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As long as you make your payments on time, having a mortgage can build your credit score. You may see a slight negative impact to your credit when you first apply for a mortgage, since the lender will likely do a hard pull on your credit report. But after that, your mortgage will generally have a positive impact on your credit score, assuming you’re consistently making on-time payments.

Does Having a Mortgage Build Your Credit Score?

One of the mortgage basics is that in exchange for an upfront payment (generally a down payment used to purchase a home), you’ll make regular monthly payments to your lender for a specified period of time (often 30 years). Having a mortgage on your credit report can help your credit score in two ways. First of all, making your mortgage payments on time each month helps show a positive payment history. Another way that having a mortgage can help your credit is by diversifying your credit mix, which is another factor that makes up your credit score.

How Mortgage Application Impacts Credit Score

The process of applying for a mortgage can impact your credit score in a variety of ways. Here’s a closer look.

Situations Where It May Hurt Your Credit

When you apply for a mortgage, your lender will usually do a hard pull on your credit report to assess your overall creditworthiness. This process can lower your score by up to several points for a few months. This might impact which credit range you are in.

Recommended: What Is the Average Credit Card Limit?

Situations Where It May Help Your Credit

It can be smart when applying for a mortgage to work with different lenders to find the right home loan for your situation. One piece of good news is that multiple mortgage-related inquiries in a short period of time usually will only count as one inquiry. So if you’re working on establishing credit, you won’t need to worry about multiple inquiries from different mortgage lenders having a significant negative impact, as long as they’re all within the same window of time.

Recommended: Understanding Purchase Interest Charges on Credit Cards

How a Mortgage Can Affect Your Credit

Beyond applying, there are a number of ways that having a mortgage can affect your credit. When you get a mortgage it can help your credit score, but it can also hurt it.

Hard Inquiry When You Apply

One of the factors that makes up your credit score is the number of recent hard inquiries you have. Any time a potential lender conducts a hard pull of your credit report, it can cause a temporary drop in your credit score by a few points. This drop usually goes away after a few months, but it’s something to be aware of.

Paying Your Mortgage On Time

One important factor that affects your credit score is your payment history. So if you have a mortgage and pay it on time each month, that can make a positive contribution to your credit score. This is one reason it’s important to make sure that you don’t take out a mortgage that you’ll have trouble paying each month.

Late Or Missed Mortgage Payments

Because your payment history is such a big part of what makes up your credit score, late or missed mortgage payments can have a large negative impact on your score. Potential lenders look at your credit report to get an idea of how likely you are to repay your debt obligations, so having late or missed payments can be a red flag to future lenders.

Improving Your Credit Mix

A lesser-known but still important part of what makes up for your credit score is your overall credit mix. Generally, it’s considered a positive sign if you have a variety of different types of credit on your credit report. This includes different types of credit cards, auto loans, mortgages, personal loans, etc. Adding a mortgage to a credit report that doesn’t have one helps diversify your credit mix.

Changing Your Average Age of Accounts

Another factor that contributes to your credit score is your overall average age of accounts. Potential lenders like to see a lengthy history of you responsibly using the credit that’s been issued to you. So while initially a new mortgage will lower your overall average age of accounts, over time it can work in your favor.

Recommended: Tips to Qualify for a Mortgage

Tips for Building Your Credit Score After Buying a House

After you’ve bought your house, here are a few tips to continue building your credit:

•   Pay your mortgage in full and on time, each and every month.

•   Continue to pay your other debts (like credit cards and student loans) on time each month as well.

•   Keep an emergency fund to ensure you can still meet your debt obligations (including your mortgage) even when the unexpected happens.

•   Make sure you save enough money to pay your home insurance and property taxes (if your mortgage isn’t escrowed).

•   Regularly review your credit report for unexpected or inaccurate information. Report any issues as needed to help protect your credit.

•   Decrease your credit utilization ratio by raising credit limits and limiting debt.

•   Limit your new credit inquiries as much as possible.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

Having a mortgage can affect your credit score in a variety of ways, but most of them are positive. While you will likely see a small temporary drop in your credit score due to the hard pull from your mortgage lender, that should go away after a few months. Then, as long as you pay your mortgage on time each month, you should see a positive impact on your credit score from having a mortgage. Another great way to build your credit can be by responsibly using a credit card.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How long does it take for your credit score to go up after buying a house?

When you get a mortgage (or any type of loan), the potential lender will likely do a hard pull of your credit report. Because the number of recent inquiries you have is a factor that makes up your credit score, this hard pull may temporarily drop your credit score. The good news is that it usually only drops by a couple of points, and even that small effect usually goes away after a couple of months.

How long should I wait after closing to make another big purchase?

You want to be careful about making large purchases or applying for any other credit before you are approved for a loan. This is because your lender and underwriter will be digging into your credit report in detail to make sure your overall financial situation is sound, and they’ll want to know about anything out of the ordinary. After you close on your mortgage, you don’t need to be as careful about making another big purchase, as long as it fits into your overall financial picture.

What credit score is needed to get a mortgage?

Typically, you will need a credit score of at least 620 to get a conventional mortgage, and a score of over 700 for a jumbo loan. At the lower end of the range of credit scores needed for a mortgage, you might find some government-backed loans available with a credit score of 500 and above.

Photo credit: iStock/sturti

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.

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 .

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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When you close on a home, one of the most important documents you’ll review and sign is your mortgage note. It’s an agreement between you and the lender that outlines the terms and conditions of the mortgage. The document tells you how much and when to pay, and spells out the consequences if you don’t.

What Is a Mortgage Note?

A mortgage note, often referred to as a promissory note, is what you sign when you agree to take on the responsibility of a mortgage. The note outlines:

•   Your interest rate

•   The amount you owe

•   When the payments are due

•   The amount of time it will take to repay the loan

•   How to remit payment

•   Consequences for missed payments

It’s one of the key documents you’ll sign at closing.

Promissory notes also may be used in owner-financed home sales. The buyer and seller sign the document, which contains the loan terms. When a borrower pays the seller directly, the promissory note gives the lender the ability to enforce their rights through a mortgage lien, foreclosure, or eviction.


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

What Is Included in a Mortgage Note?

The mortgage note outlines the conditions and responsibilities of the buyer. You’ll see sections like these in a mortgage note:

•   Borrower’s promise to pay. This section includes the total amount of money you’re borrowing and the name of the lender to whom you will remit payment.

•   Interest. The interest rate charged on the unpaid principal is listed here.

•   Payments. Borrowers agree to pay a monthly amount before or on a specific date. The place where borrowers can remit payment is also listed.

•   Borrower’s right to prepay. This section specifies a borrower’s ability to pay toward the mortgage principal without penalty. (Some lenders charge a fee if you pay off some or all of the principal early. Make sure you understand whether you have the right to prepay without a penalty before you get to the closing table.)

•   Loan charges. All charges by the lender must be legal. Any amounts over the legal limit will be refunded to the buyer or applied to the principal.

•   Borrower’s failure to pay as required. Default is clearly defined for the buyer, as are late charges and what happens in the event of default.

•   Giving of notices. Borrower and lender will have the details of how to contact each other for legal purposes.

•   Obligations of persons under this note. All people listed on the mortgage note are equally responsible for repayment of the loan.

•   Uniform secured note. Buyers are advised that a security instrument is signed in addition to the note that protects the note holder from potential losses by giving them the ability to foreclose in case of default.

How Does a Mortgage Note Work?

A mortgage or promissory note is drawn up by the lender when preparing your mortgage for closing during the underwriting process. This document is what makes the terms and conditions of the mortgage legally binding.

Borrowers will see the mortgage note at closing, though the terms and conditions will be outlined in a closing disclosure provided at least three business days before the closing date. The closing disclosure document can be compared with the loan estimate that was provided at the beginning of the mortgage application process. (This help center for mortgages is useful if you want to understand the entire mortgage process.)

A mortgage note is accompanied by another document, called the mortgage, security instrument, or deed of trust. It restates the terms of the mortgage note and outlines the rights and responsibilities you have as a borrower. As a security instrument, the document specifically gives the lender the right to foreclose on your property if you fail to make payments. Having this right reduces the risk to the lender, which can offer more competitive terms to the borrower in return.

Who Holds the Mortgage Note?

A mortgage note isn’t usually held by the lending institution that originated your loan. Mortgage notes are often sold, and it’s not easy to tell who holds your mortgage note. This is because the loan servicer (the company that sends your mortgage statements and handles day-to-day management of the loan) is usually different from the note holder.

Selling a Mortgage Note

You’ll see in your closing documents a provision that allows the lender to sell the mortgage note. This is common and legal in home contracts and typically occurs soon after the property closes. Lenders sell mortgages on the secondary mortgage market, usually to one of the large federally backed mortgage companies, Fannie Mae or Freddie Mac. When the mortgages are sold, the lender doesn’t have to keep the mortgage on their balance sheet, which, in turn, allows them to originate more mortgages for other borrowers.

Fannie Mae and Freddie Mac then bundle mortgages into what is called a mortgage-backed security. Investors around the world (think pension funds, mutual funds, insurance companies, and banks) can buy shares of mortgage-backed securities. The investors will receive steady returns as the mortgages are repaid by individual borrowers.

The loan servicer (which may be your original lender or a separate company) typically continues to service your loan, meaning you’ll send your payment to them. They’ll keep a small portion of your mortgage to cover their costs for servicing your loan while sending the rest to the buyer of your note.

When your mortgage note is sold, the terms of your mortgage won’t change. Your payment, interest rate, and due date will remain the same. If your servicer changes for any reason, you’ll be notified of the new servicer and the new way to remit your mortgage payment.

Different Kinds of Mortgage Notes

There are different types of mortgage loans and different kinds of mortgage notes to accompany them.

Secured Loans

With a secured mortgage note, the mortgage uses collateral to secure the property. The collateral is usually the property itself. A secured loan is usually accompanied by better terms, such as a lower interest rate and a longer repayment period.

Private Loans

Private mortgage notes are secured by private lenders. A seller may own the property outright and act as a private lender, setting their own terms for mortgage loans.

Institutional Loans

Institutional notes are mortgage notes issued by traditional lenders, such as financial institutions or banks. They’re highly regulated. Buyers must meet specific criteria, and the loans must have standard interest rates and repayment terms.


💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

The Takeaway

Understanding your mortgage note and how it works is a critical step in buying and financing a home. You should review the terms of your mortgage well before you arrive at the closing, and it may be helpful to review the details of the mortgage note with a professional, as the note can protect the buyer just as much as the seller.

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.

Photo credit: iStock/Chinnapong

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.

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The change of seasons often brings on a flurry of cleaning and a home refresh. If you’re looking for some budget-friendly changes that will bring new life to your rooms, we have those for you.

Before you start, try to clear any clutter you may have. If you tend to hoard, begin your refresh by donating or throwing away items you no longer use. You may also want to review this list of home improvements that can increase the value of your home.

Living Room

Whether you’re entertaining guests or just hanging out, your living room should feel inviting and reflect your style, yet also be functional and versatile.

1. Paint

A fresh coat of paint can do wonders for any living space. Picking neutrals like white or beige ensures a clean and timeless look.

2. Statement furniture

If you don’t have the budget to buy all new furniture, you may want to consider picking one or two new pieces, such as an eye-catching chair or coffee table, that will update your space.

3. Area rug

A quality rug can anchor a room and add a subtle splash of color. It’s also a good idea to make sure it’s sturdy enough to handle high traffic. Adding a rug pad can be worth the additional cost because it feels luxe underfoot and prolongs the life of your rug.

4. Lighting

How you light a room can affect its overall feel. Installing dimmers can enable you to adjust the lighting depending on the mood you’re trying to set. A new floor or table lamps can also allow you to subtly adjust lighting.

5. Clutter containment

If you still have a lot of “stuff” after your initial purge, you may want to consider storing it in decorative receptacles such as woven baskets or a storage ottoman. This is especially useful for kids’ toys.

6. Framing

Buying nice frames to create a gallery on blank walls, or even just to display family photos on a side table, can really personalize your space. Consider a digital photo frame for convenient streaming.

7. Window treatments

Blinds or curtains can add depth to a room. The most affordable option is to buy premade curtains and rods from a home décor store and install them yourself. Measuring carefully is the key to success.

8. Sofa spruce-up

Purchasing a bold couch cover and swapping out your throw pillows can be a quick and inexpensive way to add color and patterns to your space. Toss a blanket over the arm of the sofa for both added texture and warmth.

9. Go green

Plants have always been a simple and effective way to bring life into a space. Good news if you don’t have a green thumb: You can now download an app (Planta is one example) that will help you remember to care for them properly.

10. Switch it up

Looking for a zero-cost home refresh option? You can try rearranging your furniture. Using apps like Modsy for floor plan ideas can help you find options that complement your lifestyle and make the most efficient use of your space.


💡 Quick Tip: Loans typically offer lower interest rates than credit cards. Consider a SoFi home improvement loan to fund your next renovation.

Kitchen

Dreaming about that perfect HGTV kitchen? You can use our calculator to estimate just how much a full remodel may cost you. (Hint: The average cost of a kitchen remodel taps in at more than $50,000.) Never fear: You can still refresh your kitchen with some of the following affordable upgrades — no permits or contractor required.

11. Cabinet facelift

If your cabinets are looking dated, you may want to try putting a fresh coat of paint on them. For an added touch, consider changing out the hardware and installing new handles and drawer pulls.

12. Seat swap

You may want to consider upgrading worn or outdated bar stools in exchange for something sleeker. If purchasing new stools isn’t in your budget, get out your staple gun and try changing the upholstery.

13. Appliance upgrade

If your appliances aren’t working as well as they used to, or they’re nearing the 10 year mark, it may be time to replace them. Although this can get expensive, you can find bargains on bundles, especially during holiday sales, and some outlet stores offer steep discounts on open box appliances.

14. Fill a wall

If you have unused wall space, you may want to consider installing floating shelves for smaller items such as cookbooks, plants, and other knick knacks. Not only will the extra shelving provide more storage in your kitchen, but it can also create an eye catching display.

15. Light it up

For a style update with a big impact, you can look into replacing old lighting fixtures with modern pendants. They come in such a wide variety of styles and price points that there’s something for just about anyone’s taste and budget.

16. Combine decor with utility

It’s easy to warm up a space with an attractive fruit bowl, colorful wall clock, or pretty serving tray. If you’re adding a TV to your kitchen, consider one that will display art or photos when you aren’t watching your favorite shows.

17. Streamline storage

Your storage areas can also be the focus of a spring upgrade. Toss expired foods from your pantry and do a deep clean of your fridge and freezer. If you want to really get organized, consider storing your dry goods and refrigerated items in clear canisters and bins for easy identification and access, and using drawer dividers to separate utensils.

Recommended: Interior Decoration Tips for Furnishing A New Home

Bathroom

In an ideal world, a bathroom remodel would include a new vanity, tile, and hardware. However, even if a demo is more idealistic than realistic, that doesn’t mean this space is out of bounds. Start small with a few less costly changes.

18. Hardware update

Replacing your outdated sink, bath and shower hardware can boost the appeal of just about any bathroom. By adding matching towel racks, door hooks, and vanity knobs and handles, you can achieve a cohesive upgrade that doesn’t break the bank.

19. Target: toilet

If your porcelain throne is starting to show wear and tear, it may be time to replace the lid and seat. You can go all in and buy a new toilet for just a couple hundred dollars, although you will likely need a plumber as well.

20. Mirror modern

If you have a long vanity with two sinks, you may want to consider installing two separate mirrors with bold frames. Mirrors with LED backlighting offer a more modern hotel-like look.

21. Shower showcase

The shower curtain is one of the first things people see when they walk into a bathroom. Introduce a new look by finding a curtain with a cool pattern and adding a new curtain rod and rings.

22. Spa retreat

A bamboo bath mat that’s easy to clean and water-resistant can elevate your space. So can candles or a diffuser. Add attractive shelving — or simply swap in plush new towels — and you’ll instantly create a serene scene that could compete with any day spa.

23. Accessorize

Placing your soap dispenser and toothbrush holder on a decorative tray easily gives your bath a tidy boost. Take a good look at all the personal care products that are visible in your space. Stow unattractive or less frequently used products in drawers and make sure what’s still visible is in attractive containers.

24. Grout out

No budget for new tiles? Put some elbow grease into cleaning the grout on your existing tile floor and walls, or regrout the entire space for a cleaner, brighter look.


💡 Quick Tip: You never know when you might need funds for an unexpected repair or other big bill. So apply for a HELOC (a home equity line of credit) brokered by SoFi today: You’ll help ensure the money will be there when you need it, and at lower interest rates than with most credit cards.

Bedroom

Your bedroom should be your haven after a long day of work, but you don’t need to do a complete bedroom remodel to reap more relaxation. Just make a few changes to create a more peaceful setting.

25. Headboard

For a few hundred dollars, you can find an upholstered headboard that’s both fashionable and easy to assemble. It can create a dramatic difference in your bedroom’s appearance.

26. Paint

It’s pretty easy to refresh your walls over a weekend. If you want to liven up your space with some color, stick with soft hues such as pale blue or gray. For the I-hired-a-decorator feel without the price tag, consider removable wallpaper.

27. New linens

To quickly liven up a boring bed, you can replace old sheets, blankets and pillows. Opt for soothing colors and muted patterns that will create a peaceful sleeping environment.

28. Floors

Whether you have wooden floors or carpet, layering an area rug can help to create a cozy environment. For a luxurious feel, try shag or sheepskin rugs.

29. Lighting

Designing a unique lighting setup doesn’t have to be hard or expensive. You may be able to freshen up your space by installing plug-in sconces (which require no rewiring) on each side of your bed. It can save table space and add decor to your wall.

30. Side tables

For a budget-friendly furniture refresh, just replace your bedside tables. Look for a pair with concealed storage to cut down on the cluttered look.

31. Closet clutter

Custom closets can get expensive very quickly. But you can get your closets under control by installing affordable hanging bars and shelves that not only look good, but help you organize your wardrobe.

32. Floor mirrors

A full-length floor mirror will reflect light and make your room feel bigger — not to mention that it comes in handy when you’re pulling together your daily outfit.

33. Art & photos

Many designers suggest thinking of your walls as a blank canvas to display your style and the people you love. You can achieve this by hanging your favorite photos or artwork in eye-catching frames.

What is Your Home Missing Quiz

The Takeaway

Even small changes can make your home feel new again. Figure out how much you want to spend on your home refresh before you start so you can prioritize which changes are most important to you. Staying within your budget by choosing upgrades that you can do yourself, shopping secondhand stores, and comparing prices carefully.

Inspired to tackle a larger home makeover project? A home improvement loan may be the way to go. SoFi’s no-fee home improvement loan could help you foot the bill of your kitchen reno or bathroom demo, with no collateral required. Plus, it’s possible to get your funds the same day* which can help fast track your remodel.

Learn more about how a home improvement loan can help with your remodel.

Photo credit: iStock/KatarzynaBialasiewicz

^* Same-Day Personal Loan Funding: 82% of typical SoFi Personal Loan applications, excluding Direct Pay Personal Loans and Personal Loan refinance, from January 1, 2022 to January 1, 2023 that were signed before 7pm ET on a business day were funded the same day.

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.

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Buying a new home requires managing a lot of moving parts, from mortgage preapproval to closing. Even after an offer is accepted, buyers and sellers are still at the negotiating table. If closing costs or surprise expenses become too much for the buyer, a seller concession could help seal the deal.

Although seller concessions can work to a buyer’s advantage, they are neither a guaranteed outcome nor a one-size-fits-all solution for every real estate transaction.

To determine if seller concessions are the right move from a buyer’s perspective, here are some key things to know, including what costs they can cover and when to consider asking for them.

Recommended: How Much Are Closing Costs on a New Home?

What Are Seller Concessions?

Seller concessions represent a seller’s contribution toward the buyer’s closing costs, which include certain prepaid expenses and discount points. A seller concession is not the equivalent of a price reduction; nor is it received as cash or a loan discount.

Closing costs usually range from 3% to 6% of the loan principal on your mortgage. When combined with a down payment, the upfront expense of buying a home can be burdensome, especially for first-time homebuyers.

Buyers can ask for concessions on the initial purchase offer or later if the home inspection reveals problems that require repairs.

Although this can be a helpful tool to negotiate a house price, there are rules for eligible costs and limits to how much buyers can ask for.

Recommended: Home Buyer’s Guide

What Costs Can Seller Concessions Cover?

A buyer’s closing costs can vary case by case. Generally, buyers incur fees related to the mortgage loan and other expenses to complete the real estate transaction.

There are also types of prepaid expenses and home repairs that can be requested as a seller concession.

Some common examples of eligible costs include the following:

•   Property taxes: If the sellers have paid their taxes for the year, the buyer may be required to reimburse the sellers for their prorated share.

•   Appraisal fees: Determining the estimated home value may be required by a lender to obtain a mortgage. Appraisal costs can vary by geography and home size but generally run between $300 and $500.

•   Loan origination fees: Money paid to a lender to process a mortgage, origination fees, can be bundled into seller concessions.

•   Homeowners insurance costs: Prepaid components of closing costs like homeowners insurance premiums can be included in seller concessions.

•   Title insurance costs: A title insurance company will search if there are any liens or claims against the property. This verification, which averages $1,000 but varies widely, protects both the homeowner and lender.

•   Funding fees: One-time funding fees for federally guaranteed mortgages, such as FHA and VA loans, can be paid through seller contributions. Rates vary based on down payment and loan type.

•   Attorney fees: Many states require a lawyer to handle real estate closings. Associated fees can run $500 to $1,500 or more, based on location.

•   Recording fees: Some local governments may charge a fee to document the purchase of a home.

•   HOA fees: If a home is in a neighborhood with a homeowners association, there will likely be monthly dues to pay for maintenance and services. A portion of these fees may be covered by the seller.

•   Discount points: Buyers may pay an upfront fee, known as discount points, to lower the interest rate they pay over the life of the mortgage loan. (The cost of one point is 1% of the loan amount.)

•   Home repairs: If any issues emerge during a home inspection, the repair costs can be requested as a seller concession.

Closing costs can also be influenced by the mortgage lender. When shopping for a mortgage, evaluating expected fees and closing costs is a useful way to compare lenders. Factoring in these costs early on can give buyers a more accurate idea of what they can afford and better inform their negotiations with a seller.

Recommended: Home Improvement Calculator

Rules and Limits for Seller Concessions

Determining how much to ask for in seller concessions isn’t just about negotiating power. For starters, the seller’s contributions can’t exceed the buyer’s closing costs.

Other factors can affect the allowable amount of seller concessions, including the type of mortgage loan and whether the home will serve as a primary residence, vacation home, or investment property.

Here’s a breakdown of how concessions work for common types of loans.

Conventional Loans

Guidance on seller concessions for conventional loans is set by Fannie Mae and Freddie Mac. These federally sponsored enterprises buy and guarantee mortgages issued through lenders in the secondary mortgage market.

With conventional loans, the limit on seller concessions is calculated as a percentage of the home sale price based on the down payment and occupancy type.

If it’s an investment property, buyers can only request up to 2% of the sale price in seller concessions.

For a primary or secondary residence, seller concessions can add up to the following percentages of the home sale price:

•   Up to 3% when the down payment is less than 10%
•   Up to 6% when the down payment is 10-25%
•   Up to 9% when the down payment is greater than 25%

FHA Loans

FHA loans, which are insured by the Federal Housing Administration, are a popular financing choice because down payments may be as low as 3.5%, depending on a borrower’s credit score.

For this type of mortgage, seller concessions are limited to 6% of the home sale price.

VA Loans

Active service members, veterans, and surviving spouses may qualify for a mortgage loan guaranteed by the Department of Veterans Affairs. For buyers with this type of mortgage, seller concessions are capped at 4% of the home sale price.

VA loans also dictate what types of costs may qualify as a seller concession. Some eligible examples: paying property taxes and VA loan fees or gifting home furnishings, such as a television.

Seller Concession Advantages

There are a few key ways seller concessions can benefit a homebuyer. For starters, they can reduce the amount paid out of pocket for closing costs. This can make the upfront costs of a home purchase more affordable and avoid depleting savings.

Reducing closing costs could help a buyer make a higher offer on a home, too. If it’s a seller’s market, this could be an option to be a more competitive buyer.

Buyers planning significant home remodeling may want to request seller concessions to keep more cash on hand for their projects.

Seller Concession Disadvantages

Seller concessions can also come with some drawbacks. If sellers are looking for a quick deal, they may view concessions as time-consuming and decline an offer.

When sellers agree to contribute to a buyer’s closing costs, the purchase price can go up accordingly. The deal could go awry if the home is appraised at a value less than the agreed-upon sale price. Unless the seller agrees to lower the asking price to align with the appraised value, the buyer may have to increase their down payment to qualify for their original financing.

Another potential downside is that buyers could ultimately pay more over the loan’s term if they receive seller concessions than they would otherwise. If a buyer offers, say, $350,000 and requests $3,000 in concessions, the seller may counteroffer with a purchase price of $353,000, with $3,000 in concessions.

Recommended: Guide to Buying, Selling, and Updating Your Home

The Takeaway

Seller concessions can make a home purchase more affordable for buyers by reducing closing costs and expenses, but whether it’s a buyer’s or seller’s market will affect a buyer’s potential to negotiate. A real estate agent can offer guidance on asking for seller concessions.

The vast majority of homebuyers finance their purchase. So for most buyers, finding the right mortgage is an important step in landing their dream home.

SoFi offers home mortgages with competitive rates and down payments as low as 5%. And prequalifying takes just a few minutes.

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.

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You’ve saved for a down payment, and you’re ready to cover closing costs. But do you have enough cash and assets to cover your mortgage reserves?

Lenders sometimes require mortgage reserves from home buyers in order for the loan to be approved at application and then funded on the day of closing. But what are mortgage reserves, and how much might you need to have set aside? Below, we’ll review what assets qualify as mortgage reserves and when you might need them.

What Are Mortgage Reserves?

Mortgage reserves are the cash and other assets that home buyers can access in the event they need help covering their mortgage payments for a set number of months. Such reserves are a kind of fail-safe in the event a buyer is laid off or otherwise loses a revenue stream.

In some cases, lenders require you to prove you have such reserves before funding your home mortgage loan. Requirements can range from as little as one month of reserves (i.e., all your mandatory housing costs for a month) to six months or more.

Luckily for home buyers, lenders consider more than just the money in your checking and savings accounts as mortgage reserves. Cash and assets that can be classified as mortgage reserves include:

•   Money in a deposit account (not only checking and savings, but also money market accounts and certificates of deposit)

•   Stocks and bonds

•   Trust accounts

•   Cash value in a life insurance policy

•   Vested retirement funds, such as money in 401(k)s and IRAs

Keep in mind that money in your savings account that you’ll use for the down payment and closing costs does not count toward your mortgage reserves. Mortgage reserves are money and assets that you will have access to after closing.

Still crunching the numbers on your dream home? Use our mortgage calculator to understand just how much you might spend.

Recommended: What Is a Bank Reserve?

Do All Types of Mortgages Require a Reserve?

Not every borrower will need mortgage reserves when buying a home. Requirements depend on the type of mortgage you’re applying for, as well as your overall financial picture (credit score, debt-to-income ratio, and size of your down payment, for instance).

The table below breaks down potential mortgage reserve requirements by loan type:

Why do these requirements vary? Lenders may have different rules depending on whether a government agency is guaranteeing the loan, or whether the home will be your primary residence or if it’s an investment property.

Lenders may also have stricter mortgage reserve requirements if you’re making a small down payment, you have a high debt-to-income ratio, or if your credit score is too low (typically anything below a 700 credit score can warrant larger reserves if the borrower is making a down payment of less than 20 percent).

Recommended: Tips to Qualify for a Mortgage

Tips for Building Your Mortgage Reserves

Saving up for a down payment can be challenging on its own, but cobbling together enough cash reserves for a mortgage loan can make it even tougher. Here are some tips for building your home loan reserves:

Decrease Spending

Take a good, hard look at your budget to figure out how to stop spending money that you could be saving. Common culprits include dining out, streaming services, cups of coffee on your way to work, and memberships and subscriptions. Determine what you can cut out of your life — just for now — to reduce your monthly spending.

You may also be able to lower your utility bills by making some simple, eco-friendly updates in your current home. Also consider carpooling or using public transportation to reduce fuel costs, and raise your deductible on your car insurance to get a lower monthly premium. Finally, clip coupons and look for deals when shopping for groceries.

Use a Certificate of Deposit

If you know you’ll be buying a home within a few years, store some savings in a certificate of deposit (CD). Though the money is less liquid than funds in a savings account, it still counts toward your mortgage reserves and a CD may offer a higher interest rate, so your money will grow faster.

Set Aside a Chunk of Your Income

When you get each paycheck, intentionally move some into a high-yield savings account that’s earmarked for your mortgage reserves. (You can also do this when saving for the down payment on your home.)

Automatically setting aside some of your income for a specific purpose can make it a lot easier to resist the temptation to spend it on other things, like clothes and vacations.

Take Up a Side Gig

If you’ve cut all the expenses you can and you’re still coming up short, think about how you can earn more money. You can always ask for a raise at work, but you may have more luck taking on a side hustle to earn extra income. That doesn’t always mean getting a second job — there are passive income ways to build wealth.

Boost Your Retirement Contributions

Mortgage reserves don’t have to be money in your bank account. Retirement contributions to IRAs and 401(k)s (if vested) also count toward your reserves, and these may grow faster than money in a high-yield savings account, depending on how the market is doing.

Even better, if your employer matches contributions to a 401(k), that’s an easy way to quickly increase your mortgage reserves. And it’s free money!

What Happens If You Don’t Meet the Mortgage Reserve Requirements?

Mortgage reserve requirements are called that for a reason: They’re required. Just like the down payment and closing costs, you will absolutely need your mortgage reserves if your lender asks for them in order to have your mortgage loan funded. You’ll be asked to note these assets on a mortgage application.

If the lender discovers prior to the closing that you don’t have the reserve for the mortgage, the lender can back out.

The Takeaway

Depending on your credit score, down payment, the type of property you’re purchasing, and the type of mortgage loan you’re looking for, you may need to have mortgage reserves set aside to get approved. Mortgage reserves are cash and assets you can use to cover your housing costs for a set number of months if something happens and you suddenly can’t afford your mortgage.

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 the difference between cash reserves and mortgage reserves?

Mortgage reserves are a type of cash reserves. Cash reserves broadly refers to money set aside for short-term needs and emergencies, like sudden job loss; cash reserves can get you through a set number of months’ worth of expenses.

Mortgage reserves are specifically money set aside to cover housing costs for a set number of months and may be required for some home loans.

Can I use retirement savings as mortgage reserves?

Retirement savings can count toward your mortgage reserves. If you’re using 401(k) funds in the total calculation, they must be vested.

How long do I need to maintain mortgage reserves?

How long you need to maintain mortgage reserves depends on the type of mortgage loan you’re using and factors like your credit score and debt-to-income ratio. Typical conventional loan reserve requirements are two months of mortgage reserves after closing, but it’s possible to need up to six months of reserves for a conventional mortgage.

Can I use gift funds for mortgage reserves?

You can use gift funds for mortgage reserves for an FHA loan, as well as certain other loans with some restrictions. Gift funds refers to money or assets donated to a home buyer, usually from a loved one, without the expectation of repayment.

Photo credit: iStock/FilippoBacci

*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.

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