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For many, downsizing is more accurately described as “right-sizing.” The idea of a smaller home is that it helps people live more compactly and reduce the typical avalanche of stuff.

It’s not about giving up everything, but instead deciding what’s really important and then finding ways to better incorporate those things into one’s lifestyle.

Shrinking a home’s total square footage might not be the right fit for everyone, but it does offer economic, lifestyle, and emotional benefits for some.

Read on to learn why less is more for the Americans who choose to downsize.

The Rise of Downsizing

Living minimally has always been a lifestyle choice, but in recent years, more and more people have opted to live with less. The minimalist lifestyle went mainstream with Marie Kondo’s The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing, which urges readers to get rid of items that don’t bring joy.

Downsizing as a trend goes hand in hand with minimalism, the urge to have fewer objects and live in a smaller space. It’s part of the cultural shift of valuing doing something over having something. Three-quarters of Americans value experiences more than things, one study showed.

That shift and home building data suggest that it’s not just empty-nesters looking to purchase a home with less square footage. The National Association of Home Builders reported the slight shrinking of the average home size in recent years.

The choice to downsize a house is personal, but it’s one that many homeowners are taking on.

Signs It’s Time to Downsize

No matter a person’s life stage, there are a few signs that may signal it’s time to downsize.

•   Housing expenses are too high. The traditional notion is that no more than 30% of a person’s gross income should be spent on housing costs. (The number has been debated, but the 50/30/20 rule has wide support: 50% of post-tax income goes to essential needs, including housing, 30% to discretionary spending, and 20% to savings.)

If the cost of the mortgage, upkeep, and additional home-related expenses far exceed a 30% of a person’s budget, it might be time to think about downsizing. This could apply to a retired couple now living on a fixed income or a first-time homebuyer who has a hard time paying the mortgage without roommates.

•   No ties to the location. Remote work is still common, and that could mean employees are no longer tied to their neighborhood, city, or state. Similarly, the kids might be out of school and parents no longer feel the need to stay in the school district. When a homeowner no longer feels committed to their property’s location, it might be time to consider downsizing.

•   A lifestyle change. It could stem from limited mobility or simply fewer people living in the house, but if rooms or even floors aren’t being used weekly, it could be time to try a smaller space.

•   Home equity could be used. Depending on the amount of equity a person has in their home and the value of the market, they could be sitting on a potentially huge payday. The proceeds from the sale of their home could be a significant down payment on a smaller property.

Recommended: Cost of Living By State

The Upside of Downsizing

Downsizing can sound restricting, but there’s a lot to benefit from.

•   Less upkeep. A smaller home means less upkeep overall. A bigger home requires more maintenance, cleaning, and possibly yard work.

•   More affordable. A smaller home will probably come with a smaller mortgage payment or none at all. On top of that, the less space, the less things that can go wrong in the home. Additionally, a smaller space typically means lower heating and cooling bills.

•   A fresh locale. In general, smaller homes typically cost less, so that could create the opportunity to move into a small place in a more desirable or exciting neighborhood. It could cost more on average per square foot, but with less square footage overall, up and coming neighborhoods might be attainable.

•   Freed-up money. A smaller space with fewer expenses and less upkeep can translate to a bigger budget for travel and experiences.

The Downside of Downsizing

Downsizing has its perks, but there are a few potential drawbacks to the life choice as well.

•   Less space. A smaller footprint could mean sacrificing a guest room, having fewer bathrooms, or losing some garden space. Homeowners thinking about downsizing can be forced to make tough decisions about what truly matters to them in their day-to-day living space.

•   Cost of moving. Overall, downsizing is a more affordable lifestyle, but don’t discount the cost of selling a home and the costs of moving. Remember, when selling a home, real estate agent commissions and other fees can eat up to 10% of the sales price of the home. Selling should lead to a payday, but homeowners take on expenses when prepping their property for sale. Additionally, a full-service move can cost thousands, move.org notes.

•   Stress of sorting through stuff. In a recent survey, 45% of respondents said moving is the most stressful event in life, ranked a hair above divorce or a breakup. Downsizing can be particularly stressful because not everything can go with you. It could mean parting with keepsakes; paring down heaps of clothes, shoes, books, holiday decorations, and the list goes on; or deciding to go without some beloved items because they simply don’t suit a smaller home.

•   Staying minimalist-minded. Downsizing isn’t just a one-time choice; it’s the conscious decision to live with less. The initial work of downsizing is probably the biggest hurdle to overcome, but there’s the ongoing choice to live with less and resist buying and accumulating more stuff.

How to Downsize: Steps to Get Started

•   Explore alternative housing. Before diving headfirst into downsizing, it’s worth trying out a smaller way of life. That could mean renting a smaller home for a week or two in a new neighborhood. Downsizing can mean a lot of things, from a tiny house or a condo, or moving from a four-bedroom to a two-bedroom. Getting an idea of what downsizing will mean on a personal level begins with understanding how small you’ll go.

•   Start organizing. Sorting through all your worldly possessions and deciding what to get rid of can be exhausting. Getting the organizing process underway sooner rather than later can save downsizers time and energy. Starting to live with less can make the transition a little easier.

•   Research your property’s value. Knowing the value of your current property, as well as the equity you have, can help create a road map to more affordable living. With an idea of the market value and the proceeds, you’ll have a good idea what your down payment could be.

The Takeaway

If you’re asking yourself “Should I downsize my home?” know that downsizing comes with benefits including less stuff, a smaller mortgage payment, and minimized upkeep, freeing up time and money for other pursuits.

Downsizing is about making everything simpler, down to the mortgage process and loan. A SoFi home mortgage loan comes with competitive rates, an easy online application, and help from start to finish.

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.

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.

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.

SOHL0623049

Buying a house can be a fraught process, but when the market is hot, the days between offer and closing can feel endless, especially if the mortgage underwriter asks you to write a letter of explanation.

But there’s no need to panic or assume that your mortgage application will fail. The lender is simply seeking clarification about any potential red flags in your financial documents or credit history.

What’s a Letter of Explanation?

A letter of explanation for a mortgage explains details of your financial situation that may need further clarification. Because a mortgage is a large loan, lenders need to know that the borrower is capable of shouldering the mortgage.

Lenders also know that life can’t be boiled down to a spreadsheet, and that it’s not unusual for a mortgage application to include things like a late credit payment or a period of job loss.

To do due diligence, the mortgage underwriter will ask you to explain the situation in a brief letter, which will be added to your mortgage application. Additional documentation and paperwork may be required.


💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.

Why Do I Need to Provide a Letter of Explanation?

Common issues that could trigger a request for a letter of explanation include:

• Questions about your income if you don’t have W-2s or are self-employed

• Negative items on your credit report

• Employment gaps

• Your living situation if you don’t pay any rent or mortgage

• A property income or loss you claim

• Credit lines opened after you’ve put in your mortgage application

• Large deposits to, and sometimes withdrawals from, your bank account

Must I Explain a Large Deposit?

If there’s a big or unexplained deposit to your bank account, your lender may want to know where the money came from — and whether that money needs to be paid back.

A lender may also question any uneven income streams, or if deposits don’t line up with your W-2s or your tax returns.

If you received cash from, say, a parent to help with a down payment or closing costs, you may also need a gift letter signed by the giver and recipient stating that the money was a gift, not a loan. Your lender may have a template for a gift letter.

Keep in mind that your lender may be more likely to scrutinize any large deposits or withdrawals within the last 60 days.

Letter of Explanation Template

A letter of explanation is not an autobiography or an admission that you did anything wrong. It’s simply a statement of the reason for any discrepancy or issue, along with any documentation, to back up your current financial picture.

You can keep a letter of explanation brief. It should include:

• Your name and address

• Your lender’s name and address

• A subject line that includes your application number and name

• A brief paragraph explaining the situation

• A polite closing

• Your signed full name

It might look like this:

The tone of the letter should be polite and factual. Remember: Your goal is not to pull on the lender’s heartstrings; it’s to reassure them that your application is solid and you would responsibly pay back your mortgage on time.


💡 Quick Tip: Jumbo mortgage loans are the answer for borrowers who need to borrow more than the conforming loan limit values set by the Federal Housing Finance Agency ($806,500 in most places, or $1,209,750 in many high-cost areas). If you have your eye on a pricier property, a jumbo loan could be a good solution.

4 Tips for an Effective Letter of Explanation

Although being asked to write a letter of explanation may sound like being assigned homework, it’s actually a great opportunity: It means you might be able to qualify for the mortgage you want, even with an imperfect application. Here are some tips to help ensure you get an A+ on this particularly important homework assignment.

1. Keep It Simple

When you’re asked to explain yourself, it can be easy to jump into a broad-reaching narrative starting from childhood, but the best letters of recommendation tend to be short and simple: They clarify the situation being asked about and reassure the lender that the “red flag” situation won’t affect the borrower’s ability to repay the loan.

2. Provide Clear Details

Generally speaking, you’ll want to specifically name whatever item you’re being asked about (late payments on a credit card account ending in 0101; an employment gap between 2/20/2020 and 9/07/2020; etc.).

Then explain. For instance, if you’re being asked about an employment gap, you might let the lender know that you were let go as a result of corporate downsizing and that you freelanced while searching for a new job.

If you’re being asked about late credit card payments, you might let the lender know that you were in the hospital at that time and thus unable to make your credit card payments, or whatever the case may be.

The key is to take responsibility for the issue and provide clear, pertinent details without being too wordy.

3. Be Honest

This may go without saying, but you definitely don’t want to lie in your letter of explanation. For one thing, doing so is likely to keep you from being approved for the mortgage — and for another, it can be considered mortgage fraud, a serious crime that can come with prison time and fines.

4. Acknowledge Responsibility, but Don’t Get Emotional

When writing a letter of explanation, you may be justifying negative items in your credit history that resulted from poor decisions — or just poor circumstances. Nobody’s perfect, but a lender simply wants to make sure you won’t default on your loan.

It can be helpful to acknowledge the ways you’ve adjusted your financial habits in response to a negative item. This helps to reassure the lender that it won’t have an impact on your ability to pay your mortgage.

For example, if you’re writing a letter of explanation to address late rent payments after a layoff, you might add that you’ve since saved up an emergency fund of three months of living expenses in order to avoid being financially blindsided in the future.

However, writing an emotional sob story won’t help. Remember: It’s a good idea to keep it simple, clear, honest, and as short as possible while still covering all those bases.

Getting Your Mortgage Application in Shape

Knowing what documents you need and what a mortgage lender will look at can help get your application in strong shape before you file it. Your lender will scrutinize your credit history and any late payments, especially ones within the last 12 months. But there are ways to proactively tackle any issues on your credit reports.

• Check your credit reports. Knowing what your mortgage lender may see can help you assess where any weak points may be, and what information they may ask for.

• Call the creditor if you have a recent late payment. Creditors know that accidents happen and bills may be misplaced. If your account is otherwise in good standing, it’s possible that a creditor may erase the late payment.

• Focus on additional aspects of your credit. Making sure to pay bills on time and keeping your credit utilization below 30% can help build credit.

• Think twice about opening accounts. Before and after applying for a mortgage, it can be a good idea to be mindful of opening new lines of credit or charging an extensive amount on current cards. Suddenly taking on more debt on credit cards can raise a red flag to lenders, which may result in being asked to write a letter of explanation.

Understanding how a lender will see your mortgage application can give you confidence and may help you head off any potential problems.

Recommended: Preapproved vs. Prequalified: What’s the Difference?

The Takeaway

A letter of explanation is when a mortgage lender needs clarity about a red flag or discrepancy that arises on your application. Knowing what to expect, having documentation ready, and answering any questions the lender may have can all be helpful in getting your home loan approved.

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

Photo credit: iStock/scyther5

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.

*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.

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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SOHL0623072

As of 2023, only 21% of people say now is a good time to buy a house according to a Gallup poll. This is due to high home prices and high interest rates. While the average home price has dropped since the last quarter of 2022, prices are still higher than normal. The median home price currently sits at $424,495 and mortgage rates as of June 2023 are 6.67% for 30-year fixed-rate mortgages and 6.03% for 15-year FRMs.

We’ve seen higher home prices and higher interest rates in the past year, so now may not be the worst time to buy. However, whether or not now is a good time to buy a house depends heavily on your unique financial situation and local market dynamics.

Determining When You’re Ready to Buy

Before you assess the current real estate market and pay close attention to interest rate fluctuations, it’s important to understand your financial and personal situation.

Here are a few factors you may want to consider before deciding if a new home is a good play right now.

Making Room in the Budget

When buying a home, the first thing you’ll need to budget for is a down payment.

While 20% of the home’s value is the benchmark, you may only need 3.5% if you apply for an FHA loan. But even 3.5% can be a chunk of change. If you want to buy a $200,000 house, 3.5% is $7,000.

Your home-buying budget should be large enough to cover a down payment as well as closing costs, which typically include homeowners insurance, appraisal fees, property taxes, and any mortgage insurance.

Remaining Consistent

How long do you plan to live in the city where you’re eyeing a home? If you plan on staying in the home long-term, now could be a good time to buy because staying put will give your home time to appreciate (subject to market fluctuations).

Since mortgage lenders pay close attention to job consistency and a steady income, you may also want to consider your job security. Especially during uncertain times, it’s crucial to feel confident knowing you can make your mortgage payments every month.

💡 Quick Tip: Buying a home shouldn’t be aggravating. Online mortgage loan forms can make applying quick and simple.

Checking Your Financial Profile

It’s a good idea to check your financial profile. Doing so may help you secure better financing terms when you purchase a home. Lenders will review your credit history, debt-to-income ratio, and assets, among other factors, to determine your eligibility for a mortgage.

Lenders review your credit history to gauge your creditworthiness and the level of risk to lend you money. They look at your debt-to-income ratio to indicate how much of your income goes toward debt payments every month.

If your ratio is high, it can show you’re overleveraged, which may mean you’re not in a position to take on more debt like a mortgage. You may also face a higher interest rate.

Last, a mortgage applicant can list assets like cash and investments. The more assets you have, the less risky lenders view you.

Weighing Renting Vs. Buying

You may want to compare renting vs. buying a home.

If renting a home in your community is less expensive than buying, you may want to hold off on a home purchase. Conversely, if renting is more expensive, you may be more enticed to purchase a new home.

Overall, if you find that these factors point you in the direction of homeownership, it’s possible you’re ready to buy a home and can begin determining the perfect time to pounce.

Observing Interest Rates

When determining if now is a good time to buy a house, buyers should look closely at interest rates.

Financial institutions charge interest to cover the costs of loaning money when they offer you a mortgage. The interest rate they charge is influenced by the Federal Reserve, but mortgage-backed securities are considered to be the main driver.

When interest rates are low, borrowing money is less expensive to the borrower. As interest rates rise, borrowing money becomes more costly. The government has been slashing rates to keep buyers in the market.

But keep in mind that the rate and terms you qualify for will depend on financial factors including your credit score, down payment, and loan amount.

And, if interest rates go down after you purchase your home, you can always choose to refinance your mortgage in hopes of getting a lower rate.


💡 Quick Tip: A home equity line of credit brokered by SoFi gives you the flexibility to spend what you need when you need it — you only pay interest on the amount that you spend. And the interest rate is lower than most credit cards.

Timing the Real Estate Market

Essentially, to time any market, you want to aim to buy low and sell high. If you’re going to buy a property, you’ll want to ideally buy when there are more sellers than there are buyers—a buyer’s market.

In a buyer’s market, buyers have an abundance of homes to choose from. This may also give you leverage to ask for more concessions from sellers eager to close a deal, such as a seller credit toward your closing costs or help covering the cost of repairs.

Conversely, in a seller’s market, real estate inventory is low and demand is high, which may drive up home prices.

Recommended: How Does Housing Inventory Affect Buyers & Sellers?

To identify the current market conditions, you may want to visit real estate websites like Zillow, Redfin, Realtor.com, or Trulia to look at inventory in your area or ZIP code.

Typically, it’s a buyer’s market if you see more than seven months’ worth of inventory.

If you see five to seven months of inventory, you’re in a balanced market that isn’t especially beneficial to buyers or sellers.

It’s a seller’s market when there is less than five months’ worth of inventory.

Understanding Local Economics and Trends

Because prices can vastly vary from area to area, real estate is often considered a location-driven market. This means that general rules of thumb might not be valid in every region or city.

Also, local economics may play a role in housing demand. For instance, if a large company decides to move its operations to a city, that city may experience a housing boom that creates a spike in home prices.

That said, hopeful buyers will want to pay close attention to the economic happenings and housing trends in their desired location.

The Takeaway

If you find a home that seems right for you, your employment is stable, and you can get a home loan with a good interest rate, buying may make sense. Then again, with interest rates and home prices still being on the high side, comparing the costs of renting and buying may be called for.

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
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.

*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.

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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SOHL0623040

Installing solar panels in your home allows you to do your part for the planet while also reducing your monthly utility bills. However, the cost to purchase panels and have them installed can be a deterrent. Even if you know you’ll save money over the long term, it may be hard to come up with the funds to pay for the project up front.

Fortunately, there are tax incentives as well as financing options that make paying for a solar system a lot more manageable. Solar financing involves using instruments, like loans and leases, to pay for a solar system in installments over time rather than in one lump sum at the time of purchase. Each financing option has different features, advantages, and drawbacks.

Read on to learn more, including how much solar panels cost today, how much they can help you save, plus solar financing options that can help you cover the initial bill.

The Cost of Solar Panels

The cost of solar panels varies by location, the type of solar panels, and the system’s size, but an average-sized residential system currently runs around $16,000. The actual cost of solar panels can run as high as $35,000. However, federal and local tax incentives and rebates can take more than half of the cost off.

There are also different financing options available that allow you to pay for a solar system in installments rather than in one lump sum up front. The monthly amount owed on a solar loan is typically less than an average utility bill.

Recommended: Strategies to Lower Your Energy Bill When Working From Home

Potential Benefits of Solar Panels

One of the benefits of solar panels is the potential to reduce or completely eliminate your energy bills. Depending on how much sunlight there is where you live, how many panels you install, and your energy use, you could potentially receive enough power through solar panels to completely meet your needs.

Even if your solar panels don’t eliminate your electric bills, it can lead to significant savings. Generally, the initial expense of the purchase of a solar system can be recouped in an average of six to 10 years. After recouping installation costs, the amount you’ll save over the life of your panels will continue to add up.

Another benefit of solar panels is the potential to increase the resale value of your home. Research has shown that, on average, homes with solar panels sell for 4% more than those without them.

For some people, one of the biggest benefits of installing solar panels, however, is knowing that they’re using renewable energy and helping to reduce greenhouse gasses. This could especially be important for those living in a state where the majority of the energy generated is through non-renewable power sources.

Recommended: Does Paying Utilities Build Credit?

Potential Drawbacks of Solar Panels

While solar panels have the potential to save homeowners money and do a lot of good for the planet, they come with a high price tag. Solar power financing can help make solar energy possible for more people, but not everyone qualifies.

Another drawback to solar energy is that it is sunlight dependent. If there is a long stretch of overcast weather, or if you live in an area that doesn’t get a lot of sun, you might not be able to generate enough solar energy to take care of your energy needs. However, solar batteries (which store excess energy) can help mitigate this issue.

Solar panels and the wiring they require can also use up a significant amount of space. Depending on how many panels you need for your home, it can be difficult to find adequate space with sufficient sun exposure to install a solar system.

Also keep in mind that uninstalling a solar system and moving it can be difficult and costly. As a result, a solar system is not something you can generally take from house to house. It’s best to consider it as an investment in your home.

Saving Money by Installing Solar Panels

More than 2.5 million homeowners in America currently have solar panels. One reason is the savings it can offer over time. Once installed on your roof, solar panels typically last for at least 25 years. If your solar system eliminates your electric bill and you normally spend about $150 a month on electricity, that would bring in a potential savings of $65,000 over the life of the system.

Keep in mind, however, that solar panels don’t always eliminate your electricity bill. And, as with any home improvement project, it’s important to consider the upfront costs, how long you plan to live in your home, and if you can find financing options that work with your budget.

Four Options for Solar Panel Financing

While converting to solar can pay for itself over time, it requires a sizable upfront investment. Here are some options that can help make it easier to foot the bill.

1. Tax Credits and Rebates

A smart solar power financing strategy starts with taking advantage of all available tax credits and rebates. The federal government currently offers a 30% tax credit for solar panels installed through 2032.

Unlike a deduction, a tax credit is an amount of money that you can subtract, dollar for dollar, from the income taxes you owe. So, if you pay $30,000 to install a new solar system, you’ll qualify for a roughly $9,000 tax credit, which equates to $9,000 more in your pocket.

In addition, many states offer rebates that further reduce the cost. To help people learn more about state and local incentive programs, North Carolina State University’s N.C. Clean Energy Technology Center offers a nationwide directory of programs .

2. Solar Panel Leases

A unique option for solar panel financing is a solar lease or power purchase agreement (PPA). With both a lease or a PPA, a company installs the solar system on your roof, and you pay that company for your energy each month, which is typically 10% to 30% lower than your usual electric bill. The company owns the panels and remains responsible for any required maintenance.

Since you don’t own the solar system, however, you can’t take advantage of any tax rebates or other incentives that come with purchasing solar panels outright. Also, solar lease and PPA contracts can extend 25 to 30 years. If you want to move before the contract is up, you would need to find a buyer who wants to take over your contract or could end up paying a hefty cancellation fee.

3. Secured Solar Panel Loans

Since you are adding to and improving your home, you might consider using a home equity loan or home equity line of credit (HELOC) to finance solar panels. This type of financing is secured by the equity you have in your home. Because the debt is secured (which lowers the risk to the lender), you may qualify for a relatively low interest rate. However, if you are unable to repay the loan or credit line, the lender can take your home to recoup its losses. Also, you need to have equity in your home to qualify for a home equity loan or HELOC.

4. Unsecured Solar Panel Loans

An unsecured solar panel loan is an unsecured personal loan that you can use to purchase solar panels. You don’t have to have any equity in your home, or use your home as collateral, to qualify for an unsecured solar panel loan To get approved, the lender considers your income and your credit rating (among other financial factors that vary from lender to lender).

With an unsecured personal loan, you receive a lump sum up front, which you can use for virtually any type of expense, including solar panels. These loans typically have fixed rates so your monthly repayments stay the same over the term of the loan, which is often five to seven years. Because this type of solar panel financing is unsecured, rates can be higher than you might get with a home equity loan or HELOC.

The Tax Benefits of Solar Panels

Installing solar panels can help reduce your federal income tax due in the year the installation is complete. There is a 30% tax credit currently in place for systems installed in 2022-2032. The tax credit expires starting in 2035 unless Congress renews it.

To qualify for the solar panel tax credit, your solar panels must be installed at your primary or secondary U.S. residence between Jan. 1, 2022, and Dec. 31, 2034. You also must own the solar panel system, i.e. you purchased it with cash or solar panel financing but you are neither leasing nor are in a PPA arrangement.

In addition, the system must be new or being used for the first time, and the credit can only be claimed on the original installation of the solar equipment. There is no maximum amount that can be claimed.

The following expenses can be included:

•  Solar PV panels or PV cells (including those used to power an attic fan, but not the fan itself)

•  Contractor costs, including installation, permitting fees, and inspection fees.

•  Balance-of-system equipment, including wiring, inverters, and mounting equipment

•  Energy storage devices that have a capacity rating of 3 kilowatt-hours (kWh) or greater

•  Sale tax on eligible expenses

In addition to the federal tax credit, there are also state-level solar incentives, which vary widely. Generally, getting a state tax break or rebate won’t limit your ability to get solar credits from the IRS.

Your local utility may also offer clear energy incentives, which can help you save money on solar panels. However, this may impact your federal income tax credit.

The Takeaway

There’s no question that solar panels are environmentally friendly. Over time they can also be economically friendly, saving you money on your electricity bill. Doing some research about residential solar panels and general home improvement financing are good steps to take to see if it’s the right choice for your home.

If you are interested in getting a loan to finance a solar system, a SoFi unsecured personal loan could be a good option. SoFi personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.

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USDA loans are available for certain properties with no down payment required and possibly a lower interest rate than conventional loans. However, eligibility for USDA loans largely depends on borrower income and home location.

While those four letters, namely USDA, may conjure up images of prime beef or grain crops, this particular usage refers to a program that can encourage homeownership for those with lower incomes in rural and some suburban areas. These mortgages may also help people buy and repair homes in need of updating.

Here, you’ll learn more about what these loans offer, how they work, and who qualifies for them.

What Is a USDA Loan?

USDA loans offer a loan option with no down payment for certain qualifying buyers who plan to purchase property in rural or some suburban areas. These mortgages are guaranteed by a division of the USDA known as the USDA Rural Development Guaranteed Housing Loan Program.

While partner lenders typically issue the loans themselves, the fact that the government is taking on some of the risk of lending funds has a big benefit. It allows these loans to often offer a considerably lower rate than you’d find at a commercial lender.

To qualify for a USDA loan, you may have to earn below a specific income limit and buy in certain areas. You may also purchase a property in need of repair.

If you are eligible, another perk of these mortgages is that private mortgage insurance (PMI) is not required, which is another way they present an affordable option for some buyers.

How USDA Loan Programs Work

USDA Rural Development’s housing programs give individuals and families the opportunity to buy or build a rural single-family home with no money down, repair their existing home, or refinance their mortgage under certain circumstances.

The USDA promotes homeownership for low-income households and economic development in rural areas.

USDA loans are available to eligible first-time homebuyers and repeat buyers for primary residences.

USDA Loan Requirements

Here are more details on who qualifies for a USDA loan.

Single Family Housing Guaranteed Loan Program

This program is the one that most people think of when they hear about USDA loans.

The USDA guarantees 30-year fixed-rate loans originated by approved lenders so that people in households with low to moderate incomes can buy homes in eligible rural areas. (You’ll need to search with an exact address.)

The income threshold is defined as no more than 115% of area median household income. In other words, your household income can’t exceed the area median income by more than 15%.

Buyers can finance 100% of a home purchase, get access to better-than-average mortgage rates, and pay a lower mortgage insurance rate.

That means no down payment, but borrowers still might want to look into down-payment assistance programs that also may help with closing costs.

A USDA loan can be used to purchase, renovate, or build a primary single-family home (no duplexes).

Single Family Housing Direct Home Loans

These subsidized loans, issued directly by the USDA, are available for homes in certain rural areas and for applicants with low and very low incomes.

The amount of the subsidy depends on the adjusted income of the family, and it reduces the family’s mortgage payment for a certain amount of time.

Adjusted income must be at or below what’s required for the geographical area where the house is located, and applicants must currently be without housing that’s considered safe, sanitary, and decent.

In addition, they must be unable to qualify for loans elsewhere; meet citizenship requirements (or eligible noncitizen ones); legally be allowed to take on a loan; and not be suspended from participating in federal programs.

The home itself must meet certain requirements for USDA loan eligibility. It must:

•   Typically have no more than 2,000 square feet

•   Not have an in-ground swimming pool

•   Not have a market value that exceeds the loan limit for the area

•   Not be used to earn income from the home.

Typically no down payment is required, although borrowers who have more assets than are allowed may need to use part of them toward the purchase. The rate is fixed and, when taking payment assistance into account, could be as low as 1%. The repayment term can be up to 33 years, or 38 years for applicants with very low income.

Funds can be used to purchase, build, repair, or renovate a single-family home. Once the title is out of the borrowers’ names or they no longer live in the house, they must repay part or all of the subsidies received.

Apply directly with your state Rural Development office .

This online eligibility tool can help potential borrowers see if they might qualify.

Single Family Housing Repair Loans and Grants

This program, also called the Section 504 Home Repair Program, is for homeowners with very low incomes who need a loan to improve, repair, or modernize their homes.

The program also offers grants if the applicants are 62 or older with very low incomes, and the money will be used to remove hazards to health and safety. The borrower must own the home and live in it. Prospective homeowners must not be able to find affordable credit through other venues.

Current limits on both the loans and the grants are as follows:

•   Maximum loan amount: $40,000

•   Maximum grant amount: $10,000

•   Maximum per person: $50,000, if they qualify for both the loan and grant.

Loan terms can be up to 20 years, with a fixed 1% interest rate.

For details about how to apply, applicants may contact their state Rural Development office.

Homeowners of higher income levels who need to finance home repairs may want to look into home improvement loans.

Note: SoFi does not offer USDA loans at this time. However, SoFi does offer FHA, VA, and conventional loan options.

What Is the Minimum Credit Score for a USDA Loan?

The USDA does not set a firm credit score requirement. However, you are most likely to be approved if your score is in the 640 and higher range.

Even with a lower score, however, you may qualify for a loan.

Recommended: Learn the Cost of Living by State

Pros and Cons of USDA Loans

This section will focus on the USDA guaranteed loan program.

USDA Loans Pros

•   Typically no down payment is required.

•   Lower rates than FHA and conventional loans on average.

•   There isn’t a minimum FICO® score to qualify, so a less-than-ideal credit history may not prevent the loan from going through, though lenders like to see a credit score of at least 640.

•   Lenders may also require a debt-to-income ratio (DTI) of 41% or under. Depending on other factors, a slightly higher DTI might be possible.

•   No private mortgage insurance (PMI).

USDA Loans Cons

•   Homes must be in eligible rural areas.

•   Applicants must meet income limits.

•   Only certain lenders offer the program.

•   USDA loans require a 1% upfront guarantee fee and a 0.35% annual guarantee fee, based on the remaining principal balance each year.

Other Types of Mortgage Loans

In general, if your household income is more than 115% of the area median income, you can’t qualify for a USDA loan. The income of the entire household is considered, even if someone isn’t going to be on the mortgage note. That’s just one reason you might need to seek another type of mortgage.

Three broad types are:

Conventional loans: These are provided by banks and other private lenders and are not government-backed loans. This is the most common type of mortgage today. Borrowers typically need to have a down payment of 3% to 20%, and the lender will look at the debt-to-income ratio and credit scores when deciding whether to grant the mortgage loan.

FHA loans: Lenders that issue these loans are insured by the Federal Housing Administration, and it can be easier to qualify for this type of loan than a conventional mortgage. Lending standards can be more flexible and, with a credit score of 580 or higher, the borrower might qualify for a down payment of 3.5%. Note that mortgage insurance for an FHA loan can be high.

VA loans: Veterans, active military members, and some surviving spouses may receive VA loans provided by banks and other lenders but guaranteed by the VA. Eligible borrowers can benefit from a loan with no down payment and no monthly mortgage insurance. Most borrowers will pay a one-time funding fee, though.

Different types of mortgage loans have benefits and disadvantages. As a homebuyer, it is beneficial to understand what is applicable to your situation.

First-Time Homebuyer Programs

Borrowers who qualify as first-time homebuyers can receive benefits. Loan programs include:

•   Freddie Mac’s Home Possible® program and Fannie Mae’s 97% LTV. The programs offer down payments as low as 3% for buyers who have low to moderate incomes.

•   The Fannie Mae HomeReady® mortgage program. Borrowers who undergo educational counseling can get help with closing costs.

•   Mortgages for qualifying first-time buyers, who can put as little as 3% down.

It can make sense for low- and moderate-income borrowers to contact their state housing agency to see what programs are available for first-time homebuyers.

Recommended: Find First Time Home Buyer Programs in Your State

The Takeaway

USDA loans support rural homebuyers and homeowners who meet income limits and whose properties qualify. Others shopping for a mortgage will need to research home loans and find a choice that suits them.

FAQ

What are the basics of how a USDA loan works?

USDA loans are available with no down payment and potentially a lower interest rate to borrowers who are buying certain properties in qualifying rural areas and who meet income limits.

What’s the difference between an FHA loan and a USDA loan?

These loans address different types of properties and have different qualifying requirements. With a USDA loan, there is no down payment requirement, there is no PMI, but borrowers must meet income guidelines and be purchasing properties in a rural or suburban area. With an FHA loan, there is a 3.5% down payment and a DTI requirement, but there is not the regional guideline for the property. However, PMI is assessed.

Is FHA better than USDA?

When comparing FHA vs. USDA loans, it’s not really a matter of one being better than another but of which one suits your needs and which one you qualify for. An example: If you are buying in a rural area, you might get a USDA loan requiring no down payment. If you are buying in a metropolitan area, you might instead qualify for an FHA loan with 3.5% down.

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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.

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.

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