make sure everything is solid and safe.

Rent

Finding the right renter can be difficult — so you may want to hire a trusted property management service to take on this step of the BRRRR strategy. You’ll likely want to check on each applicant’s employment, review their credit score, and perhaps do a criminal background check. Having a reliable renter can cut your overall costs (the place won’t sit empty, you’ll get paid, and you won’t have to worry about damages). And you may need to have a signed lease when you go to do your cash-out refinance. It’s also critical to factor in all your costs and current rent prices for comparable homes in the area when deciding how much to charge.

Refinance

Once you begin collecting rent, you can use it to pay off some of your current costs and prepare for your next purchase. Then, as soon as you have enough equity in the property, you can start the ball rolling on your cash-out refinance. The goal here is to swap your original mortgage for a new loan, preferably with better terms, and to come away with a portion of your equity in cash to put toward your next project. Lenders may have different rules regarding how long you have to own the property, or how much equity you must have to qualify, so it can be helpful to build a relationship with a reliable lender who becomes your go-to source for this step.

Repeat

With the cash from your refinance in hand, it’ll be time to start another property search — or, better yet, to move on a property you’ve already found. If the strategy works, an investor could potentially purchase multiple rental properties and continue making money through rent and equity.

Benefits of the BRRRR Method

As with any investment, there are benefits and risks associated with the BRRRR method. Some of the pros include:

•  You can build equity. If you buy multiple properties, renovate them, hold on to them, and maintain them so they keep their value, you can expect to keep building equity.

•  You can generate a reliable flow of cash. If you buy multiple properties, renovate them, hold on to them, and maintain them so they keep their value, you can expect to keep building equity.

•  You can diversify your investment portfolio Adding real estate investments that provide passive income can further diversify your portfolio, which can help protect you during market fluctuations.

•  You can take advantage of certain tax breaks. As a property owner who earns rental income, you may be able to deduct some of your expenses (mortgage interest, property taxes, repair and management costs, etc.) on your tax return each year.

Challenges and Risks

Some of the drawbacks to the BRRRR strategy can include:

•  You may experience market fluctuations. Although property values and rent prices always seem to be going up, there’s the chance they could slip and (at least temporarily) affect your profit. And if you can’t make your payments, you could lose the property.

•  You may run into renovation overruns. If you’ve ever watched a home renovation show, you know how easy it can be to go over budget. Solid planning, a thorough home inspection, and a contingency fund are must-haves for the rehab stage of this strategy.

•  You may lose rental income if there’s vacancy. Finding reliable tenants can be challenging — and unreliable tenants can mean lost income and/or added costs.

•  You may have trouble refinancing. Depending on the market, lender criteria, and your own creditworthiness, it may be harder than you expected to get a loan, or to get the terms you hoped for when buying or refinancing.

Financial Considerations

Before jumping on the BRRRR bandwagon, there are several financial considerations to keep in mind, including:

Initial Capital Requirements

Unless you’ve saved up a pile of cash to buy your first property, you’ll need to find financing. That could mean:

•  Taking out a mortgage — which can require coming up with a down payment and closing costs.

•  Borrowing against the equity in your own home — which can put your home at risk of foreclosure if your BRRRR business isn’t profitable.

•  Taking out a hard money loan — which is common for this type of real estate investing, but typically comes with high interest rates and short repayment terms — can be risky. Hard money loans are generally offered by individual investors and investment firms that can provide fast funding and usually care more about the value of the asset than the borrower’s creditworthiness.

Rehab Costs

When looking at investment properties — particularly distressed properties — it’s important to calculate the estimated value of the home after renovations and repairs. This is known as the after-repair value (ARV = current property value + value added from renovations). For the BRRRR method, it can be useful to consider how improvements will affect the value of the home for equity and rental income. A common BRRRR rule of thumb is that you should avoid paying more than 70% of the ARV when purchasing the property. So, for example, if a home’s ARV is $400,000, you wouldn’t pay more than $280,000 for the home.

It can also be helpful to carefully prioritize the renovations you plan to make. Making the home safe is critical, but your costs will also include improvements that add value, such as updating appliances, installing new windows, and adding curb appeal.

Cash-Out Refinancing

Cash-out refinancing is a critical part of the BRRRR strategy, since you’ll use the money to buy another property to rehab and rent. You may want to spend a little time researching and comparing lenders to get the best interest rate and other loan terms for your needs and goals. Be prepared: Qualifying for a cash-out refinance and the mortgage refinancing costs (loan fees and other closing costs) can be similar to a home purchase.

Return on Investment Calculations

Calculating return on investment (ROI) can help you make smarter decisions about the properties you own and those you hope to add to your real estate portfolio. Some things to consider when estimating your ROI include:

•  Purchase price and financing terms. If you pay too much for a property or the loan, your returns are likely to disappoint. Negotiating a good deal is a key to making the BRRRR strategy work.

•  Profitable and reliable rental income. Finding the sweet spot between charging competitive rental prices and keeping vacancies low is also essential.

•  Operating expenses. Keeping your property running smoothly can lower your operating costs in the long term. But things like maintenance costs, property management fees, insurance premiums, and the property taxes included in mortgage payments can all directly impact ROI. Again, finding the right balance between efficiency (getting things done) and economy (keeping things affordable) can help you maximize your profit.

•  Property appreciation. Speaking of the long term, a property’s potential to increase in value can also be an important factor when determining ROI.

•  Tax advantages. Investors can reduce their taxable income each year by claiming depreciation, mortgage interest deductions, and other tax benefits related to their rental properties.

Recommended: Mortgage Calculator with Taxes

BRRRR vs Traditional Real Estate Investing

Risk vs. reward is a common theme in all types of investing — and it’s definitely something to look at when comparing the BRRRR method to traditional real estate investing.

While investors using the BRRRR method have the potential to expand their portfolio — and grow their wealth — at a faster clip than traditional real estate investors, they’re also taking on more risk. Which is why choosing between the two approaches can boil down to knowing yourself: How much time and effort do you want to put in? How much do you really know about real estate, renovating, rentals, and the market where you would purchase the home? What is your tolerance for risk (emotionally and financially)?

If you’re relatively new to real estate investing, you may want to seek out some advice from someone who’s a BRRRR veteran. It may make sense to hone your skills and get to know your market better before diving in. Or you may decide that taking a more hands-off approach with REIT investing (investing in a real estate investment trust) is a better fit for you.

Recommended: Real Estate vs. Stocks: Pros and Cons

Tips for Successful BRRRR Implementation

Think you may be ready to tackle the BRRRR method? Here are some planning tips:

•  Use your contacts. If you’ve been investing in real estate for a while, it’s likely you have a go-to group of pros you work with on a regular basis. Tap those folks — real estate professionals, contractors, workers — for advice and assistance as you search for a property to purchase and rehab.

•  Stick to a budget. The key to BRRRR is to keep costs manageable all through the process. That means figuring out your costs before you buy, and sticking to a budget as you renovate, rent, and maintain the property.

•  Be picky about tenants. Choosing good tenants can help you avoid problems with vacancies, missed rent payments, maintenance problems, and other issues. Paying a professional service to vet potential renters could end up saving you money later on.

•  Don’t forget the importance of refinancing. Finding the right lender and home mortgage loan terms as you prepare for your cash-out refinance can help you confidently move on to the next property.

•  Learn from your wins and losses. When you hit the “repeat” stage of the BRRRR method, you can use what you learned along the way to keep improving your process and the team of people you work with.

The Takeaway

The BRRRR method of real estate investing can be profitable: Investors who make it work can enjoy passive income from their rentals and build equity in a portfolio of properties. But BRRRR also can be time-consuming and risky. Newer investors may want to wait until they have more experience with traditional real estate investing before they jump into this strategy.

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

FAQ

How long does a typical BRRRR cycle take?

A BRRRR cycle can vary based on several factors (property selection and closing, renovation schedule, cash-out refinance timeline), but it generally takes a few months to a year.

What types of properties work best for the BRRRR method?

BRRRR investors typically look for distressed properties that can be purchased for a low price. This allows them to add value faster, and to turn their equity into cash to use for their next purchase.

How does BRRRR affect taxes and depreciation?

BRRRR investors can reduce their taxable income over the long term by claiming mortgage interest deductions as well as deductions for property taxes, operating expenses, repairs and depreciation on their rental properties.

Can BRRRR be used in any real estate market?

Yes, the BRRRR method can be used in any real estate market. But it requires finding the right property at the right price, as well as having a manageable rehab budget and reasonable financing and refinancing terms to make it a success.

Photo credit: iStock/Rockaa

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 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.

SOHL-Q424-010

If you own one or more rental properties and you’re considering selling this year, it’s important to think about the impact capital gains tax on rental property could have on your profit — and on your future goals for that money.

Planning ahead is key to minimizing the hit to your bottom line. So read on for some capital gains tax basics and a few strategies that can help rental property owners lower the tax burden when they decide to sell.

Capital Gains in Real Estate

When you invest in real estate, the expectation (or hope, at least) is usually that when you sell it, you’ll make a nice profit on the deal. It’s one reason so many people have been investing in single-family rental homes in recent years.

You may already have a plan for how you’ll use that profit — to make another investment, for example, or to put toward your retirement. But if the value of the property has increased substantially during the time you’ve owned it, you should also be prepared to hand over some of your gains to the IRS to cover the capital gains tax.

What Is a Capital Gain?

When you determine how much a house is worth, find a buyer, and sell a capital asset for more than you paid for it, the increase in value is referred to as a capital gain.

Capital gains taxes are the taxes you pay on the profit you made because of that increase in value. The tax isn’t applied while you own the asset — in this case a rental property. It hits only when you profit from the sale.

Short-Term vs. Long-Term Capital Gains

The length of time you owned the property before selling it determines whether your profit is a short-term or long-term capital gain. This distinction can make a significant difference in how, and how much, your gains are taxed.

•  Short-term capital gains: If you sell the property after owning it for a year or less, the profit is considered a short-term capital gain, and you’ll be taxed at your ordinary income tax rate for the year you made the sale. Tax rates are always subject to change, but the maximum you could pay for short-term capital gains on a rental property in 2024 is 37%.

•  Long-term capital gains: If you sell after holding the property for more than a year, the profit is considered a long-term capital gain, which makes it subject to preferential capital gains tax rates. Long-term capital gains tax rates are set at 0%, 15%, and 20%, based on your filing status and income.

How Capital Gains Tax Works on Rental Properties

If you’ve ever sold a home, you’re probably familiar with the “home sale exclusion” that eligible home sellers can use to avoid or reduce the capital gains tax on the sale of their primary residence.

Unfortunately, this exclusion typically doesn’t apply to a property used as a rental. (Though there may be an exception if you lived in the property during part of the time you owned it and rented it part of the time.)

Factors Affecting the Capital Gains Tax You May Pay

Without the home sale exclusion, the primary factors that will go into deciding how much you ultimately could be taxed on your gains include:

•   How long have you owned the property?

•   How much did you pay for the property?

•   How much did you spend on improvements to the property?

•   How much did you claim in depreciation?

•   How much did you sell the property for?

•   What was your filing status and taxable income in the year you made the sale?

Recommended: What Is a Home Inspection?

Calculating Capital Gains on Rental Property Sales

These steps can help you estimate the gain on the sale of a rental property:

1.    Start by determining your cost basis (or adjusted cost basis if you made major improvements). This is the price you originally paid for the property, plus money you spent on major improvements (such as additions and upgrades), minus the amount you claimed for depreciation over the years and/or casualty and theft losses.

2.   Next, calculate the capital gain. To do this, subtract your adjusted cost basis from the net proceeds of the sale. (Net proceeds is the amount the seller walks away with after all the closing costs are paid and any home loan balance is paid off.)

Strategies to Minimize Capital Gains Tax on Sale of Rental Property

There are several strategies that can help sellers avoid paying capital gains tax on real estate, either by legally deferring or minimizing their gains.

1031 Exchange

A 1031 exchange is an effective but complicated strategy that allows the owner of an investment property to defer paying capital gains taxes if the sale’s proceeds are reinvested into a replacement or “like-kind” property.
The IRS has several rules regarding the type of property that can be used in the exchange, the timeline, and other details, so you may want to consult with a tax professional if this strategy appeals to you.

Tax-Loss Harvesting

With tax-loss harvesting, you can sell long-term positions in your investment portfolio that have produced capital losses, replace them with similar (but not identical) investments, and then use the loss to offset the gains from the sale of your rental property.

If your losses exceed your gains, you can even use the excess to offset up to $3,000 of ordinary income that year, with any remaining losses carried forward to future years. But again, you’ll likely need some professional help to make sure you’re getting the most out of your investments and that you’re following IRS rules.

Installment Payments

If you prefer to spread out your capital gains tax liability over a period of several years, you may want to look at the benefits of receiving installment payments from the buyer instead of a lump sum. With this method, you would pay capital gains tax only on the portion of the gain you receive each year until the property is paid off.

Convert the Rental Property to Your Primary Residence

If you move into the rental property and make it your primary residence before the sale, you may be able to use the home sale exclusion to reduce your capital gains.

Of course there are IRS rules: To qualify, you must own and occupy the property as a principal residence for two of the five years immediately before the sale. But the ownership and occupancy don’t have to be concurrent, so if you’ve lived in the property as your primary residence for at least 24 of the last 60 months, the gains may qualify for the tax exemption.

Reporting Capital Gains on Rental Properties

The IRS has specific rules for reporting the capital gains on a rental property.

You can start by making sure you get a copy of Form 1099-S. Typically, the person who closes the transaction (real estate attorney, lender, real estate broker title company, etc.) is required to file this form in order to report the sale of a business property. Copies go to the seller and the IRS.

You’ll use Form 1099-S along with other records and receipts to report the capital gains from the sale on your tax return. It’s important to have the original closing documents from your purchase, the real estate purchase contract and closing documents from the sale, receipts related to major improvements, records of any depreciation claimed, and any other relevant paperwork related to the property. This way you (or your tax professional) can more accurately complete the appropriate tax forms and schedules when it’s time to file your tax return.

Filling out these forms can be challenging, especially if it’s your first time selling a rental property and dealing with capital gains. You may want to tap a tax attorney or other professional for the job to ensure that you’re fully compliant with IRS rules.

State-Specific Capital Gains Taxes

Depending on where you reside, you also may have to pay taxes on your capital gains to your state. Most states have a capital gains tax rate between 2.9% and 13.3%, although some states (Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming) don’t charge any capital gains tax.

Impact of Capital Gains on Investment Strategy

Smart planning can help investors manage and mitigate the impact of capital gains. Some things to consider include:

•  Timing: If you can put off selling an asset until you’ve held it for at least a year, you can qualify for the lower long-term capital gains tax rate. Delaying also may make sense if you decide to wait until you have investment losses that can offset the profit from the sale of your rental property. Or you could wait for a year when your income is lower so that you’re taxed at a lower rate.

•  Reinvestment opportunities: Reinvesting the profit from your sale into another investment could open up new opportunities to grow your money — and possibly reduce or defer your tax liability (if, for example, you choose to do a 1031 exchange). A financial advisor can help you figure out your next move and what might be a good fit for your goals.

•  Think holistically: How does selling or not selling the rental property fit into your overall investment plan? It might be better to sell for a profit now and pay the taxes than to wait and end up losing money on the sale.

Recommended: Small Business Loans for Rental Property

Common Mistakes to Avoid with Capital Gains Taxes

Ultimately, it’s your responsibility as the seller to make sure your capital gains tax is accurately calculated and paid on time. Getting the amount wrong or failing to pay could result in IRS penalties. Some common mistakes to avoid include:

•  Failing to report capital gains. It’s important to report all capital gains, whether you think you’ll owe taxes on the amount or not.

•  Miscalculating the cost basis. This number is key to determining your gains (or losses) and, therefore, what you’ll owe the IRS.

•  Record keeping errors. Keeping good records can make calculating your capital gains tax easier, and you may need to provide those records and receipts if the IRS asks for documentation.

Working with Tax Professionals

You may have noticed that the word “professional” comes up repeatedly in this guide. That’s because selling a rental property, and the variables that can go into calculating and reporting the gain on your tax return, will be a little different for every seller. There’s no one-size-fits-all process for DIYers to replicate.

And let’s face it, it can be pretty darn difficult to decode the tax code if it isn’t your line of work. If your goal is to legally maximize your tax breaks, it can be helpful to seek out a tax attorney or an experienced tax professional who specializes in real estate issues.

The Takeaway

Understanding how to avoid capital gains on the sale of a rental property, and doing some proactive planning, could make a big difference to your bottom line. And the more money you can keep from the sale, the more you’ll have to put toward your other financial goals — whether they’re personal, for your business, or both.

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 are short-term capital gains?

Short-term capital gains are profits from the sale of an asset held for one year or less. (Long-term gains, as you might imagine, are the profits from an asset held longer than a year.)

Can I avoid paying capital gains tax on the sale of a home?

If the home is your primary residence, the IRS allows you to exclude a portion of the capital gain from its sale (up to $250,000, or $500,000 if married filing jointly).

Photo credit: iStock/everydayplus

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 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.

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.

SOHL-Q424-009

If you purchased your home with a VA loan but are ready to move on, you may be able to benefit from VA loan assumption. VA loan assumption allows someone else to take over your existing VA loan mortgage — and unlike when you originated your VA loan, the new borrower doesn’t necessarily have to be a military servicemember, veteran, or surviving spouse to qualify. However, your eligibility for this program depends on a few factors, including when you took out your VA loan, and has a few caveats to understand. We’ll explain below.

What Is VA Loan Assumption?

VA loan assumption is a process in which a new borrower can “assume,” or take over, an existing VA mortgage loan. As mentioned above, you don’t have to be eligible to take out a VA loan to be eligible to assume one.

In other words, using VA loan assumption, the homebuyer could take over the existing VA loan rather than securing a brand-new mortgage to buy the home (or buying it in cash). A VA loan has some benefits vs. a conventional loan, and assuming the loan may offer the buyer a lower interest rate (as VA loans often have competitive rates). On the seller side, loan assumption could attract more buyers and help a home sell more quickly.

Eligibility for VA Loan Assumption

Even when a new buyer is taking over a VA assumable loan, the original lender will still want to see proof of the new borrower’s creditworthiness. (After all, repayment of the remainder of the balance will now fall to the new borrower.) Here’s what you need to know about eligibility requirements for VA loan assumption:

For the Assumer

The person taking over the loan still needs to prove their creditworthiness to the lender or VA. The VA doesn’t specify a minimum credit score, but most lenders want to see a score of at least 620.

The assumer’s debt-to-income ratio (DTI) also matters, and should be no higher than 41%. They’ll also need to have sufficient income and be able to pay the VA loan assumption fee, which is 0.5% of the total loan balance — and the difference, if any, between the home’s sale price and the existing loan balance.

For the Seller

Those who took out a VA loan to purchase their home anytime after March 1, 1988, are eligible to sell their home via loan assumption. Be sure to triple-check that your lender will release you from the liability of the loan — otherwise, if the new borrower fails to repay or makes late payments, it could hit your credit score. And once the deal goes through, recheck to be sure your lender has finalized the release. (If you don’t yet have a VA loan but are wondering what is a VA loan and could I get one, briefly: You may be eligible for a VA loan if you are a member of the military, veteran, Reserve or National Guard member, or surviving spouse. You’ll need to get a Certificate of Eligibility from the VA in order to apply for a VA loan.)

Recommended: VA Loan Calculator

Benefits of VA Loan Assumption

As mentioned above, VA loan assumption has benefits on both sides of the table.

For buyers, taking advantage of a VA assumable loan could be very attractive if current mortgage rates are generally higher than the rate on the existing loan. Although creditworthiness still needs to be proven to the lender, if you’re wondering how long does it take to assume a VA loan, rest assured that the underwriting process may be faster since the mortgage is already written.

For sellers, having an assumable loan could expand your pool of potential buyers and help the house sell faster. Transferring a loan may also take less time than going through the process of waiting for the buyer’s new mortgage to pay off your debt.

Risks and Considerations

While there are benefits that can make VA loan assumption worth considering, there are risks and drawbacks to consider, too.

For one thing, while the new borrower doesn’t need to be eligible for a VA loan to take one over, you won’t be able to take out a new VA loan until the loan that’s being assumed is fully paid off. (Normally, you can use a VA loan multiple times to buy a house.) Additionally, you must check with your mortgage lender to ensure you can obtain release of liability for the loan to avoid impacts to your credit score after managing the loan is out of your hands.

On the buyer’s side, assuming a loan may offer better interest rates — but require more cash up front to pay the owner for the equity they’ve stored in the home. Depending on how long the loan has been in place, that total may be higher or lower than a traditional down payment.

VA Loan Assumption Process

If you want to put your home on the market with the option to assume your VA loan, you’ll need to take these steps.

1.    First, reach out to your lender and let them know your intentions. You can also use this opportunity to ask about the release of liability once the loan has been transferred.

2.    In your home sale listing, market the fact that an assumable loan option is available. This may be attractive to many buyers and increase the speed of your sale.

3.    Once you have a prospective buyer, you’ll need to offer full disclosure about the terms of the loan. (If the buyer turns out to be a service member, veteran, or surviving spouse, inquire about a “substitution of entitlement,” which is used when one person who is VA-loan eligible takes over a loan from another.)

4.    At the time of sale, you’ll need to wait for the borrower to be qualified by your lender or the VA to ensure they’re deemed creditworthy enough to take over the loan. Closing will also involve the cash payment to make up the difference to the agreed-upon purchase price.

5.    Once the loan is transferred, ensure you have documentation of your release of liability from the VA or your lender.

VA Funding Fee for Loan Assumption

While VA loans are generally low-cost ways to buy a home, they do come with a funding fee — and assumed loans have one too. However, the fee is only 0.5% in the case of assumed VA loans, which is far lower than the 1.25%-3.3% it might cost to take out such a loan in the first place.

Recommended: VA Loan Buyers Guide

Release of Liability

We’ve said it before, but it bears repeating: As the seller, you’ll want to make sure you have a document stating your liability for the loan has been released once the loan transfer is completed. Otherwise, you may see impacts on your credit score for financial behaviors you have no control over.

Comparison: VA Loan Assumption vs. New VA Loan

Here’s how VA loan assumption vs. new VA loans compare, at a glance.

The Takeaway

Assuming a VA loan can be a valuable way for borrowers to save money on interest (and enjoy a shorter repayment period) while also allowing veterans to market their home for sale in an attractive way.

SoFi offers VA loans with competitive interest rates, no private mortgage insurance, and down payments as low as 0%. Eligible service members, veterans, and survivors may use the benefit multiple times.

FAQ

Who can assume a VA loan?

Anyone who can prove their creditworthiness to the lender and afford to pay the difference can assume an available VA loan. However, if that party would not be qualified to take out their own VA loan in the first place, the original lender will not be able to take out a new VA loan until the existing one is paid off by the new borrower.

Does the assumer need to be a veteran?

The assumer of a VA loan does not need to be a veteran. However, if they are not a veteran, the original VA loan borrower will not be able to take out a new VA loan for themselves until the original loan has been paid off.

Can any VA loan be assumed?

Any VA loan issued after March 1, 1988 is eligible for assumption.

Photo credit: iStock/SethCortright

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 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.

^†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-Q424-001

What’s your number? That’s not a pickup line; it’s the digits a mortgage lender will want to know. Credit scores range from 300 to 850, and for most types of mortgage loans, it takes a score of at least 620 to open the door to homeownership. The lowest interest rates usually go to borrowers with scores of 740 and above whose finances are in good order, while a score as low as 500 may qualify some buyers for a home loan, but this is less common.

Why Does a Credit Score Matter?

Just as you need a résumé listing your work history to interview for a job, lenders want to see your borrowing history, through credit reports, and a snapshot of it, expressed as a score on the credit rating scale, to help predict your ability to repay a debt.

A great credit score vs. a bad credit score can translate to money in your pocket: Even a small reduction in interest rate can save a borrower thousands of dollars over time.

Do I Have One Credit Score?

You have many different credit scores based on information collected by Experian, Transunion, and Equifax, the three main credit bureaus, and calculated using scoring models usually designed by FICO® or a competitor, VantageScore®.

To complicate things, there are often multiple versions of each scoring model available from its developer at any given time, but most credit scores fall within the 300 to 850 range.

Mortgage lenders predominantly consider FICO scores. Here are the categories:

•   Exceptional: 800-850

•   Very good: 740-799

•   Good: 670-739

•   Fair: 580-669

•   Poor: 300-579

Here’s how FICO weighs the information:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   New credit: 10%

•   Credit mix: 10%

Mortgage lenders will pull an applicant’s credit score from all three credit bureaus. If the scores differ, they will use the middle number when making a decision.

If you’re buying a home with a non-spouse or a marriage partner, each borrower’s credit scores will be pulled. The lender will home in on the middle score for both and use the lower of the final two scores (except for a Fannie Mae loan, when a lender will average the middle credit scores of the applicants).

Recommended: 8 Reasons Why Good Credit Is So Important

A Look at the Numbers

What credit score do you need to buy a house? If you are trying to acquire a conventional mortgage loan (a loan not insured by a government agency) you’ll likely need a credit score of at least 620.

With an FHA loan (backed by the Federal Housing Administration), 580 is the minimum credit score to qualify for the 3.5% down payment advantage. Applicants with a score as low as 500 will have to put down 10%.

Lenders like to see a minimum credit score of 620 for a VA loan.

A score of at least 640 is usually required for a USDA loan.

A first-time homebuyer with good credit will likely qualify for an FHA loan, but a conventional mortgage will probably save them money over time. One reason is that an FHA loan requires upfront and ongoing mortgage insurance that lasts for the life of the loan if the down payment is less than 10%.

Credit Scores Are Just Part of the Pie

Credit scores aren’t the only factor that lenders consider when reviewing a mortgage application. They will also require information on your employment, income, and bank accounts.

A lender facing someone with a lower credit score may increase expectations in other areas like down payment size or income requirements.

Other typical conventional loan requirements a lender will consider include:

Your down payment. Putting 20% down is desirable since it often means you can avoid paying PMI, private mortgage insurance that covers the lender in case of loan default.

Debt-to-income ratio. Your debt-to-income ratio is a percentage that compares your ongoing monthly debts to your monthly gross income.

Most lenders require a DTI of 43% or lower to qualify for a conforming loan. Jumbo Loans may have more strict requirements.

How to Care for Your Credit Scores Before Buying a House

Working to build credit over time before applying for a home loan could save a borrower a lot of money in interest. A lower rate will keep monthly payments lower or even provide the ability to pay back the loan faster.

Working on your credit scores may take weeks or longer, but it can be done. Here are some ideas to try:

1. Pay all of your bills on time. If you haven’t been doing so, it could take up to six months of on-time payments to see a significant change.

2. Check your credit reports. Be sure that your credit history doesn’t show a missed payment in error or include a debt that’s not yours. You can get free credit reports from the three main reporting agencies.

To dispute a credit report, start by contacting the credit bureau whose report shows the error. The bureau has 30 days to investigate and respond.

3. Pay down debt. Installment loans (student loans and auto loans, for instance) affect your DTI ratio, and revolving debt (think: credit cards and lines of credit) plays a starring role in your credit utilization ratio. Credit utilization falls under FICO’s heavily weighted “amounts owed” category. A general rule of thumb is to keep your credit utilization below 30%.

4. Ask to increase the credit limit on one or all of your credit cards. This may improve your credit utilization ratio by showing that you have lots of available credit that you don’t use.

5. Don’t close credit cards once you’ve paid them off. You might want to keep them open by charging a few items to the cards every month (and paying the balance). If you have two credit cards, each has a credit limit of $5,000, and you have a $2,000 balance on each, you currently have a 40% credit utilization ratio. If you were to pay one of the two cards off and keep it open, your credit utilization would drop to 20%.

6. Add to your credit mix. An additional account may help your credit, especially if it is a kind of credit you don’t currently have. If you have only credit cards, you might consider applying for a personal loan.

Recommended: 31 Ways to Save for a House

The Takeaway

What credit score is needed to buy a house? The number depends on the lender and type of loan, but most homebuyers will want to aim for a score of 620 or better. An awesome credit score is not always necessary to buy a house, but it helps in securing a lower interest rate.

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 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 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.

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 .

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.

SOHL-Q424-112

If you’re one of the more than 20 million Americans working remotely, you might be tempted to buy a house out of state. Or maybe you just need a change of scenery.

Buying a house long distance can be a challenge, but it’s doable with a plan in place.

Why Buy a House in Another State?

There are multiple reasons to consider a house in a different state. Here are some.

Affordability

People may be lured by the cost of living of a state and its quality of life, or trying to escape high costs in the state they are leaving.

More than 350,000 people left California (the country’s third-highest state in cost-of-living rankings) from April 2020 to January 2022 for Arizona, Texas, Florida, Washington, and other states. This trend slowed in 2023, but the state still lost more than 250,000 people.

Job Relocation

Some companies move personnel out of state, and some employees are good with that. A Graebel report exploring the Great Resignation found that 70% of knowledge workers who resigned in the past two years may have stayed if they’d been offered the same role in a different region of the country.

Family Reasons

Some folks choose to buy a house out of state to be closer to parents, children, or grandchildren. And people in their 40s,especially, may have aging parents and financial concerns on their minds.

Retirement

Americans entering retirement may want to buy a home in a state where the weather and lifestyle are more appealing. When it comes to a home, some may want to downsize.

How to Purchase a Home in Another State

Buying a house from out of state may be a challenge, but people do do it.

It can be tough to buy a house if you already have a house and a home mortgage loan. Homeowners have been known to use a home equity loan or bridge loan to fund the down payment on another house.

A personal loan can fund travel and moving costs.

If you’re ready to move on, it might be a good idea to sell and maybe ask for a leaseback. If you’re in a hurry, learn how to sell a house fast.

1. Virtually Explore

It’s easy to research cities, states, and communities online. There’s a listicle for almost everything.

For example, maybe you’re interested in the safest cities in the U.S.

Or the 50 most popular suburbs.

It can also be helpful to explore housing market trends by city.

Areavibes, BestPlaces, and HomeSnacks provide rankings or information. Coldwell Banker introduced Move Meter, to compare locations across the country. Or you could use Google Maps or Google Earth to study an out-of-state home’s proximity to schools, medical centers, law enforcement agencies, parks, and restaurants.

2. Link Up to Social Media

Social media platforms like Facebook Groups and Nextdoor can provide a personal sense of home buying and community. These groups are user-friendly to newcomers, and many group members are happy to answer questions about life in their city or town.

3. Ask Co-Workers, Friends, or Family

If you’re moving out of state for a job, check in with future co-workers for advice about the homes and neighborhoods. If you’re moving near friends or family members, pick their brains. Is this going to be a good spot for you?

Moving is stressful enough. If you’re one of the growing number of people interested in financially downsizing, you may want to just exhale and enjoy when you land.

4. Consider Talking to a Relocation Specialist

Yes, home relocation professionals exist. And they do everything from connecting clients with a real estate agent to finding a long-distance moving company, scouring school districts, securing a storage space, and supervising a contractor’s work if the client is buying or building a house.

Relocation companies can also suggest local service providers and transport pets and vehicles across state lines.
Relocation services are often free of charge because the specialists earn their money from third-party vendors like real estate firms and employers transferring employees.

If you’re not inclined to hire a relocation specialist, here’s some helpful reading before making a big move:

•   How to move across the country

•   How to move to another state

•   The ultimate moving checklist

You can look into the safety record of carriers on the U.S. Department of Transportation website.

5. Find a Reliable Real Estate Agent

A brave few who are interested in buying a house out of state opt to go without an agent.

It’s true that you can buy a house without a Realtor® — but even a local home sale may be challenging without a buyer’s agent in your corner.

Partnering with an experienced real estate agent who is based in the area where you hope to move could be highly beneficial.

Besides familiarity with neighborhoods, schools, and vibe, a buyer’s agent can walk a future homebuyer through local zoning regulations and the permit process.

6. Consider Visiting IRL

It’s not that rare to buy a house sight unseen. That can work out.

But someone looking to buy a house in a new state may want a real visit. You may receive short notice on a viewing date, so it could be helpful to budget for out-of-state travel as part of the buildup to buying a home in another state.

While a real estate agent can act as a proxy for homebuyers, there may be nothing like being onsite during the home inspection of a property you’ve made an offer on.

Then again, if you adore a property and must have it, you might waive some contingencies in the case of multiple offers.

7. Get Preapproved for a Mortgage

It can be easier to find a real estate agent or relocation specialist with a mortgage preapproval letter in hand.

When a lender preapproves a mortgage (a credit check and a review of financial assets is typical), it is tentatively greenlighting a specific home loan amount at a particular interest rate, which is not locked unless the lender offers a lock.

Obtaining preapproval tells home sellers that you’re qualified for a home loan up to a certain amount.

8. Handle the Closing Online

Get ready, because closing on a house may take only 20 or 30 days.

In some cases, everyone huddles to sign closing paperwork. Other times, buyers and sellers sign separately.

But most states have approved remote online notarization, when buyers join a video call, present their government-issued IDs to a title company rep and a notary, and sign all paperwork electronically.

The Takeaway

Buying a house out of state requires investigation and probably a good real estate agent. Getting preapproved for a mortgage can ease the path to a new address.

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 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 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.

SOHL-Q424-111