SoFi

Sometimes, home sweet home is right under our nose. Buying a house from a relative may be the perfect solution, but everyone should be aware of how to negotiate and seal the deal.

An adult child may have her heart set on buying her parents’ home because of the memories it holds. Another might want to purchase Grandma’s home so he can retire in Florida. Others may have a relative who wants to give them a good deal.

Whatever the case, if you’re buying a house from family, you’ll want a harmonious handoff.

Buying a House From a Relative

It’s important to understand the home-buying process before making any real estate purchase.

And knowing what is needed to buy a home is useful before, erm, buying a home.

Buying a house from family, though, is a bit different than a deal between strangers. First of all, whether you’re a first-time homebuyer or not, it’s important to consider how crafting the deal can affect familial relationships.

Not hiring real estate agents might keep negotiations and planning all in the … family. If that’s the case, it’s a good idea to have regular check-ins to ensure that both parties feel good about the next steps and are ready to move forward.

It can be helpful to take notes about the arrangement after an initial meeting and make a copy for everyone involved so that all important details are in writing and available for review. That way, everyone is clear on what is expected of them.

Do We Need Real Estate Agents and Other Pros?

Even though buying a house from family is a personal affair, it can be helpful to bring in professionals to make sure the process goes smoothly, everything is done legally, and both parties walk away feeling satisfied and respected.

A lawyer or real estate agent can help make sure the purchase contract is done properly, state-required property disclosures are made, and the house sells for fair market value — what the property would sell for on the open market.

A title company can protect the buyer from any liens and ensure that no one else has a claim on the home. Even with a high level of trust between family members, this can be a smart step to take to protect the buyer.

And it can be helpful to consult a tax professional in order to be aware of any tax implications of the agreement.

Determine the Purchase Price

Deciding on the fair market value can be done by reviewing the sales price of recently sold comparable properties in the area of the home, or by hiring an appraiser to conduct an objective property valuation. Keep in mind that lenders usually require an appraisal.

Once both parties have an idea of the market value, they can decide how much the buyer will pay. In some cases, this will be the fair market value. In other scenarios, a family member may offer to pay closing costs, or provide a cash gift or gift of equity (described below).

Draw Up the Purchase Agreement

When both parties are ready to move forward, it’s time to draw up a purchase agreement. The legally binding real estate purchase contract will outline the price and payment terms.

Buyers who need a home loan can send the contract to their lender when applying for a mortgage.

Prepare for Scrutiny

There are two main types of real estate transactions: arm’s length and non-arm’s length.

In an arm’s-length transaction, the buyer and seller do not have a relationship and are acting in their own self-interest.

When someone buys a home from a family member, it’s a non-arm’s-length transaction. These deals may be subject to more scrutiny because the chance of mortgage fraud increases.

The sale price of the home must equate to what it would be between strangers unless a gift of equity is on the table.

A heads-up for anyone whose elder family member needs to go to an assisted living facility or nursing home and plans to fund their stay with Medicaid: To prevent Medicaid applicants from simply giving away a home or other resources to qualify for the low-income medical program, the federal government has a “look-back period” of five years. The exception is California, which has a 2.5-year look-back period that is gradually being phased out and will be eliminated by July 2026. A Medicaid applicant is penalized if assets were gifted or sold for less than fair market value during that time.

Know How the Gift of Equity Works

One thing sellers may want to consider is giving the relative a gift of equity, or selling for less than fair market value.

The maximum amount of the discount without reporting it as a gift to the IRS is $19,000 per recipient in 2025.

Spouses “splitting” gifts may each contribute $19,000 a year. Spouses splitting gifts must always report the gift. You and the seller can learn more about gift taxes on the IRS website.

That doesn’t mean sellers have to pay a gift tax; they can apply it to their lifetime gift exclusion. The lifetime gift and estate tax exemption is $13.99 million, or $27.98 million for a couple, in 2025.

So for the vast majority of people, the gift and estate tax exemption allows for the tax-free transfer of wealth from one generation to the next. Homeownership in general helps build generational wealth.

Here’s another plus for buyers: Most lenders allow the gift to count as a down payment.

A lender will require a gift letter signed by the sellers for a cash gift or a gift of equity sale. The letter will confirm that the gift is not a loan.

Know How to Finance the Home

When buying a home from a family member, many buyers will still need to take out a home loan. Even with a discount or a special offer from a family member, it can be hard to purchase a home outright.

Go with a mortgage broker or direct lender? Each has pluses and minuses.

Any mortgage loan officer or broker should be willing to answer your mortgage questions, including those about fees, points, and mortgage insurance.

Weighing different types of mortgage loans (including conventional conforming mortgages, jumbo loans, and government-backed loans) and loan terms (usually 30 years) can help you make a more informed decision.

After applying for mortgages, you’ll receive loan estimates. It’s important to compare mortgage APRs, fees, and closing costs.

After you choose a mortgage and close on the home, your mortgage servicing outfit will handle your payments.

The Takeaway

How to buy a house from a family member? For starters, consider calling in professionals, including a lawyer to help draft a contract. And make sure you and the seller understand how the gift of equity process works. But when everyone is well informed, buying a house from a relative can be seamless.

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.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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

SOHL-Q424-128

Congratulations! You’ve found a house you love and want to buy. You may even be in the final stages of closing on this dream home. But sometimes, homebuyers may need to access what’s known as an escrow holdback: a way of setting aside funds at the closing for repairs that are most definitely needed as you take ownership.

For example, what happens if a blizzard hits the week before your scheduled closing, revealing a leaky roof that needs major (pricey) repairs?

This wasn’t something that showed up in the initial inspection report. Or, maybe it did show up in the inspection report, but the issue is suddenly much more pressing in light of said snowstorm. Either way, these repairs can’t be made at this particular time because it’s winter and, well, it’s snowing outside.

What’s a buyer to do? In this scenario, an escrow holdback could be a path to funding the necessary repairs without blowing your closing date. Here, you’ll learn more about escrow holdbacks, including:

•   What is an escrow holdback?

•   How does an escrow holdback work?

•   What qualifies for an escrow holdback?

•   What if your situation doesn’t qualify for a holdback?

Escrow Holdbacks Defined

Before defining escrow holdbacks, here’s what escrow is: Typically, it’s money held by a third party as assets (such as real estate) are being transferred.

An escrow holdback agreement, however, occurs when money is set aside at the closing of a home to complete repairs. Generally, the seller is the one supplying the money, though not always.

Money is held in an escrow account until the repairs are completed. The funds can then be released. Another name for an escrow holdback that you may hear used is a repair escrow.

This may sound like a pretty good arrangement, but an escrow holdback isn’t a possibility for every borrower and in every scenario. Consider the following:

•   The lender’s underwriter will review the appraisal and any accompanying inspection reports to confirm that the sales price is met and that the property does not show evidence of any deferred maintenance items that can have an effect on things like safety, soundness, or structural integrity.

•   These are often referred to as health and safety issues. Health and safety issues can affect whether the home is eligible for financing.

•   Most lenders will not close a loan on a home that has been called out for things like missing railing, stairs, fencing, and much more.

It’s not hard to imagine a situation where a homebuyer needs the seller to repair something that cannot be completed until after the contract’s closing date, as in the snowstorm example above. Depending upon the repair, a lender may allow for the seller to place a specific amount of funds in escrow for what’s known as defect cure, which must be completed within a specified period of time.

These repairs could be expected or unexpected as the parties move through the homebuying process. Generally, the appraiser calls out the more obvious issues that hurt a home appraisal and may recommend further inspection by an expert for something noted in their report. If an appraiser requests an inspection, the lender’s underwriter may review the report and require some repairs.

Another example of a situation in which an escrow holdback could be a valuable tool: when a seller needs the proceeds from the sale of the home in order to comply with the repair request.

These are examples of how and when an escrow holdback could be warranted and beneficial. If you’ve never been through the homebuying process before and all this is making you a bit nervous, consult a first-time homebuyer’s guide for help.

Recommended: 31 Ways to Save for a Home

How Does the Escrow Holdback Process Work?

If you’re curious about how the escrow holdback process works, consider these points that spell out the process in more detail:

•   Normally, the first step is the buyer’s and seller’s agents negotiating any required repairs through an addendum to the purchase contract. This is drawn up by the real estate agents and signed by all parties.

•   The document will likely outline the repairs that the buyer (or lender) would like the seller to make, the timeframe for those repairs, and details about how and when the payments to the contractors are to be made.

•   This contract addendum is then sent to the escrow company (or the attorney) and to the lender, who will review the document. The underwriter of the loan will have the last say as to whether the escrow holdback is approved.

•   If it is approved, then the closing may proceed as initially planned. However, not all holdback requests will be approved. The lender may have conditions around the approval of an escrow holdback. These can include but are not limited to such requirements as improvements having to be completed within 180 days of the mortgage closing date.

   The lender may have conditions around the approval of an escrow holdback. These can include but are not limited to such requirements as improvements having to be completed within 180 days of the mortgage closing date.

•   The lender will likely establish an escrow completion account with the title company from the purchase proceeds. This is typically equal to 120% of the estimated cost for completing the improvements and more.

•   Once the repairs are completed, another inspection occurs to verify that the work has been satisfactorily finished. The escrow account can then release the funds.

It’s important to note that not all transactions qualify for an escrow holdback. The criteria can vary between lenders, property, and even type of transaction (sale of existing property or of a new construction home).

Recommended: What to Look for When Buying a House

What Qualifies for an Escrow Holdback?

Generally, lenders prefer that repairs take place prior to the closing, but exceptions can be made — such as when repairs must be delayed due to inclement weather.

This may limit escrow holdbacks to repairs that require some work on the outside of the home, such as repairs to a roof, yard, or plumbing accessed outdoors.

Here are some types of repairs that are factors that affect property value and residents’ safety and may qualify for an escrow holdback. These are probably already on your list of things to look for when buying a house:

•   Patio problems

•   Pest control

•   Roof repair

•   Septic tank issues

•   Sprinkler system problems

•   Yard cleanup

Again, there are no sure things or guarantees of how an escrow holdback will work. That’s because it is ultimately up to all of the involved parties to agree on the terms.

Beyond the weather causing a delay, lenders are often looking to determine whether the repairs present a risk to the property (their collateral) or present health and safety issues to the prospective occupants. As you might imagine, a lender generally won’t want to make a loan for a property that they believe could threaten the health or safety of its occupants.

Recommended: The 7 Steps to Buying a House

What if Your Situation Doesn’t Qualify for a Holdback?

Say you believe there is an issue that merits an escrow holdback, but the lender doesn’t approve it. Now what? There’s not much, unfortunately, that you can do in this situation. The most likely scenario is that the closing date will need to be pushed out to make time for any required repairs before loan closing.

As you pursue an escrow holdback, it might be helpful to understand that some lenders’ guidelines may not offer escrow holdbacks under any conditions.

This could be due to the fact that the follow-up involved in closing the holdback is too arduous. Or perhaps there are difficulties in getting the repairs completed within the specified period of time given. If lenders have been burned in any of these ways in the past, they may decide the process is too risky.

In the event that a lender refuses an escrow holdback agreement, you might have to delay your closing. If the lender also refuses to make a loan, you (the buyer) could be in a very tough spot. Even if you’re willing to pay for the cost of repairs in order to move forward with the lending process, this may not be in your best interest.
You do not yet own the property, and issues can arise from financing repairs to it.

It may be wise to get your real estate lawyer’s and real estate agent’s opinions about how to handle this kind of difficult situation. They can help you explore any options that exist.

The Takeaway

Escrow holdbacks can be a way to solve for needed repairs of a property you are interested in buying or have already begun to purchase. By keeping funds in this kind of account, the parties involved may be able to satisfactorily complete the work needed and pay for it in a clear and equitable way.

No matter your situation, you’ll likely want to work with a lender that can help you navigate the home-buying process. While you’re shopping for a mortgage, check out customer service reviews in addition to rates and terms.

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

FAQ

Is a deposit different from a holdback?

A deposit and a holdback are not the same thing in real estate, although both may be held in escrow (which means they are held by a third party in the transaction). A deposit is money provided by the buyer early in the sale process to show the seller that they are interested in proceeding in good faith with the purchase of a property. A holdback is typically provided by the seller near the closing of the deal. In this case, funds are held back (in escrow) to pay for a repair to the property that needs to be done within a certain period of time after the closing.

What is a release of escrow holdback?

If funds have been withheld to pay for repairs, an inspection will be done to confirm the repairs are completed. At that point, if repairs are satisfactory, the escrow holder will release the funds to pay for the repair; any remaining funds are typically returned to the seller.

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

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

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

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

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

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

SOHL-Q424-140

Land loans allow borrowers to purchase acreage, or a piece of land, often with the intention of building a home there or developing the plot for business.

Because of the inherent risk to lenders, land loans can be challenging to obtain. The rate and required down payment are typically higher than those of traditional mortgage loans, and the repayment term is often shorter.

Let’s dig into land loans and look at some alternatives.

What Is a Land Loan?

A land loan, also referred to as a “lot loan,” finances a piece of land. Borrowers may have plans to build a home or start a business on the land, but they also might want to keep the plot for just fishing or hunting. Developers can also get land loans to build homes or businesses.

A land loan is different from a construction loan, which is typically a short-term loan to build or rehab a home. With a land loan, the borrower might not have immediate plans to develop the land or build the house.

A land loan can be more challenging to obtain because, unlike with traditional types of mortgage loans, there is no home to serve as collateral for the lender. Thus, lenders may have stricter requirements and higher rates attached to a land loan.

Types of Land Loans

The land loan rate and terms you get — and the down payment you’re required to make — may depend on the type of land you’re trying to buy.

Raw Land

Securing financing for raw land can be challenging. Land that has never been built on, also called unimproved land, is entirely undeveloped, meaning it lacks roads and electrical, water, and sewage systems.

To improve your chances of loan approval, it’s a good idea to have a comprehensive development plan to show lenders.

Of course raw land is generally cheaper than land that has been partially developed, but because it is virtually untouched, it is not possible to know what major issues await when you start development.

Recommended: How to Find a Contractor for Home Remodeling

Improved Land

Because improved land is developed, with utilities routed to the property and road access achieved, lenders may be more willing to offer financing. But acreage featuring these improvements typically costs more than raw land.

How to Find Land Loan Lenders

Finding land loan lenders can prove to be more challenging than finding a lender for a traditional mortgage.

Potential land buyers can try these routes for securing financing:

•   Local banks and credit unions: If your personal bank doesn’t issue land loans or you’re struggling to find a big-name financial institution that offers them, you might have more luck with a local bank or credit union.

•   Online lenders: Searching the web allows you to compare land loan rates from the comfort of your couch. It also means you can read reviews about the lenders before applying.

•   USDA loans for low-income borrowers: The U.S. Department of Agriculture offers Section 502 direct loans to help low- to moderate-income individuals or households purchase homes or buy and prepare sites, including providing water and sewage systems, in rural areas. The rate is well under current market rates. The term is as long as 38 years. Down payments are not usually required.

•   SBA loans: Business owners planning to use land for a business may qualify for a 504 loan through the U.S. Small Business Administration. The SBA and a lender issue loans for up to a combined 90% of the land purchase cost. The rate is based on market rates.

Recommended: What Is a USDA Loan?

What Are Typical Land Loan Rates and Terms?

Like any other loan, the interest rate will largely depend on your credit score. That said, land loan rates are typically higher than traditional mortgage rates, thanks to the inherent risk and only the land as collateral.

And the repayment term? A land loan from a bank often is a five-year adjustable-rate loan with a balloon payment at the end. Rarely you might find a 30-year fixed-rate loan through a financial institution in the Farm Credit System.

The Federal Deposit Insurance Corp. (FDIC) recommends loan-to-value (LTV) limits. Lenders may set down payment requirements even greater than the FDIC proposes, however.

•   For raw land, the FDIC advises a 65% LTV, meaning borrowers must put 35% down.

•   For land development, the FDIC recommends a 75% LTV, meaning borrowers must put 25% down.

•   For construction of a one- to four-family residence on improved land, the FDIC calls for an 85% LTV, meaning borrowers must put 15% down on the land loan.

If you don’t plan to develop the land, the rate and down payment could be steep.

If you do build a home on the land, you may be able to refinance the land loan into a traditional mortgage.

Alternatives to Land Loans

A land loan is not your only option when purchasing a lot. One of these alternatives to land loans may be a better choice for you:

Construction-to-Permanent Loans

If you plan to build a house in short order, this kind of loan could work. At first, you would make interest-only payments on the purchase price of the land. The loan then allows for draws until the house is done, often 12 months from closing. The loan then converts to a permanent mortgage, sometimes with the same rate.

You may need to make a down payment of at least 20% of the total loan amount. The rate for construction loans in general is higher than a regular mortgage.

FHA, VA, and USDA single-close loans are also available to eligible borrowers.

Seller Financing

Though not as common as traditional financing, owner financing is when the current landowner acts as the lender. Also called a land contract, this type of financing does not involve a bank, credit union, or traditional lender.

While it can be beneficial for those who cannot secure a land loan, buyers have fewer consumer protections working in their favor.

Home Equity Loan or HELOC

If you have significant equity in your primary home, you may qualify for a home equity loan. Your home would serve as the collateral for the loan.

Similarly, you may be able to finance the land purchase with a home equity line of credit (HELOC) or a cash-out refinance.

How much home equity can you tap? Many lenders will let you borrow up to 85% of your home equity, the home’s current value minus the mortgage balance, but some allow more than that.

Personal Loan

Though personal loan rates may be higher than home equity products’ and you may need to pay off the loan in a shorter time, it might be possible to use a personal loan to finance your land purchase.

You’ll receive the funds quickly, and an unsecured personal loan requires no collateral.

What You Need to Know Before Applying for a Land Loan

Before applying for a land loan, it’s important to educate yourself about land development and to understand the details of the specific lot you’re interested in.

Survey

When buying a large plot of land, knowing the boundaries can be more challenging. Hiring a surveyor to mark the boundaries can be helpful before applying for the loan.

Utilities and Roads

Unspoiled land may be beautiful, but it can be difficult to develop. Understanding what utilities and roads are available — or how to make them available and how much it will cost to do so — is important before applying.

Zoning

When considering a land purchase, it’s a good idea to research any zoning restrictions in that area. Before purchasing land, you’ll want to know that you can actually build on it the way you envision.

The Takeaway

Land loans allow borrowers to purchase land to develop as they see fit. Because there is more risk involved for the lender, it can be challenging to find a land loan, and the rates and terms tend to be less favorable than those of typical mortgages.

A personal loan, cash-out refinance, home equity loan, or seller financing may also allow a land buyer to hit pay dirt.

SoFi offers fixed-rate personal loans from $5,000 to $100,000 and a cash-out refinance.

And SoFi brokers a home equity line of credit that allows qualified homeowners to access up to 90%, or $500,000, of their home’s equity.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

FAQ

Is it hard to get a loan to buy land?

Getting a loan for a land purchase can be more difficult than getting a traditional mortgage. Fewer lenders offer land loans, and because there is more risk involved, they typically require a higher down payment, impose higher interest rates, and offer shorter repayment terms.

Are land loans higher interest?

Land loan rates are typically higher than traditional mortgage rates because there is no home to act as collateral for the lender. Interest rates may vary depending on credit scores and the down payment amount.

What is the first step to apply for a land loan?

First, research land loan lenders. Before applying, it’s also smart to devise a plan that shows the lender how you will develop the land, accounting for things like utilities, land boundaries, roads, and construction costs.

Photo credit: iStock/shapecharge

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 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.

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.

SOHL-Q424-148

If your home isn’t connected to a local sewer system, a septic tank is a must-have. But setting up a new septic system, or replacing an old one, can be a pricey endeavor.

Fortunately, there are a few different payment options available to help homeowners cover the costs of installing this essential piece of equipment.

In this guide, we’ll explore the various sources you might choose to fund your septic system project, and some of the pros and cons of each.

Septic System Costs

Most homeowners in the U.S. pay from $3,615 to $12,406 for a septic system installation, according to the home improvement site Angi. The average cost comes out to about $8,000. But prices can vary significantly depending on the size and type of tank you choose, the materials used, labor, and other factors — and costs could go over $20,000.

If you’re a die-hard DIYer who’s considering tackling this project with the help of some YouTube videos, you may want to think again. This is a big and dirty job that’s probably best left to professionals with the experience and machinery to get it done right. So let’s take a look at some ways you can pay for the work and stay clear of the mess and stress.

Recommended: The Ultimate House Maintenance Checklist

Personal Loans for Septic System Financing

If you need to finance your project in a hurry (and with a septic system repair, that’s often the case), you may want to consider a personal loan.

With personal loans, it’s possible you could receive your money on the same day you apply, or at most within a few business days. You also may have some flexibility in when the funds arrive and how long you have to pay back the money.

Personal loan repayment terms typically range from two to seven years, but they vary by lender. The amount you can borrow and the interest rate you’ll pay with home improvement loans are generally based on a few different factors, including your credit score. Typically, the better your credit, the lower the interest rate.

Generally speaking, qualifying borrowers with a strong credit history and high income may be able to secure a loan of up to $100,000 without having to provide some type of collateral. This type of home improvement loan usually has a fixed interest rate, so you can know exactly what your monthly payments will be.

Home Equity Loans and HELOCs

Another potential way to finance a septic system project is to tap your home equity and apply for a home equity loan or home equity line of credit (HELOC).

If you qualify for a home equity loan for your septic system, you’ll receive a lump-sum amount that you’ll repay in equal monthly installments, much like a personal loan.

A home equity line of credit (HELOC), on the other hand, works more like a credit card. The interest rate usually isn’t fixed with a HELOC, and neither is the payment amount. As you repay the money you’ve borrowed, you can use it again — up to a predetermined limit.

Because both home equity loans and HELOCs are secured with your home as collateral (which means the lender can foreclose if you fail to make your payments), the interest rates are generally lower than with unsecured personal loans. But it’s worth noting that you typically have to have at least 15% to 20% equity in your home to qualify, it can take longer to get your money, and you can expect to pay closing costs with this type of financing.

Government Programs and Grants

If you meet certain criteria, you may be able to get help with funding through federal or state assistance programs. Here are a few options you may want to research:

•   The Environmental Protection Agency (EPA) Clean Water State Revolving Fund provides grants to all 50 states and Puerto Rico so that qualifying residents can receive low-interest loans to install, upgrade, or maintain their septic systems.

•   The U.S. Department of Agriculture (USDA) offers both loans and grants that can benefit low-income homeowners who need help with their septic system costs.

•   The Department of Housing and Urban Development (HUD) provides community block grants to help eligible homeowners repair, install, or improve their residential septic system.

•   Some states also offer tax credits or deductions to residents who repair or replace a septic system. (You may want to check with your state government or local tax professional first to see what’s available and if you qualify.)

Contractor Financing and Payment Plans

It’s possible the septic tank company you’re considering has teamed up with a lender in order to offer its own financing plan to potential customers.

The salesperson or contractor will likely take you through each step of how the company’s septic tank financing works and may even offer a financial incentive if you sign up. Just remember that a contractor isn’t obligated to find you the best payment solution when it comes to how to pay for septic repair. So it’s important to review and understand the terms of any offer you receive, and to compare the contractor’s offer with other options available.

Recommended: How Much Does a Home Inspection Cost?

Comparing Septic System Financing Options

Hopefully, you’ll have time to do some comparison shopping as you consider the various financing methods for your septic system project. Here are some things to keep in mind as you do your research:

•   What monthly payment works for your budget? A longer loan term generally means lower monthly payments. Keep your budget in mind as you choose how much time you’ll need to pay back your septic tank installation financing.

•   How’s your credit? Good credit can often get you a better interest rate and other loan terms. If you aren’t sure where your credit stands, you may want to check out your latest credit report and/or credit score and dispute any errors you see.

•   What’s in the contract? Understanding the terms you’re being offered for a septic tank loan can keep you from running into trouble down the road. For example, if a contractor or credit card company offers you a low introductory interest rate, it’s important to ensure you’ll have enough time to pay off your purchase before the interest rate goes up.

•   Are there fees? Remember, fees can add to the overall cost of your loan. Some lenders may charge origination, application, and other loan fees. And you can expect to pay for a home appraisal and other closing costs if you get a home equity loan or HELOC.

•   How fast can you get the money? If you don’t have enough cash stashed away for your project, applying for a personal loan may be the quickest way to finance the work. Some personal loan lenders can get you your money on the same day you’re approved. Contractor financing also may offer a convenient and fast approval process.

The Takeaway

Hiring a company to install or replace your septic system can be expensive, and the DIY route isn’t a great alternative for most people. You may be able to cut some of your costs if you can qualify for a government-funded grant or low-interest loan. But these financing options aren’t available to everyone, and it can take time to go through the application and approval process.

Some people find it makes sense to tap their home equity to get the money. Or they may find their contractor’s customer financing a convenient solution. However, if you’re in a hurry to get the work done — and you have good enough credit to score a low interest rate — a type of home improvement loan may make the most sense for you.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ>

Are there tax deductions for septic system installation or repair?

A new septic system doesn’t qualify for any of the tax credits the IRS currently allows for home improvements. But some states offer tax credits or deductions to homeowners who replace or repair a septic system. A tax professional in your area can help you check for potential tax savings.

Can I finance both installation and ongoing maintenance of my septic system?

It’s a good idea to make septic tank maintenance costs a part of your household budget, but those expenses likely won’t be included in the amount you borrow to pay for a new system.

Are there special financing options for rural homeowners?

Yes. The USDA’s Rural Decentralized Water Systems Grant Program helps qualified nonprofits fund loans to increase access to clean and reliable septic systems for households in eligible rural areas.

Photo credit: iStock/Kwangmoozaa

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.

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.

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

SOPL-Q424-006

Renovations can improve your home and increase its value. But as any seasoned homeowner will tell you, those projects can be expensive. If you can’t afford to cover the costs out of pocket, you may wonder if a construction loan is right for you. While it is an option, there are complications that people should be aware of.

We’ll take a look at construction loans, their requirements, and some alternatives to consider.

Overview of How Construction Loans Work

Construction loans finance the building of a new home or substantial renovations to a current home. They are typically short-term loans with higher interest rates, designed to cover the costs of land, plans, permits and fees, labor, materials, and closing costs. They can also provide a contingency reserve if construction goes over budget.

With a construction loan for a remodel, applicants must submit project plans and schedules along with their financial information. Once approved, they receive funding for the first phase of building only, rather than a lump sum. As construction progresses, assessments are provided to the lender so that the next round of funds can be released. Meanwhile, borrowers make interest-only payments on the funds they’ve received.

When construction is finished — and the borrower now has a home to serve as collateral — the construction loan may be converted to or paid off by a regular mortgage. The borrower then begins repaying both the principal and interest.

Recommended: Home Maintenance Checklist

Renovation Loans vs. Construction Loans: What’s the Difference?

Though renovation loans and construction loans can be used for similar purposes, there are important differences to know. Let’s take a closer look at both types of loans.

Renovation Loans

Unlike other types of home improvement loans, a renovation loan takes into account the property’s after-repair value, which is an estimation of the home’s value once the improvements are made. This can be good news for borrowers, especially those buying a fixer-upper. That’s because they may be able to secure a larger loan amount than they would with a traditional mortgage based on the home’s current value.

What’s more, renovation loans often come with lower interest rates than credit cards and unsecured personal loans.

Some common types of renovation loans include:

•   Government-sponsored loans, such as the FHA 203(k) home loan, Freddie Mac’s CHOICERenovation loan, and Fannie Mae’s HomeStyle renovation loan. Each type has its own rules and requirements.

•   A home equity loan

•   A home equity line of credit (HELOC)

•   VA renovation loans, which are available to eligible veterans and active-duty military personnel.

Construction Loans

As we mentioned, a construction loan is commonly used to pay for building a brand-new home. In some cases, the loan can be converted to a mortgage after your home is finished. However, getting one can be more challenging than securing a conventional mortgage.

Lenders generally want to see a debt-to-income ratio of 45% or lower and a high credit score, and you may be required to make a down payment of at least 20%. Depending on the type of construction loan you apply for, you may also be required to provide a detailed plan, budget, and schedule for the construction. Some lenders will also need to approve your builder.

There are different types of construction loans to consider:

•   Construction-to-permanent loans, or single-close loans, which converts to a mortgage once the project is finished. The borrower saves money on closing costs by eliminating a second loan closing.

•   Construction-only loans, or standalone construction loans, which must be paid off when the building is complete. You will need to apply for a mortgage if you don’t have the cash to do so.

•   Renovation construction loans, which are designed to cover the cost of substantial renovations on an existing home. The loan gets folded into the mortgage once the project is complete.

Pros and Cons of Using a Renovation Loan

As you explore different home improvement loans, consider the following pros and cons of renovation loans.

Pros

•   Borrowers may have access to substantial funds that can pay for major upgrades or repairs.

•   Money can be used for a wide variety of renovation projects.

•   The loan amount is based on the home’s projected value after the repairs and renovations are complete.

•   Interest rates tend to be lower than what you’d be offered with an unsecured loan or credit card.

Cons

•   You may be required to use your home as collateral.

•   As with any loan, you’ll need to meet certain eligibility requirements, such as a good credit score, low debt-to-income ratio, and proof of income and employment.

•   A renovation loan increases your debt load, which could put a strain on your finances.

Recommended: Home Inspection Checklist

Pros and Cons of Using a Construction Loan

There are advantages and disadvantages to consider before taking out a construction loan to fund renovations.

Pros

•   Funds can be used to cover all construction expenses.

•   Borrowers can use equity from other investments as collateral.

•   Loan requirements are generally focused on the construction process instead of a borrower’s credit profile.

•   Borrowers may only need to make interest payments during construction.

•   Loan terms may be more flexible than a traditional loan.

Cons

•   Funds are released as work progresses instead of in one lump sum.

•   It can be difficult to find lenders that offer competitive rates and to qualify for them — particularly if you don’t have a flawless credit history.

•   Loans tend to be short-term and must be paid in full at the end of the term.

•   May need to provide extensive documentation on the construction process in order to get approved.

•   If construction is delayed, you may need to ask the lender for an extension on the loan. This can cause interest rates and fees to accumulate.

Alternative Ways to Finance Home Renovations

If you are planning a small construction project or renovation, there are a few financing alternatives that might be easier to access and give you more flexibility.

Personal Loans for Renovations

An unsecured personal loan can fund a renovation project or supplement other construction financing.

Personal loan interest rates are typically lower than construction loan rates, depending on your financial profile. And you can frequently choose a personal loan with a fixed interest rate.

Personal loans also offer potentially better terms. Instead of being required to pay off the loan as soon as the home is finished, you can opt for a longer repayment period. And applying for a personal loan and getting approved can be much faster and easier than for a construction loan.

The drawbacks? You won’t be able to roll your personal loan into a mortgage once your renovation or building project is finished.

And because the loan is disbursed all at once, you will have to parse out the money yourself, instead of depending on the lender to finance the build in stages.

Cash-Out Refinance for Construction Costs

A cash-out refinance is also a good financing tool, particularly if you have a lot of equity in your current home. With a cash-out refinance, you refinance your home for more than you owe and are given the difference in cash.

You can estimate your building or renovation expenses with this Home Improvement Cost Calculator. Add your estimate to what you owe on your home to get the amount of your refinance.

The Takeaway

Planning a new home or substantial renovation? There are several ways to pay for the projects. One option is a renovation loan, which lets you pay for major (and minor) renovations without having to dip into your personal savings. Another option is a construction loan, which typically covers the entirety of new construction expenses. For smaller projects, a personal loan can be a good option — and a lot less complicated.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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.

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

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

SOPL-Q424-060