SoFi

A real estate contract is one agreement you do not want to sign without reading and understanding fully. Get it right, and you’ll likely have a smooth transaction. Miss something, and you’ll face delays, lost money, or even cancellation of the contract.

What Are Real Estate Purchase Agreements?

When buying a home, you’ll make your offer on a form standardized by your state known as a real estate purchase agreement (also commonly referred to as a real estate purchase contract, a real estate contract, a real estate sales contract, a home purchase contract, or a home contract). This legally binding agreement, in general, says the buyer will pay an agreed-on amount for the purchase of the property, and the seller will convey the title in exchange.

The purchase agreement, or contract, details the terms and conditions of the sale. The fundamentals include the parties in the transaction, a description of the property, the sales price, the closing date, and the date of the title transfer and possession.

Who Prepares the Contract?

The initial offer is most often filled out by the buyer’s real estate agent and sent to the seller for review. Sellers can ask for adjustments to dates, reject or accept contingencies, negotiate the price and repairs, or even reject the offer altogether. The contract is considered a working document until both parties reach an agreement on terms. When signed by both parties, the terms are set and the contract becomes binding.


💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

Key Components of a Home Contract

There’s a lot of legal language in a home contract, but the core details are actually quite clear. These are essential details that both buyer and seller need to know so they can complete the transaction in a timely, legal manner.

1. Identity of the Parties

For a legal contract, full identification of the parties in the contract is required, and the parties to the contract must have the capacity to enter into the contract.

2. Property Details

The property must be described with certainty. This is a legal description of the property filed with the county recorder’s office.

3. Details, Rights, and Obligations

Buyers and sellers agree to certain responsibilities and obligations in entering into a real estate contract with each other.

•   Good faith. Parties should act in good faith with each other, meaning neither party should act to destroy or injure the right of the other party to receive the benefits of the contract.

•   Time is of the essence. Parties should understand that deadlines are absolute and must be met. If deadlines need to be adjusted, an addendum with the new dates can be submitted by one party to the other for consideration. A signature validates the change.

•   Legal and tax counsel. All parties should understand the legal and tax ramifications of entering into a contract and may want to consult with appropriate experts.

4. Purchase Price and Financing

Sales price, amount of down payment, and payment method are outlined in the real estate contract. An amount of earnest money is also listed on the contract. Earnest money is a deposit held in escrow by a third party that signals to the seller that the buyer is putting forth a good-faith effort to complete the purchase of the home. Earnest money may be forfeitable to the seller if the buyer does not meet the conditions of the sale. It is also refundable to the buyer under the contingencies outlined in the contract.

5. Contingencies

A real estate sales contract usually includes contingencies, which are terms the buyer or seller sets that must be satisfactorily met for the contract to become binding. One of the most common contingencies is a home inspection. If something on the checklist for a home inspection is not to the buyer’s standards, they are able to cancel the contract and have their escrow money returned to them.

Some other common contingencies are:

•   Financing

•   Sale of the buyer’s home

•   Title review

•   Appraisal

•   Survey

•   Homeowners association document review

When competing against multiple offers in a hot market, buyers have been known to waive some or all contingencies.

6. Closing Date

The closing date is the day the transaction will be finalized. Buyers often wonder how long it takes to close on a house, and the answer can vary widely depending on the property and circumstances of the buyer and seller. If you’re looking for a definitive number, national statistics show an average of 45 days to close.

On the contract, parties will agree to a closing date, identify the title company, and disclose any other terms for the final transfer of the property. At the closing, final signing and transfer of the deed occurs, the transfer of title is recorded, and the buyer often receives the keys to the house (though possession can occur in subsequent days, as per the agreement between the buyer and seller).

7. Possession Date

The possession date is the first day the buyer can occupy the home. Possession can occur immediately after closing, at an earlier date, or at a later date that is agreed on by both parties. It is most often listed as the closing date or the day after closing.

8. What Is Included in the Sale

Buyers can negotiate what is included in the sale of the property. Common items listed are the washer and dryer, refrigerator, and other heavy items that are not easily moved.

9. Closing Costs

Though exact closing costs won’t be listed in the real estate purchase agreement, the contract can be written to name who will pay for closing costs. It’s common, for example, for a buyer to offer an amount over the list price of the property and then ask the seller to help cover the buyer’s closing costs with the overage amount. Wondering how much typical closing costs are? They average 2% to 5% of the loan principal.

10. Addendums

An addendum is an additional document to the real estate purchase agreement that includes more information or buyer requests that were not included in the original contract. It has the power to override the terms of the original contract.


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

Can Purchase Agreements Be Canceled?

Canceling a contract is different for buyers and sellers. Buyers usually have contingency clauses built into the purchase agreements. If certain conditions of the sale are not met, the buyer can back out of the contract and have their earnest money returned. Some common reasons rest on:

•   Financing

•   Sale of their home

•   A satisfactory home inspection

•   An appraisal

•   Title work

It’s common, for example, for a buyer to cancel the real estate contract if the home has serious issues found during a home inspection. Foundation, electrical, pest, mold, or any other issue found during the home inspection will allow the buyer to cancel the contract if an inspection contingency is in place.

Buyers can also walk away from the purchase agreement for any reason, but they risk losing their earnest money or face court action if the reason and timing for breaking the contract do not fall within the contingencies outlined in the contract.

A seller, on the other hand, has fewer options for canceling the purchase agreement. Sellers can cancel the contract if the buyer fails to meet the conditions and deadlines outlined in the contract. Sellers who default on the contract for other reasons may be forced to pay the buyer an amount equal to the earnest money deposit. They could also face a lawsuit from the buyer to enforce the contract.

The Takeaway

A real estate purchase contract can be lengthy but it’s important to read and understand what you are signing, whether you are buying or selling a property, and to keep on top of the deadline imposed by the closing date in the agreement. Being smart about the contract can protect you as a home changes hands.

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/fizkes

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

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

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

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

SOHL0124017

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-criteria for more information.

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

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

Ready for homeownership — but looking for something a little bit less overwhelming than a whole house? A condominium might be the perfect fit. But can you purchase a condo with an FHA loan? Yes, under certain circumstances, you can use a loan from the Federal Housing Administration to buy a condo. However, the FHA has to approve condominiums before allowing people to take out FHA-insured loans to purchase them — and finding a condo that’s gone through this approval process (or getting one you have your eye on approved) can be a bit of a challenge. But it’s not impossible! Read on to learn more about FHA-approved condos: what it takes to get approval, where to find condos that have already been approved, and the process of getting an unapproved condo past the finish line.

What Is An FHA-Approved Condo?

To understand what an FHA-approved condo is, it helps to understand what the FHA has to do with purchasing a home in the first place. By offering insurance to lenders, the FHA helps consumers secure low-cost loans with less stringent qualification factors. These FHA loans are commonly used for single-family homes, but can also be used for condominiums, provided the condo is approved by the FHA. Thus, an FHA-approved condo is one that can be purchased with an FHA loan. Pretty simple right? Well, let’s take a closer look.

Benefits of FHA Approval for Condo Buyers

FHA condo approval is beneficial for buyers because finding an FHA-approved condo allows buyers to benefit from the lower overall costs of condo ownership compared to single-family homeownership — and enjoy the lower barrier to entry that an FHA loan can offer to lower-income families, first-time homebuyers, and others facing financial hurdles.

However, not every condo can be approved by the FHA. In order to qualify, it must meet the FHA’s appraisal standards, including safety features as well as financial factors. Entire condominium communities can be approved, and, as of August 2019, an individual unit can also be approved — provided it meets requirements including being “complete and ready for occupancy” and being part of a community with at least five units.

How FHA Approval Impacts Condo Sellers

Sellers, too, benefit from FHA condo approval. Condos that can be purchased with an FHA loan are more attractive to buyers looking for home loans with lower costs and more lenient approval requirements, which means FHA approval is a boon for both parties.

💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

Why Does a Condo Need to Be Approved for an FHA Loan?

When the FHA insures loans offered by private lenders, it does so at some level of risk: The loan may never be repaid, in which case it would lose money paying the lost funds back to the lending bank. But borrower delinquency isn’t the only reason a loan might go unfulfilled; if the condominium is falling apart or not financially viable, that could also increase the risk level of the loan. Therefore, the FHA approves condos on a case-by-case basis to help ensure their physical and financial safety for the lender, borrower, and the FHA itself.

How to Get a Condo FHA Approved

If you’re considering buying a condo that doesn’t yet have FHA approval — and you’d like to get that approval to pursue an FHA loan — you can initiate the approval process on a single-unit basis. (Alternatively, you could reach out to the condominium association to see if it is interested in getting the community as a whole FHA approved.) The approval process will require a variety of documentation as well as an appraisal — again, in order to ensure both the physical and financial viability of the community.

Approval Requirements

To achieve FHA approval, condo communities must be demonstrably:

•   Insured

•   Compliant with state and local law

•   In good financial standing

•   In good physical standing

•   Free of any legal action

For single-unit approval, a condo must be:

•   Part of a complex that is not FHA approved

•   Completely built and move-in ready

•   Part of a community with at least five units

•   Not a manufactured home

Minimum Owner-Occupancy Ratios

The FHA maintains minimum owner-occupancy ratios for complexes attempting to get approved. This figure ranges based on a variety of factors, but is usually somewhere between 35% and 50% — meaning between about a third and about half of the condo units must be occupied by their owners.

Financial Stability and Reserve Requirements

The FHA will also assess the financial stability of the condominium complex in order to ensure it’s likely to continue to stay in business for the foreseeable future. For example, 20% of the annual budget must be set aside for reserves, and three years’ worth of financial documents must be provided.

FHA Insurance Requirements for Condos

FHA-approved condos must maintain up-to-date insurance coverage in order to create financial safety for owners and lenders alike.

Restrictions

Condos that don’t meet the eligibility requirements outlined above may not be suitable for FHA approval — and therefore may not be able to be purchased with an FHA loan.

FHA Application and Documentation

In order to get FHA approval, condos will need to prove they meet the requirements with documentation, including financial information, proof of insurance coverage, inspection reports, and more. If you’re attempting to get a single unit approved, the onus may fall on you as the interested party to get this process started. (The seller, if motivated, may also be able to help.)

The Condo Board’s Role in Securing FHA Approval

In order for an entire condominium complex to become an approved FHA condo, the condo board must first meet to decide whether or not board members want to file for FHA approval. If the vote is in favor of seeking approval, the board will need to aid in filing paperwork to begin the application process and to prove the minimum required eligibility factors are fulfilled.

How Long Does it Take for a Condo to Get FHA Approval?

While specifics will vary and delays can occur, the FHA approval process for a condo may take between two and four weeks on average once all the paperwork is in place.


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

How to Find an FHA-Approved Condo

Fortunately, it’s pretty easy to determine whether or not a condominium you have your eye on is FHA-approved: The U.S. Department of Housing and Urban Development (HUD) offers a searchable database tool that allows you to simply look the property up by address, community name, condo ID, and more.

Leveraging Realtor Expertise

If you have your heart set on purchasing a condo — and on using an FHA loan to do so — a local real estate agent may have the best sense of which complexes in the area are already FHA approved. Some agents may be game to help you get a unit you’re interested in approved on a single-unit basis.

FHA Loan Alternatives for Condos

If you’ve fallen in love with a condo that is, alas, not FHA-approved, take heart: There are different types of mortgage loans worth considering. Many conventional loans these days come with required minimum down payments as low as 3%, though to avoid paying mortgage insurance, you’ll need a down payment of at least 20% of the home’s value. Fortunately, that goal may be a lot more achievable for a condo than a larger single-family home.

In addition, you may be able to use other types of government-insured loans, like VA loans and USDA loans, to buy condos if you qualify. (VA loans are for veterans and their families, while USDA loans are specifically for properties in designated rural areas.)

Benefits and Drawbacks of FHA-Approved Condos

FHA-approved condos, like any other home, have both benefits and drawbacks to consider.

Pros

•   Approved FHA condos can be purchased using an FHA loan, which my offer easier-to-meet qualification requirements and lower costs to borrowers

•   Condos may be overall less costly to own than single-family homes

Cons

•   FHA-approved condos can be harder to find, especially in competitive, fast-moving housing markets

•   Getting a condo FHA approved is a process that takes time and effort, and can be difficult for an everyday consumer to take on

The Takeaway

Purchasing an FHA-approved condo can help buyers hop over some of the primary hurdles to homeownership with lower down payment and minimum credit score requirements. However, not every condo meets the FHA’s strict approval criteria — which means hopeful homeowners may have to choose an alternative mortgage loan type (or keep looking for their dream home).

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

FAQ

Can you purchase a condo with an FHA loan?

If the condo in question is FHA-approved, yes, you can — but not all condominiums meet the FHA’s requirements. In order to discern whether or not the condo you’re looking at is FHA approved, you can use the FHA’s searchable database, which allows you to search by address, condo complex name, and more.

What does it mean when a complex is not FHA approved?

If a condo complex is not FHA approved, it may not meet the FHA’s requirements — or the board may simply have not yet filed for approval, which does take some time, effort, and paperwork to do. It also means that the condos will not be able to be purchased with an FHA-insured loan, at least until such approval is obtained.

Are there specific criteria for FHA approval of condos in certain regions?

FHA-approved condos must be in compliance with all state and local guidelines, which can vary by region — so yes, the specific criteria may vary slightly.

Photo credit: iStock/benedek

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.

^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.
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.

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.

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.

SOHL1223002

One of the time-honored ways to build wealth and financial stability is by buying real estate. Properties typically appreciate over time and may provide cash flow as well.

Owning your own home not only gives you a great place to live, but it will likely turn out to be a good investment, one that can help build generational wealth for your family.

What Is Considered Generational Wealth?

Generational wealth refers to assets passed on from one generation to another within the same family. Assets is a broad term that includes cash; stocks, bonds and other securities; a family business; and real estate, including the family home.

Because of the high rates of appreciation in the past several decades, real estate can be one of the most valuable assets passed down from one generation to another.


💡 Quick Tip: SoFi’s award-winning mortgage loan experience means a simple application — we even offer an on-time close guarantee. We’ve made $7.5 billion in home loans so we know a thing or two about what makes homebuyers happy.‡

How Does Homeownership Build Wealth?

Homeownership can help build wealth directly through price appreciation. When the value of a home rises, owners are able to sell for that higher price, sometimes moving into a new, larger home. For homeowners who aren’t selling, price appreciation adds to their home equity and overall financial assets.

Of course, if home values decline, as they did in the 2007-2009 Great Recession, the opposite can happen and owners may find they owe more than the home is worth. But real estate has proved to be one of the most reliable assets in the long term.

The bottom line: A person’s home is often their largest financial asset, the benefits of which are often passed on to the next generation.

If you’re just getting started, know that a first-time homebuyer can be anyone who has not owned a principal residence in the past three years, some single parents, and others. The prospective purchasers can often get assistance (such as low or no down payment) as they progress towards buying their first property. Programs such as these can be a stepping stone to building generational wealth.

Direct and Indirect Building of Wealth

Next, consider different ways of building wealth over the generations.

Inheritance

Inheriting appreciated capital assets like real estate, stocks, bonds, ETFs, or a small business can have a big tax benefit, thanks to the “step-up in basis.” The value of the inherited asset is “stepped up” to the fair market value on the date the original owner dies.

If the heir sells the property, the step-up in basis will greatly reduce capital gains taxes due or make them moot if there is no gain. Any capital gain from the sale of inherited property is considered long-term. Current long-term capital gains taxes are 0%, 15%, or 20%, depending on your income and filing status.

For married couples, the death of one spouse results in a partial step-up in most states, but here’s a simplified example. Let’s say you inherit your grandmother’s home, purchased in 1940 for $10,000. The home is valued at $450,000 on the date of her death, which is the stepped-up basis. If you sell the home for $450,000, you’ll pay no capital gains tax. If you sell for a higher sum, capital gains tax will apply only to the amount over $450,000.

Imagine using the stepped-up basis provision over more than one generation of a family. An heir could sell a phenomenally appreciated asset and pay a minimal amount in capital gains tax or none at all on their inheritance, as long as the asset was included in the decedent’s estate.

Indirect Benefits

Heirs of homeowners may well inherit the actual real estate, but generational wealth can also be more indirect. Consider these points:

•   Homeowners are often more financially secure than renters, passing that security on to children.

•   Homeowners are able to borrow against the equity to improve the home (and often boost its value) or take care of other financial needs.

•   Many homeowners are located in districts with high-performing schools, enhancing overall opportunities for their children.

•   Down the line, the equity in a home can help finance retirement and health care needs, shielding adult children from that financial burden.

All of these factors can positively affect the next generation and add to their wealth.

How Discrimination Can Affect Generational Wealth

When housing discrimination occurs, it can keep people of color, women, and families with children, immigrants, and people with disabilities from living in the place they want. Importantly, it can also have a serious impact on generational wealth.

Considering the following statistics from the Fed for the fourth quarter of 2023:

The homeownership rate for non-Hispanic white households overwhelmingly led the pack, at 73.8%. Asian, Native Hawaiian, and Pacific Islander families came a distant second, at 63%. Hispanic families of any race had only a 49.8% homeownership rate, and African American households logged in at 45.9%.

A number of factors have contributed to the race gap in homeownership; not the least is the legacy of race-based discrimination in the housing market.

When homeownership lags among a certain group because of housing discrimination, so does the possibility for generational wealth.


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

Understanding Home Appreciation and Home Equity

To understand how homeownership can build wealth, it’s important to understand the concepts of home appreciation rates and home equity. These are some key points:

•   The increase in the value of a home over time is known as appreciation or the appreciation rate.

•   Home equity is the property value minus the outstanding balance of mortgages, liens, or other debt on the property.

•   Your first contribution to home equity is your down payment.

•   Every time you make a monthly mortgage payment, you are paying down the amount you owe and slowly paying part of the principal on your loan, which builds equity.

•   Price appreciation and home improvements can also add to home equity.

Most people purchase real estate with the expectation that their home will increase in value over time. But many things come into play when it comes to home appreciation and the amount of home equity you can build. Some you can control and some you can’t.

Recommended: How Much Is a Down Payment on a House?

The Economy

Housing prices can be affected by several economic indicators. When a recession hits, unemployment rises, or inflation jumps, the real estate market often declines.

Interest rates are also vitally important. Low mortgage interest rates can fuel demand, which can increase home prices in many areas. Conversely, a rise in mortgage rates can have a cooling effect on buyer demand.

The correlation between the housing markets and the rest of the economy can be surprising at times. For instance, during the initial stages of the pandemic, when economic indicators were showing signs of trouble, the nation saw a giant rise in home prices. This was particularly true in rural and suburban areas as urban dwellers sought more space and fewer crowds.

Recommended: How Rising Inflation Affects Mortgage Interest Rates

Laws and Regulations

Federal legislation can have a big effect on the U.S. housing market. Government tax credits, deductions, and subsidies aimed at certain homeowners can fuel the housing markets.

Local policies and regulations can also affect housing appreciation. Local investments in infrastructure or new schools and parks can increase your home’s value. Local zoning laws can also have an effect, positive or negative.

Home Improvements

This encompasses everything from an extensive addition to a fresh coat of paint. All kinds of improvements can add to the resale value of your home and, importantly, enhance your life while you’re living there.

Whether you decide to remodel a kitchen, a bathroom, or a remodel a living room, updated appliances and décor and energy-efficient improvements are often valuable upgrades.

To fund them, some homeowners use home improvement loans.

Is Homeownership a Smart Investment?

The answer to that question isn’t always straightforward. First, your home is the place where you live, of course, and hopefully you derive happiness from that. In that sense, the costs associated with your home and your mortgage payment can be considered living expenses, not necessarily an investment.

On the other hand, appreciation and home equity can be seen as the return on your investment in your home.

The sweet spot is often a combination of the two: a great place to live and a profitable investment.

Still, homeowners’ net worth far outpaces renters’. Every three years, the Federal Reserve issues the Survey of Consumer Finances, which compares the net worth of homeowners and renters. The latest report shows that homeowners had a median net worth of $396,200; renters, $10,400.

Keeping your expectations realistic can effectively put your home value into the context of your overall financial wellness and estate planning. To do that, you may need to keep in mind the total costs of owning and maintaining real estate. Too often, people subtract their purchase price from the expected sale price and figure the difference is the return on investment. But there are many more costs involved in homeownership.

To calculate your true return, you’ll want to add up the following:

•   Down payment

•   Closing costs

•   Mortgage points

•   Any mortgage insurance

•   Home maintenance expenses

•   Home improvements

•   Total mortgage payments

•   Taxes

•   Any homeowners association fees

•   Estimated selling costs (such as the real estate agent’s fees and staging charges).

That total is the number you want to compare against home appreciation to determine your actual return.

The Takeaway

How does homeownership build generational wealth? In direct and indirect ways. The real estate itself can likely grow in value, and the homeowner may enjoy such benefits as raising a family in a good school district. Buying real estate can build a foundation for a family today and for generations ahead.

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/Capuski

*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.

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

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

^‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
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.