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There are many steps to the homebuying process. If you’re taking out an FHA loan (a loan backed by the Federal Housing Authority) to buy a property, you’ll most likely need to get an appraisal to verify the value and condition of the home. Let’s take a closer look at how FHA appraisals work, what to expect, and how to prepare as a homebuyer.

Understanding FHA Appraisals

An FHA loan appraisal is an in-person assessment performed by an accredited appraiser. The purpose of the appraisal is to evaluate how much a house is worth and determine if it meets minimum safety and livability standards. The appraisal is sent to the lender for further evaluation before a FHA loan can be approved. FHA appraisals are typically required whether the borrower is buying or refinancing a home with an FHA loan.


💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.1

Differences Between FHA and Conventional Appraisal

Whether a borrower is seeking an FHA loan or a conventional loan, an appraisal estimates the fair market value of a home based on the property condition and nearby home values. But FHA loans must meet the minimum standards set by the U.S. Department of Housing and Urban Development (HUD). This means that FHA appraisals also consider the health and safety of the property, while conventional appraisals focus on the property’s value and condition. FHA lenders may require that any health and safety hazards be addressed before approving the mortgage.

Role of FHA Appraiser and Their Requirements

FHA appraisers follow HUD guidelines for minimum property standards. During the appraisal, they analyze and report a property’s physical and economic characteristics to provide an opinion of its value. HUD requires FHA appraisers to have state certification and meet the minimum certification criteria issued by the Appraiser Qualification Board.

How Do FHA Appraisals Work?

An FHA loan appraisal involves two steps. The appraiser will complete a site visit to inspect the property condition and perform market research for comparable homes in the area to estimate the market value of the home.

The appraiser will inspect the home’s interior and exterior to determine the property’s safety and soundness. The appraiser’s findings, plus information on the home like square footage and the year it was built, are cataloged in HUD’s Uniform Residential Appraisal Report.

To estimate the property’s value, the appraiser evaluates the selling prices for comparable homes in the same area that were recently sold. This information, combined with the property’s condition and characteristics, is used to estimate the market value.

Recommended: The Ultimate Home Inspection Checklist

What’s the Purpose of an FHA Appraisal?

FHA appraisals are required by lenders to ensure that the loan amount doesn’t exceed the market value of the property. The appraisal process is also used to determine that a property meets FHA standards for health and safety.

Differences Between Appraisal vs. Home Inspection

The appraiser only factors in readily observable conditions. A home inspection, by comparison, is much more in-depth in its assessment of a property’s need for repairs.

Besides the property value, the criteria evaluated during an FHA appraisal include the safety, security, and soundness of a home. In other words, the home should be safe for occupants to inhabit, protect the security of the property, and not have physical deficiencies or conditions impacting the structural integrity and ability to market it for future sale.

Appraisers are required to describe the property conditions, including any renovations, necessary repairs, or deterioration. Minor issues, such as missing handrails, cracked windows, or worn countertops, do not require automatic repair.

Safety and Structural Standards

In terms of occupant health and safety, the FHA appraisal looks out for exposure to hazardous materials, such as lead paint and asbestos. Mold, radon gas, and poor insulation are other potential safety risks that would be flagged in an appraisal. The overall property structure needs to be in sufficient condition to keep occupants safe. This means that damage to the foundation, structural decay, or anything that impacts the long-term integrity of the home would not meet FHA requirements.

Compliance with Minimum Property Standards (MPS)

FHA appraisals follow the Minimum Property Standards (MPS) set by HUD. The MPS establishes baseline conditions to cover aspects of a property that aren’t met by model building codes. For example, the MPS covers doors, gutters, and wall coverings to ensure the property value is not impacted by the quality of these components.

What to Expect from an FHA Appraisal

Being prepared for an FHA appraisal can help streamline the loan application and homebuying process. Here’s what to expect from an FHA appraisal:

Appraisal Timeline and Duration

The duration of an FHA appraisal site visit varies by property size and condition, but plan for it to take between one and several hours to complete. The full appraisal report is usually complete within a week.

Common Issues That Can Affect the Appraisal Outcome

There are a number of issues and property conditions that the FHA requires to be remedied for loan approval. Some common issues include:

•   Roof condition or damage

•   Exposed wires

•   Water heater temperature and pressure relief valve

•   Damaged foundation

•   Peeling paint (for homes built before 1978)

Conditions That Won’t Pass FHA Inspection

It’s important to know what won’t pass the FHA inspection. Any property conditions that impact the safety and health of occupants could need to be addressed in order to get FHA loan approval. Besides the common issues outlined above, hazards, nuisances, and obstructions to property access could fail to pass FHA inspection. For example, the level of traffic or proximity to a hazardous waste site could violate FHA standards.

Factors That Can Affect Property Valuation

Property valuation accounts for the home condition, square footage, any renovations, and the number of bedrooms and bathrooms. The appraiser must observe neighborhood characteristics and surrounding properties to make determinations that will be incorporated into the valuation of the property.

FHA Inspection Checklist and Tips

Sellers can plan ahead and fix what won’t pass FHA inspection to avoid delays and improve the marketability of their home. Here’s how to address some common issues that could cause a property to fail an FHA appraisal.

•   Roof repair: Fix leaks and consider a new roof if life expectancy is less than three years.

•   Chipped or peeling paint: Scrape and repaint peeling surfaces if property was built prior to 1979.

•   Water heater: Ensure the water heater has a pressure and temperature relief valve and sufficient piping.

•   Plumbing: Repair all toilets, showers, and sinks that aren’t in working order as leaky plumbing won’t pass FHA inspection.

Both the inspection and the home’s appraised value are critical to FHA loan approval. Sellers and their real estate agents are permitted to communicate with an appraiser to offer additional property information that can contribute to the valuation of the home. Gathering documentation beforehand on any home improvements can ensure the appraiser has everything needed for an accurate valuation.

Recommended: What Are the Most Common Home Repair Costs?

What Happens After an FHA Appraisal?

The FHA appraisal report will provide the estimated market value and outline any required repairs or alterations that need to be completed for FHA loan approval.

What to Do if the Home Sale Appraisal Comes Back Low

If an FHA appraisal comes back low, there are several possible scenarios. The seller can lower the sale price to accommodate the appraised value. Alternatively, the buyer can renegotiate to lower the price and potentially contribute a larger down payment to cover the portion of the home price that is not covered by the FHA loan. As a last resort, a buyer would be permitted to walk away from the deal if the FHA lender’s requirements can’t be met.

What to Do if the Refinance Appraisal Comes Back Low

If refinancing with a FHA loan and the appraisal comes back low, there are a few courses of action available to borrowers. First, review the appraisal report to see if an appraiser missed anything important. If so, providing the correct information to get another appraisal could result in a higher appraised value.

If disputing the appraisal isn’t an option or successful, borrowers can consider restructuring the loan to take less cash out. Finally, the loan can be denied if the terms are not beneficial to the borrower.

What to Do if the Appraiser Requests Further Repairs

The appraisal may identify repairs that need to be completed to close on the loan. Unless otherwise outlined in the purchase and sale agreement, sellers are typically on the hook for repairs. The sellers have up to 120 days to make necessary repairs and meet FHA standards if required by a lender.

Alternatively, buyers can pay for the repairs themselves. If the issues impact the health, safety, and livability of the property, they’ll need to be completed prior to closing. Other non-safety repairs can be completed after closing. Note that delayed repairs may require an extra escrow holdback for the estimated costs.

Once repairs and issues have been addressed, the property can be reassessed. Borrowers can consider a FHA 203(k) loan to finance both the purchase and rehabilitation costs through a single loan if the repairs are an obstacle to closing. Buyers might consider renegotiating their offer to reflect the repair costs being financed.

If appraisal-related issues are delaying closing, buyers can consider a mortgage rate lock to secure their interest rate for a set period. This can help buy more time for repairs to be made without losing out on favorable loan terms.

What to Do if the Appraisal Comes Back at or Higher Than the Expected Amount

The loan simply moves forward if the appraisal comes back at or higher than the expected amount, barring any request for further repairs.

How Long Is an FHA Appraisal Good For?

FHA appraisals are valid for 180 days unless it’s updated. If updated, an appraisal can be good for up to one year.

Recommended: 2024 FHA Loan Closing Cost Calculator

Impact of FHA Appraisal on Loan Approval

The FHA appraisal influences loan approval in two key ways. First, the appraisal evaluates the property condition and identifies if any repairs or further inspections are required for loan approval. Second, the appraised value determines the total loan amount a buyer is approved for. If the appraised value is lower than the purchase price on the contract, either a price reduction or larger down payment could fill the gap to get loan approval.

How Long Do You Have After Appraisal to Close an FHA Loan?

Repairs aside, how long can you wait after the appraisal to close on an FHA loan? It helps to understand how long an FHA appraisal is good for. Once the borrower and lender receive a copy of the FHA appraisal, it’s valid for 120 days. However, borrowers can request a 30-day extension to allow more time to close on a FHA loan.

A conditional approval from the lender will outline the required repairs to be made in order to close. After the appraisal is approved in underwriting, the loan will most likely be cleared to close. Prior to closing, borrowers will receive a mortgage closing disclosure which outlines the total funds needed to close.


💡 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.

The Takeaway

FHA appraisals estimate a property’s value and assess its condition to determine if it meets safety and livability standards set by HUD. Understanding the conditions and issues that won’t pass FHA inspection is important for buyers and sellers alike.

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

Another perk: FHA loans are assumable mortgages!

FAQ

How does the appraised value affect the loan amount?

With FHA loans, the appraised value of the property determines the loan amount a borrower can qualify for.

Can you contest an FHA appraisal?

Yes, you can contest an FHA appraisal and provide additional information to inform the property valuation. However, there’s no guarantee that the appraiser will change the valuation.

What happens if the property doesn’t meet FHA requirements?

If a property doesn’t meet FHA requirements, buyers can ask the seller to make the necessary repairs. Alternatively, buyers can consider other types of home loans, such as a conventional mortgage.

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Photo credit: iStock/valentinrussanov

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.
*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.

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A home that’s for sale by owner opens the door for you to buy the property without a middleman — though you may choose to use your own real estate agent to facilitate the transaction. A for-sale-by-owner deal can differ from a typical real estate transaction in a few important ways, so study this guide before you start perusing listings.

Buying a House for Sale by Owner

When homeowners choose the FSBO (“fizz-bo”) route, they take on all of the responsibilities real estate agents would typically shoulder in the homebuying process, from listing the house and showing it to negotiating and closing the deal.

The main motivation for doing so is often cash. Sellers who go it alone can save money on the real estate commission fee. If neither side uses an agent, the deal sidesteps the typical 5% to 6% the seller would typically pay in commissions.

On the buyer’s side there can be a number of benefits of buying a house for sale by owner. First of all, the lack of a listing agent means you have more direct contact with the seller, which might give you more negotiating power. The seller will also likely have detailed knowledge of the house and neighborhood, which can be a bonus as you decide whether or not you want the property.

However, you may run into some pitfalls with FSBO properties. A seller may love her home and overprice it, potentially complicating matters when you get an appraisal.


💡 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.

Using a Buyer’s Real Estate Agent

The home’s seller may not want to use a listing agent, but you can still engage the services of a buyer’s agent. You may already be working with an agent who can contact a FSBO seller for you. Or you may need to look for an agent who is willing to take on the job.

In some cases, buyer’s agents may be hesitant to work on a FSBO property. They may be wary of taking on extra liability, or extra work for which they will not necessarily be compensated.

That said, a buyer’s agent can negotiate the sale on your behalf and walk you through the complicated paperwork. If the seller is putting the contract together, your agent can also check the work to make sure you don’t run into any problems.

Sellers typically pay the agent commission. Just be sure the seller agrees to pay the buyer’s agent commission in the purchase agreement or be prepared to factor it into your own expenses.

Here’s what to expect in the FSBO buying process.

Shopping for a Mortgage

Before making an offer on a home, it’s a good idea to shop for a mortgage to get an idea of the terms different lenders offer and how much you are likely to pay each month.

A mortgage calculator can help you understand how down payments of various sizes will affect the numbers. And you may consider getting preapproved for a mortgage to see exactly how much you can afford to spend.

In an FSBO situation, homeowners may have no experience with the home financing process, and getting prequalified or preapproved for a home loan may remove some roadblocks on your path to making a purchase.

Viewing the Home

Your agent can contact the seller and set up an appointment to view the home. When you visit, be on the lookout for sagging floors or cracks in walls that might indicate structural issues. Test windows. Look for water damage on ceilings or walls that may be a sign of a leaky roof.

Since the seller will most likely be showing the house, take this opportunity to get as much detail about the home’s history as possible. What repairs have been made recently, and which ones haven’t been made in a while? It’s smart to ask about any warranties, and to be sure they will remain after a sale.

Recommended: What to Look for When Buying a House

Getting an Inspection

When buying a home for sale by owner, it’s not in your best interests to skip an inspection. Home inspectors go over the house with a fine-toothed comb, looking at structure, plumbing, electricity, and appliances to see whether they need repair now or in the near future. (This home inspection checklist shows you what should be covered.)

If the inspector finds any problems, you can ask the seller to fix them, credit you the cost of repairs, or reduce the sales price. If you’ve already signed a purchase agreement, severe problems found during an inspection can be a reason to pull out of the contract.

Negotiating a Sale Yourself

If you decide not to use a buyer’s agent, you and the seller will have to negotiate the sale and write up the purchase contract yourself. You may also choose to hire a transactional agent or attorney who can help you write the contract and ensure it is done legally and in a way that protects your rights. If you do decide to go it alone, below are a few things to keep in mind.

Recommended: How to Buy a House Without a Realtor

Making an Offer

Before making an offer on a house, check comparable properties in the neighborhood and see if the listing price is reasonable. Doing so can help you pin down what a reasonable offer is.

Consider offering less than the listing price. The seller may ask you to come up in the asking price, but if you start too high, it’s difficult to negotiate down again. You can use the neighborhood comps you’ve researched as a negotiating tool.

Including Contingencies

Contingencies are certain conditions that must be met in order to close the deal. Some common contingencies are a satisfactory home inspection and property valuation, also known as an appraisal. If a home is appraised at less than the agreed-upon price, a lender may be unwilling to loan the buyer the money. In that case, the appraisal contingency can be an opportunity to negotiate the sales price.

A clear title is another common contingency. The title is a document that shows who has owned and now owns the home. The title company will make sure there are no liens or disputes associated with the property. If there are unresolvable issues, the clear-title contingency gives the buyer a way out of the contract.

Negotiating Fees

It can’t hurt to ask for seller concessions, closing costs that the seller agrees to pay. A seller may agree to help pay for property taxes, attorney fees, appraisal inspections, and the like. Even in a seller’s market, if the property has been sitting, possibly because the price was too high, a seller may offer a financial incentive to move the home.

Putting Earnest Money in Escrow

Your earnest money deposit is the money you submit with your offer to demonstrate your serious intent to buy.

The listing agent would usually put this money into escrow. But if you’re going it alone, it’s a good idea to engage a title company or escrow company to hold the money for you until the sale goes through.

If you give the money directly to the seller, they may refuse to give it back to you if a contingency causes the deal to fall through, which could mean suing to retrieve your cash.

Determining When You’ll Get Possession

Be sure your purchase agreement specifies when you will take possession of the new house and receive the keys. Possession may take place immediately after closing, or the contract may give the seller time to move.


💡 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.

The Takeaway

Buying a house for sale by owner can come with challenges and opportunities. It may make sense to engage a professional real estate attorney to help you negotiate and deal with the documents. Another option is to engage a buyer’s real estate agent who can help safeguard your interests.

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

SoFi Mortgages: simple, smart, and so affordable.

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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.

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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.

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If your monthly mortgage payment no longer fits your lifestyle or financial goals, you may be able to change it with mortgage refinancing or recasting. Recasting and refinancing are two ways a borrower can save on mortgage costs — sometimes a jaw-dropping amount. To understand which might be best for you, it helps to understand the difference between them and the pros and cons of each.

Recasting vs Refinancing

Recasting is the reamortizing of an existing mortgage, meaning the lender will recalculate your monthly payments. Refinancing involves taking out a completely new mortgage with a new rate, and possibly a new term, and paying off your old mortgage in the process.

Note: SoFi does not offer mortgage recasting at this time.

Recasting

If your lender offers mortgage recasting and your loan is eligible, here’s how it works: You make a large lump-sum payment — $10,000 might be required — toward the principal balance of your mortgage loan. The lender recalculates the monthly payments based on the new, lower balance, which shrinks the payments. The lender may charge a few hundred dollars to reamortize the loan.

Mortgage recasting does not change your loan length or interest rate. But because your principal amount is lower, you’ll have lower monthly payments and will pay less interest over the life of the loan.

If you were to put a chunk of money toward your mortgage principal and not recast the loan, your payments would not change, though the extra principal payment would reduce your interest expense over the life of the loan.

Who might opt for mortgage recasting? Someone who has received a windfall and wants to put it toward the mortgage might like this option. Sometimes it’s someone who has bought a new home but hasn’t sold the previous one. Once the old home is sold, the homeowner can use some of the proceeds to recast the new mortgage.

Another fan of recasting might be someone who wants to use the lump sum to pay their loan down to 80% of the home’s value so they can stop paying for private mortgage insurance (PMI).

FHA, VA, and USDA loans are not eligible for mortgage recasting. Some jumbo loans are also excluded. If you want to change the monthly payments on those types of mortgages, you’ll need to refinance your loan.

Refinancing

When you seek refinancing, you’re applying for a brand-new loan with a new rate and terms and possibly from a new lender. Most people’s goal is a lower interest rate, a shorter loan term, or both.

While finding a competitive offer might take some legwork, refinancing could help you save money. A lower interest rate for a home loan of the same length will reduce monthly payments and the total amount of interest paid over the life of the loan.

A homeowner who refinances to a shorter term, say from 30 years to 15, will pay much less total loan interest. Fifteen-year mortgages also often come with a lower interest rate than 30-year home loans.

Equity-rich homeowners who’d like to get their hands on cash may find cash-out refinancing appealing.

Pros and Cons of Recasting

Mortgage recasting lowers your monthly mortgage payments and lets you save on total loan interest while keeping the same interest rate. Since you recast your mortgage with your existing lender, the process is pretty straightforward, and the cost could be as low as $150.

There are some potential drawbacks to mortgage recasting, however. Making a large lump-sum payment means you could be trading liquidity for equity, and creating financial instability if unexpected expenses arise or if the housing market takes a downward turn.

If you have other debts with higher interest rates, you may want to avoid mortgage recasting. It could make more sense to use the money you would put toward the principal to pay down your higher-interest debt first.

“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.

Recommended: Cash-Out Refinance vs HELOC

Pros and Cons of Refinancing

If you are eligible to refinance, you won’t need a large cash source in order to lower your mortgage payments. Instead, your main goal is to qualify for a lower interest rate. If you succeed, you will save a lot of money in interest over time.

With a cash-out refi, you can use that money for whatever you need: pay down higher-interest debt, add to the college fund, or remodel your kitchen.

Refinancing involves what looks like a bummer: closing costs, which could range from 2% to 6% of the remaining principal. You’re taking out a new mortgage, after all. Some lenders will let you roll closing costs into your loan.

A lower rate could make it all worthwhile, though. It’s a good idea to calculate the break-even point, when interest savings will exceed closing costs. Everything beyond that break-even point will be savings.

Reducing your loan term with a refi could result in a higher mortgage payment but tremendous interest savings over the life of the new loan.

Refinancing may make sense for homeowners who are planning to stay put for years; those who want to switch their adjustable-rate mortgage to a fixed-rate one; and borrowers with FHA loans who want to shed mortgage insurance premiums (MIP), on a loan they’ve paid down or a home that has appreciated. Most FHA loans carry mortgage insurance for the life of the loan.

No matter the home financing topic, find a lender willing to provide transparent answers to your mortgage questions.


💡 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.

The Takeaway

A mortgage recast vs. refinance: different animals with similar aims. A recast requires a lump sum but will shrink payments and total loan interest. A mortgage refinance may greatly reduce borrower costs and sometimes free up cash. Which one is right for you will depend on your current loan terms and your available cash, among other factors.

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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.

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Some mortgage servicers allow borrowers with unforeseen financial troubles to trim or pause mortgage payments short term through a process called mortgage forbearance. So if a homeowner hits a snag and can’t pay, a sudden hardship — such as temporary unemployment or health issues — doesn’t necessarily lead to credit damage or foreclosure.

The goal of forbearance is to give the borrower a chance to become more financially stable. If this sounds like something you need — or if you simply want to read up on forbearance so you’ll be prepared if the unexpected happens — this guide is for you.

Identifying Your Loan Servicer

If you want to ask if mortgage forbearance is an option, you’ll first need to determine your mortgage servicer, which may not be the lender that originally provided the loan. The name of the servicer typically appears on the bill that arrives in the mail or on the website where mortgage payments are made. You could also try looking up your servicer on the MERS® website. Those who think they may have Fannie Mae or Freddie Mac-owned loans can check online as well.


💡 Quick Tip: Have you improved your credit score since you made your home purchase? Home loan refinancing with SoFi could get you a competitive interest rate with lower payments.

What Does Mortgage Forbearance Really Mean and How Does It Work?

During forbearance, interest is not paid but accrues and is later added to the loan balance. All suspended payments also will need to be paid back. If rough seas are rising around you, it doesn’t make much sense to wait to ask for a lifeline. Similarly, if you’re experiencing a hardship, before missing even one mortgage payment, it would be smart to contact your servicer to ask about options, go over the details, and formalize an agreement.

It’s important to ask whether skipped payments are expected to be paid in a lump sum when the forbearance ends, paid in installments, or added to the end of the loan term. Forbearance is often only granted after a financial review to gauge the likelihood that you can resume regular payments at the end of the forbearance period.

Do You Have to Pay Extra Interest for Forbearance?

Typically no. The interest rate and amount of interest follow the loan agreement.

The loan interest might change only if the lender extends the loan term or increases the loan interest rate.

Pros and Cons of Mortgage Forbearance

Pros	Cons
It’s a chance to avoid foreclosure	Often higher monthly payments after forbearance
Usually has no impact on credit	You normally have to prove hardship
Good for short-term hardships	Interest accrues
	Missed payments must be repaid

Federally Backed and Private Mortgage Options

Thanks to the CARES Act, both conventional and government-backed mortgages were eligible for forbearance due to Covid-related hardships. But these programs wound down in the fall of 2023. This means forbearance programs are specific to your lender, as they were prior to the pandemic. So whether you have a conventional home loan or government-insured home loan (an FHA, USDA, or VA loan), if you’re experiencing hardship it’s important to contact your loan servicer as soon as possible to discuss options and the exact terms.

Lenders typically ask for documentation to prove the hardship, including current monthly income and expenses. They also will want to know whether your hardship is expected to last six months or less (short term) or 12 months (long term). Depending on the lender, you may need to call to discuss options or might be able to start the forbearance request process online.

Coming Out of Forbearance

When a forbearance period ends, how will the amount that was paused be repaid? The answer depends on the lender and type of loan.

•   It’s possible that the sum unpaid during the forbearance period will be due in full once a loan is out of forbearance.

•   That is not true with a Fannie Mae, Freddie Mac, FHA, USDA, or VA loan. With these loans, the amount that was suspended will not be required to be paid back in a lump sum.

•   Other lenders may extend the loan period, adding the forbearance dollars to the end of the loan.

•   Yet other lenders may raise monthly payments once a loan is out of forbearance to make up the amount that wasn’t being paid during the mortgage forbearance period.

Deferred Mortgage Payments and Credit Scores

Even one missed mortgage payment will dent your credit scores, and late payments will stay on your credit history for seven years. Forbearance, on the other hand, usually does not show up on credit reports as negative activity.

Alternatives to Mortgage Forbearance

For those who can’t afford to pay their mortgage, mortgage relief options like these may be available.

Mortgage Loan Modification

If you cannot refinance your loan, loan modification is an option. Loan modification changes the original terms of your mortgage long term or permanently. The point is to make your payments more manageable, usually with a lower interest rate, a longer loan term, or both. If the length of the loan is extended, you’ll probably pay less per month than before but pay more interest over the life of the loan.

When reaching out to your loan servicer to discuss loan modification, it’s wise to ask about any fees for the modification; what the new repayment term, rate, and payments will be; and whether the modification is temporary or permanent. As with forbearance, evidence of financial hardship and a letter will be required.

Mortgage Refinancing

Refinancing a mortgage is altogether different from modifying a home loan. When refinancing a mortgage loan, you’re applying for a brand-new loan that would then be used to pay off outstanding home debt. You might qualify for a lower interest rate or get a longer loan term. Closing costs apply.

If you’re struggling financially, it might be difficult to qualify for refinancing, but it doesn’t hurt to get prequalified, which takes mere minutes. You may find that you’re eligible for a refinance during or after forbearance, according to Fannie Mae. (If you do this, make sure you seek mortgage prequalification vs. preapproval and that you understand the difference.)

Draw on Savings

In an emergency, you may want to consider tapping your emergency fund or retirement account. If you have a Roth IRA, remember that you can withdraw contributions at any time tax- and penalty-free. (If you withdraw the earnings on the account, however, you may be subject to taxes, a 10% penalty, or both.)

You may qualify for a hardship distribution from a 401(k) and permanently withdraw money if your plan allows it. Your employer will likely deduct 20% upfront for taxes. The 10% penalty tax is waived if the hardship withdrawal is for a handful of specific reasons.

Sell Your Home

If the weight of mortgage payments becomes too much, you could sell your house and pay off the mortgage.

If the proceeds would fall short, an option is a short sale. Your lender decides whether or not to OK the sale or whether to work out a plan, like allowing you to make interest-only payments for a set amount of time or extending the loan term.

Declare Bankruptcy

Another option to stave off foreclosure is filing for Chapter 13 bankruptcy. Chapter 13 allows a borrower up to five years to pay missed mortgage payments. So instead of having to make one giant payment, if that’s what is being asked for, a homeowner could break up the payments over 60 months.

If, for example, a homeowner accepted a 12-month forbearance on monthly payments of $2,400, a Chapter 13 plan could allow the $28,800 in arrears to be paid over 60 months. Other debts can also be restructured and possibly discharged under Chapter 13.


💡 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.

The Takeaway

Mortgage forbearance allows paused or reduced payments for borrowers experiencing a sudden hardship that is expected to last six months or less. It’s one way to ward off foreclosure. It’s not the only way, however, so it’s worth consider forbearance as well as other options such as a loan modification or mortgage refinance.

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

A new mortgage refinance could be a game changer for your finances.

FAQ

Does forbearance hurt credit?

No, if you abide by all the terms of the agreement. Skipped payments during a forbearance period are typically not reported to the credit bureaus.

Is mortgage forbearance a good idea?

If the financial hardship is short term, forbearance could provide a welcome respite until you get back on your feet. And it sure beats foreclosure.

Does forbearance affect getting a new mortgage?

It depends. For Fannie Mae- and Freddie Mac-backed loans, if you paid everything back in a lump sum after forbearance, you can proceed. If not, you will need to make three consecutive payments under your repayment plan or payment deferral option.

FHA loans have a waiting period that varies by loan type if you’ve missed any payment in forbearance, even if you paid everything back in a lump sum.

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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.

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.

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.

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There are many steps in the homebuying process, not least of which is deciding what type of mortgage to use. Comparing two common mortgage categories — a loan backed by the Federal Housing Administration (FHA) vs a conventional loan — is a smart place to start. This may be especially true for first-time homebuyers, who often find it challenging to save a substantial amount of money for a down payment.

Understanding FHA Loans and Conventional Mortgages

Buying a home is often the largest investment of a lifetime. It’s important for borrowers to understand how the FHA loan vs conventional loan decision could impact their interest rate, loan terms, and minimum down payment. Eligibility requirements also vary between different types of home mortgages. Let’s examine how each loan type works, plus the factors to consider when deciding between an FHA vs a conventional loan.

💡 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 an FHA Loan?

An FHA loan is a government-backed loan that’s issued by a lender, such as a bank or credit union, but insured by the Federal Housing Authority (FHA). FHA loans offer low down payment options, as well as flexible income and credit guidelines. For a first-time homebuyer, it may be easier to secure an FHA loan than a conventional mortgage, although it’s always worth exploring both options.

What Is a Conventional Mortgage?

Conventional loans are not insured by the government. They typically have stricter borrower requirements than FHA loans but can cost less over the life of the loan.

Basic Eligibility and Application Process for Each

There are some key differences in eligibility requirements between these two popular mortgage types. Eligibility for FHA and conventional loans is based in part on financial factors like credit score and debt-to-income ratio (DTI). Additionally, FHA loans can only be used for a primary residence and require borrowers to occupy the property within 60 days. Buyers can typically have only one FHA loan at a time, unless they meet specific exceptions.

Applying for either type of home loan involves many of the same steps of the mortgage preapproval process. With either mortgage type, lenders may ask borrowers to submit information on the property they’re purchasing and documentation of income, assets, debts, and employment.

Recommended: The Mortgage Loan Process Explained in 9 Steps

FHA vs. Conventional Loans: Key Distinctions

In a head-to-head FHA vs conventional loan comparison, it’s worth noting some key distinctions. The minimum down payment, credit requirements, insurance, loan limit, and property eligibility varies between each loan type. Here’s how it looks:

Down Payment Requirements and Differences

Pitting an conventional loan vs. an FHA loan will show you how much money you need to put down on a house. (To get a good sense of how much home you are prepared to buy, use a home affordability calculator.) The minimum down payment for FHA loans is 3.5% for borrowers with at least a 580 credit score and 10% for borrowers with credit scores between 500-579. Meanwhile, conventional loans can offer down payments as low as 3% for a fixed-rate loan, or 5% for an adjustable-rate mortgage.

Credit Score Requirements and Impact on Approval

Lenders will look at your credit score with either loan type. Borrowers can secure an FHA loan with a credit score of 500, though as noted above, this requires a down payment of 10% versus just 3.5% with a credit score of 580 or higher. Conventional loans have stricter credit requirements — borrowers will typically need a credit score of at least 620 to qualify.

Mortgage Insurance: PMI vs. MIP

Mortgage insurance premiums (MIPs) are required with an FHA loan. This includes an upfront payment equivalent to 1.75% of the loan and an annual premium that’s spread across monthly mortgage payments. MIP runs for the full loan term or for 11 years if a borrower puts 10% or more down. With a conventional loan, buyers who put less than 20% down will need private mortgage insurance (PMI), which is paid monthly with the mortgage payment.

Loan Limits and Property Eligibility

The amount you can borrow and the condition and intended use of the property are key factors when deciding between an FHA vs. conventional loan. FHA loan limits are set annually by the U.S. Department of Housing and Urban Development (HUD). For 2025, the limit for single-family residences is $524,225 for low-cost areas and $1,209,750 for high-cost areas. The limits increase for two-, three-, and four-unit properties. In 2025, the conventional loan limit for single-family properties is $806,500 in low-cost areas and $1,209,750 in high-cost areas.

Property eligibility also differs by loan type. FHA loans involve stricter appraisals that consider safety and building codes, not just the home’s value. Additionally, conventional loans can be used for a second home while FHA loans are limited to primary residences.

Interest Rate Variations

Interest rates are influenced by several factors, including a borrower’s income, credit score, down payment amount, and the overall state of the economy. Because FHA loans are backed by the government, they generally have more competitive interest rates compared to conventional mortgages.

Benefits and Drawbacks of FHA Loans

Lower Down Payment but with Mortgage Insurance Premium

For borrowers with credit scores of 580 or higher, the ability to put as little as 3.5% down is a key reason for choosing an FHA loan. But FHA borrowers pay MIP, regardless of the down payment amount.

Recommended: Private Mortgage Insurance (PMI) versus Mortgage Insurance Premium (MIP)

Flexible Credit Requirements

In terms of credit score, FHA loans are easier to qualify for than conventional loans. FHA loans require a credit score of 580 to put 3.5% down or 500 to put 10% down.

Property Eligibility and Restrictions

FHA loans are intended for primary residences, so they can’t be used for vacation homes or investment properties. The appraisal process for FHA loans is also more strict than for conventional loans. The FHA appraisal assesses the property value and the home condition to ensure it meets minimum property standards set by HUD. These extensive standards cover design, as well as building materials such as insulation.

Interest Rate Variability

FHA loans usually have lower interest rates since lenders incur less risk with government-backed loans. Interest rates vary by lender, so it’s worth shopping around to compare options, whether you are considering an FHA or a conventional mortgage.

Advantages and Disadvantages of Conventional Mortgages

Opting for a conventional loan vs FHA loan comes with a mix of potential benefits and drawbacks.

Higher Down Payment but No Upfront Mortgage Insurance

Though borrowers could qualify for a conventional loan with a 3% down payment, a higher down payment is more common. The average down payment on a house is 13%, although younger borrowers and first-time buyers often put down less than this. Borrowers can choose to put 20% down on a conventional loan to avoid the cost of private mortgage insurance.

Stricter Credit Score Requirements

The minimum credit score to qualify for a conventional loan is 620, though this can vary by lender.

Property Eligibility and Restrictions

Conventional loans don’t have the same occupancy requirements as FHA Loans. This allows borrowers to purchase a variety of property types, including primary residences, vacation homes, and investment properties.

Interest Rate Stability and Flexibility

There are two types of conventional loans: fixed-rate and adjustable-rate. The former has the same interest rate for the loan term, offering predictability and stability. Adjustable-rate mortgages, on the other hand, tend to have a lower introductory rate for several years before the rate fluctuates based on market conditions. This can provide upfront savings at the onset of the mortgage.

FHA Loan vs. Conventional: Costs Comparison

When comparing FHA loans vs conventional loans, it’s worth considering the monthly payment and overall cost over the life of the loan with each option. For home buyers with a good credit score, a conventional loan may be more attractive. That’s because conventional loan costs are more dependent on your credit score and down payment amount than FHA loan costs. And as a result, your monthly payments and PMI are lower when your credit score is higher. This is a key difference from how FHA loans work.

Upfront and Monthly Costs for Mortgage Insurance

FHA loans require paying MIP for 11 years or the life of the loan depending on the down payment amount. MIP also involves an upfront cost that’s equal to 1.75% of the loan amount. The ongoing cost of MIP is between 0.45% and 1.05% annually, divided across monthly payments.

With a conventional loan, borrowers pay PMI, which typically ranges from 0.5% to 2% of the total loan amount annually. The cost of PMI depends on the borrower’s credit score, loan-to-value (LTV) ratio, and other factors. Borrowers can stop paying PMI once the mortgage balance is at 78% of the home’s original value or current value following an appraisal. For borrowers with stronger credit, PMI with a conventional loan can cost less than MIP with an FHA loan

Interest Rates and Overall Loan Costs

Though FHA loans can offer more competitive rates and be less expensive in the short-term, borrowers with strong credit could save in the long-term with a conventional loan. Once borrowers get out of PMI on a conventional loan, the annual percentage rate (APR) — the annual cost of the loan — may be lower than an FHA loan.

Down Payment Impact on Immediate and Long-Term Finances

If you can afford to put 20% down on a conventional loan, you’ll avoid the upfront and ongoing cost of PMI. Putting more money down could translate to a lower interest rate, providing further savings on monthly payments and long-term finances.

Increasing your down payment on an FHA loan to 10% can reduce the duration of paying MIP to 11 years and potentially lower the interest rate. However, borrowers who can afford a higher down payment may save more with a conventional loan since PMI can be canceled sooner.

FHA vs. Conventional Loans: Eligibility and Qualification Criteria

Borrowers have to meet certain eligibility requirements to qualify for either an FHA or a conventional loan. Generally, FHA loans are easier to qualify for, but they have stricter property eligibility requirements than conventional loans.

Qualifying Credit Scores for FHA and Conventional Loans

To qualify for a conventional loan, borrowers typically need a credit score of 620 or higher. Meanwhile, borrowers could qualify for an FHA loan with a credit score of 500 if they put 10% down. Borrowers with a 580 credit score can put just 3.5% down.

Down Payment Requirements for Both Loan Types

The minimum down payment for a conventional loan is typically 3% if it’s a fixed-rate mortgage or 5% if it’s an adjustable-rate mortgage. However, the down payment requirement can vary based on a borrower’s financial situation, loan amount, and type of property. FHA loans require either a 3.5% or 10% down payment depending on a borrower’s credit score.

Property Eligibility and Loan Limits

FHA loans can only be used for primary residences, while conventional loans apply to a primary residence, vacation home, or investment property. For 2025, FHA loan limits for single-family homes are $524,225 (in low-cost areas of the U.S.) and $1,209,750 (in high-cost areas). Conventional loan limits for single-family properties are $806,500 in low-cost areas and $1,209,750 in high-cost areas. Buyers who want to purchase a property that exceeds these limits will need to consider a jumbo mortgage loan.

FHA Loan vs. Conventional: Which Is Right for You?

There’s no one-size-fits all solution for buying a house. When deciding between FHA vs conventional loans, the right choice depends on your finances, your long-term financial goals, and the property type you wish to purchase.

Factors Influencing the Choice

Your credit score and ability to make a down payment are key considerations when weighing conventional loan vs FHA loan. If you have a lower credit score or a higher debt-to-income (DTI) ratio, an FHA loan could be a better bet for its flexible credit requirements and more competitive interest rate. However, borrowers with strong credit could qualify for a conventional loan with a down payment of just 3%.

Long-Term Financial Considerations

FHA loans can be more affordable upfront due to lower interest rates and down payment requirements. But borrowers will be on the hook for paying mortgage insurance for the full loan term unless they put 10% down or refinance later on.

If you’re able to qualify for a conventional loan and put 20% down on a house, not having to pay private mortgage insurance can save money in the long run. Conventional loans also offer more flexible repayment terms, whereas FHA loans are either 15- or 30-year mortgages.

Flexibility in Property Choices

FHA loans require occupancy within 60 days and the property must be the borrower’s primary residence. These loans also have strict rules for property conditions. For instance, a manufactured home built prior to 1976 is not eligible for an FHA loan. On the other hand, conventional loans can be used for second homes and a greater range of property types.

💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

The Takeaway

Deciding between an FHA loan vs a conventional loan depends on your specific financial situation and the property type. An FHA loan could be a better option if you have a higher DTI ratio, lower credit score, or less money to put toward a down payment. Whereas a conventional loan could be a better fit if you have strong credit and can afford a larger down payment.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What are the main differences between FHA and conventional mortgages?

FHA loans are insured by the Federal Housing Administration, whereas the lender assumes the risk for a conventional loan. For the borrower, an FHA mortgage typically has a lower credit-score requirement. It may also allow a lower down payment than some conventional loans.

Can I qualify for both an FHA loan and a conventional mortgage simultaneously?

It is possible to qualify for both an FHA loan and a conventional mortgage simultaneously. Note that lenders will look at your finances closely to ensure you can afford both loans.

How does property type affect the choice between FHA and conventional loans?

FHA loans are restricted to primary residences, while conventional loans can be used for second homes, such as investment properties or vacation homes. FHA loans also have stricter property condition requirements compared to conventional loans.

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Photo credit: iStock/FotoDuets

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.

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

^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.

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

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