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When a cash-back rewards credit card features a 2% cash back feature, that means you receive a flat 2% back on all purchases. This can be a solid way to reap rewards.

Read on to learn the ins and outs of what 2% cash back actually means, as well as the pros and cons of a 2% cash-back credit card, to help you determine whether it’s worth your while.

What Is Cash Back?

Cash back is a form of reward that cash-back credit cards offer that allows you to earn money back on purchases you make. Other examples of credit card rewards include points or travel miles.

With a flat-rate cash-back card, all of your purchases earn the same amount in cash back. Other credit card issuers might offer higher cash-back rates on certain spending categories, such as on gas or groceries.

Meanwhile, some may feature rotating bonus categories to give your rewards-earning abilities a boost. For example, you might earn 5% cash back in the fall months on purchases made at restaurants and on gas.

You can redeem the cash-back rewards you earn in the form of a check, bank transfer, or gift card, or as a statement credit. Other options might include making a charitable donation or making a purchase through the issuer’s online portal. Depending on the credit card, there might be a spending threshold you need to meet before you can redeem your cash-back rewards.

What Is 2% Cash Back?

Earning 2% cash back simply means that for every $100 you spend on your credit card, you’ll get $2 back. So if you were to spend $1,000, that’s $20 back in your pocket — though you’ll then have to redeem that cash back in order to make the rewards usable.

How 2% Cash-Back Credit Cards Work

As mentioned previously, having a 2% cash-back credit card means you’ll earn two cents back for every $1 you spend using the card, or $2 for every $100, and so forth.

There might not be a limit to how much you can earn in cash back. However, in other cases, the card may cap the amount of cash-back rewards you can earn for either regular spending or spending in bonus categories.

Pros and Cons of 2% Cash Back

While a 2% cash back card does come with some advantages, there are some drawbacks as well. Take a look at both:

Pros and Cons of a 2% Cash Back Card
Pros	Cons
Easy to use	Higher APRs compared to non-rewards credit cards
Can rack up rewards quickly	Earning caps may apply
Often no annual fee	Don’t often offer travel rewards or perks

Pros

•   Easy to use: A major benefit of a 2% cash-back credit card is that the rules are simple: You spend money, and get a certain amount back. Plus, redeeming rewards is usually pretty straightforward, and you have a choice of how to do so.

•   Can rack up rewards quickly: If you use your credit card for everyday purchases, you’ll accrue rewards fairly fast. Of course, only put everyday purchases on your card if you can afford to pay them off, and always use your card responsibly, considering what a credit card is and the implications overspending can have for your credit score.

•   Often no annual fee: Many cash-back cards don’t have an annual fee. That means you won’t need to worry about spending enough to offset the fee.

Cons

•   Higher APRs compared to non-rewards credit cards: While your annual percentage rate (APR) on a card partly depends on your credit and other financial factors, rewards credit cards like cash-back cards tend to carry higher interest rates. If you keep a balance on your account, you can expect to pay a pretty penny in interest, given how credit cards work.

•   Earning caps may apply: While some credit cards allow you to earn unlimited cash-back rewards, others place a limit on how much you can earn. If you’re looking to max out your rewards potential, a cap could make that harder to do.

•   Don’t often offer travel rewards or perks: If you’re hoping to earn rewards that apply to travel, such as airline trips or hotel stays, a cash-back credit card likely isn’t the form of rewards credit card for you. While some cards may offer travel redemption options, most don’t, and many also charge foreign transaction fees.

Recommended: When Are Credit Card Payments Due?

Is a 2% Cash Back-Credit Card Worth It?

Whether a 2% cash-back credit card is worth it really depends on how you’ll use the credit card. This includes what types of purchases you’d like to make, and if you plan on using your card for bills and everyday expenses, such as gas and groceries. If you use the credit card regularly, you’ll be able to earn a greater amount of cash-back rewards.

However, you’ll also want to balance that spending with sticking to important credit card rules, like not spending more than you can afford to pay off. Because rewards credit cards tend to have higher interest rates, it’s important to avoid carrying a balance so you don’t cancel out the cash back you earn.

A cash-back rewards card might not be worth it if you prefer to use your credit card rewards for travel. In that case, a travel rewards credit card typically will offer more lucrative ways to earn points or miles to use on trips.

Recommended: How to Avoid Interest On a Credit Card

Guide to Using a 2% Cash-Back Credit Card

If you get a 2% cash-back card, here are some tips to keep in mind to use it effectively:

•   Read the redemption rules. Familiarize yourself with credit card requirements, and see if there are any limits on how much cash back you can earn. Similarly, check if you need to hit a minimum amount in cash-back earnings before you can redeem those rewards.

•   Be intentional with your purchases. Devise a plan for how you intend to use your cash-back credit card. Perhaps you would prefer to use it on big-ticket items, or maybe on seasonal purchases, such as during the holidays or back-to-school season. This will help you make the most of your card.

•   Choose how you’ll receive your rewards. YYou’ll also want to decide whether you plan on receiving the cash-back in the form of an ACH transfer to your account, as a statement credit, or as a check dropped in the mail. You also might be able to use your rewards by making online purchases through the credit card’s shopping portal, or by purchasing gift cards or donating to charity.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Maximizing 2% Cash-Back Earnings

If you have a cash-back credit card, it’s worth your while to take the time to determine how to maximize your earnings. Here are several ways to do so.

Use Your Card For Everyday Purchases and Bills

Consider using your cash-back card on major spending categories to earn the most on rewards. For example, if you spend $4,500 a year on food for you and your family and put all of your groceries and dining expenses on your card, you’ll get $90 in cash-back on just that spending alone.

You might also consider putting your recurring bills and subscription services on your credit cards. This will allow you to scoop up points in areas you already spend.

Just make sure you aren’t spending beyond your means. Keep an eye on your expenditures, and commit to paying off your balance in full each month.

Put Big-Ticket Buys on Your Card

If you’ve been saving up for a sleek new laptop or coveted designer shoes, consider putting that cost on your 2% cash-back card. That way, you can get the item and earn a bit of cash back on the purchase.

Your card may even come with added perks, such as purchase protection or an extended manufacturer’s warranty.

Look for a Card With No Annual Fee

A card without an annual fee means you won’t need to spend as much to make the cash-back rewards worthwhile. Case in point: If you get a card with a $40 annual fee, you’ll need to put $2,000 in purchases to break even at a 2% cash-back rewards rate.

Pay Off Your Balance in Full Each Month

As cash-back credit cards tend to have higher APRs, make it a point to pay off your card in full. This will help you avoid racking up interest charges, which can cut into the cash-back rewards you earn.

Strategize When You’d Like to Redeem Your Cash Back

To maximize your 2% cash-back rewards card, it helps to be intentional with how you choose to redeem your cash-back rewards as well as when you do so. For instance, if you tend to dig a debt hole during the holidays, use your rewards to pay for gifts and other related expenses. Or, you can put the rewards you’ve accumulated toward a statement credit, or redeem it for a gift card for your loved one.

The Takeaway

Whether a 2% cash-back credit card is right for you may depend on a few considerations, such as how often you plan to use the card, whether you may purchase higher-priced items with it, and if you plan to pay off the balance in full each month. It’s also important to understand all of the rules that apply to the credit card. Some cards have limits on how much you can earn in cash back or have annual fees that could cut into the value of your rewards.

A 2% cash-back credit card that’s used regularly, however, can provide you with a steady stream of extra cash that could benefit your budget, and you can also be strategic about how you redeem the rewards depending on your needs at a given time.

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

FAQ

Is 2% cash back good for credit cards?

A 2% flat-rate, cash-back credit card can be a strong choice as a go-to credit card if you intend to use your card for everyday spending. Earning rewards at a flat rate and in this manner is simple and straightforward, as you don’t have to worry about keeping track of rotating categories or figuring out point conversion values.

Is 2% cash back better than points?

A 2% cash back credit card is a no-hassle, straightforward way to earn rewards. While you might earn more points on a travel card, redemption values and ways to redeem points on a travel rewards card can be more complicated. A flat-rate cash-back card can be a good choice to use as a foundation. Then, you can also open a travel card if it makes sense for your needs.

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Photo credit: iStock/LaylaBird

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.

SOCC-Q324-045

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The FHA Streamline Refinance program is a simplified version of a mortgage refinance for borrowers who already have a loan backed by the Federal Housing Administration (FHA). It’s possible for borrowers to refinance without a new property appraisal, credit check, or income verification — but owners do have to be current on their existing FHA mortgage.

The FHA Streamline Refinance does have its limitations. For example, if you need cash out or want to eliminate the mortgage insurance premium, you can’t do it with the FHA Streamline Refinance and you’ll need to find another mortgage type.

We’ll explore exactly what is an FHA Streamline Refinance, how it works, what the requirements are, the process of getting one, and what the benefits are to help you determine if this program is right for you.

What Is an FHA Streamline Refinance?

An FHA Streamline Refinance refinances an existing FHA loan into a new FHA loan with limited credit and underwriting requirements for the borrower. It’s faster and sometimes cheaper to obtain than a full refinance, especially since it doesn’t require a new appraisal.

Typically, the main goal is to lower monthly payments by refinancing to a lower interest rate, but if the mortgage term is reduced or the loan type is changed to a fixed-term loan, that could also be considered a “net tangible benefit” of the refinance by the FHA.

There are two types of FHA Streamline Refinance: credit qualifying and non-credit qualifying.

Credit Qualifying

As the name implies, your credit and income are used to qualify for an FHA Streamline Refinance and for the lowest interest rates. An appraisal isn’t needed for this type of refinance.

Non–Credit Qualifying

A non-credit qualifying mortgage doesn’t require the lender to assess your credit or ability to repay the loan, but all borrowers on the original loan must remain on the new loan. Like the credit-qualifying refinance, a non-credit qualifying one doesn’t require an appraisal, but there are other eligibility requirements.

Recommended: FHA Loan Buyer’s Guide

Eligibility Requirements for FHA Streamline Refinance

To qualify for an FHA Streamline Refinance, the borrower must derive a “net tangible benefit” from the refinance, such as a lower interest rate, a shorter loan term, or a switch from an adjustable-rate mortgage to a fixed-rate mortgage. If you’re considering a refinance, you might want to run your numbers through an FHA loan calculator to see if a refinance will save you money.

Other requirements relate to the loan type, occupancy, credit score, and payment history.

Loan Type

The loan being refinanced must be an existing FHA loan. The refinanced loan will remain an FHA loan, which means you’ll still need to pay mortgage insurance. If you’re current on your payments, it could make sense to take a look at other types of mortgage loans beyond FHA.

Occupancy Status

An FHA Streamline Refinance can be used in the following occupancy scenarios:

•   Owner-occupied one- to four-unit properties

•   HUD-approved second homes

•   Investment properties with existing FHA-insured mortgages

Credit Score and Payment History

There is no credit score requirement for the FHA Streamline Refinance under the non-credit qualifying option. However, FHA Streamline Refinance rates can be better for those who use the credit-qualifying option and supply credit qualifications to the lender.

Borrowers do need to have made at least six payments and wait 210 days before applying for a refinance on their FHA loan. Borrowers must also be current on their mortgage payments with no delinquencies.

Recommended: Minimum Down Payment for an FHA Loan

Benefits of an FHA Streamline Refinance

Here are a few of the ways in which a homeowner may benefit from the FHA Streamline Refinance program:

A Lower Interest Rate

For borrowers who bought a home when their credit was bent out of shape or interest rates were high, FHA Streamline Refinance rates could be lower than the rate they currently have.

A Different Loan Type

If you have an adjustable-rate mortgage, the FHA Streamline program can change it to a fixed-rate mortgage and help stabilize your payments.

Remove or Add a Borrower

If you need to remove a borrower from the loan, such as the case with death, divorce, or separation, you may be able to do it with a streamline refinance. This may be done if the borrower can supply supporting documentation, such as a divorce decree.

Pay Off a Loan Faster

By refinancing to a shorter loan term, you’ll likely pay off the loan faster and save yourself a good amount of money.

Avoid an Appraisal

The FHA Streamline Refinance uses the value of the home from the original FHA mortgage, with a maximum loan amount of the existing loan balance. Because these numbers don’t need to be adjusted upwards, no new appraisal is needed.

Reduce Closing Costs

There are costs involved with an FHA Streamline Refinance, but they may be less due to the reduced requirements. For example, you do not need to pay for an appraisal with an FHA Streamline Refinance.

Close Quickly

With reduced documentation and underwriting requirements, and no appraisal required, it’s possible to close on the loan relatively quickly.

FHA Streamline Refinance Process

The FHA Streamline program reduces the documentation and underwriting requirements for the lender, which usually translates into a quicker refinancing process. Here’s what you’re looking at when it comes to documentation, timeline, and costs.

Documentation Needed

Your lender will be able to see your payment history with a credit check, but there are a few more documentation requirements. If you’re applying as a non-credit qualifying borrower, these include:

•   Residency verification, such as a utility bill in the occupant’s name

•   Evidence of payment history for the past 12 months

•   If a secondary residence, approval from jurisdictional FHA Homeownership Center

If you’re applying with a credit-qualifying mortgage for the lower rate, you’ll likely need to provide the typical documentation required by the lender, such as:

•   Credit score and history

•   Proof of income and employment history

•   Bank statements

•   Debt obligations

•   Assets

Lenders use this information to determine if you have enough income to qualify for the loan, what rate you qualify for, and to verify funds to close the loan.

Refinancing Timeline

An FHA Streamline Refinance takes less time because there’s no appraisal required. In a general sense, the process looks something like this:

•   Find FHA-approved lenders. For an FHA Streamline Refinance, lenders must be approved by the FHA as a direct endorsement lender to qualify.

•   Apply. Talk with lenders to see if your situation fits with this type of mortgage. Apply with your top choices, noting the closing costs and interest rates offered by lenders.

•   Submit documentation. Since there are fewer forms to find and submit, you may be able to complete your part of the application faster.

•   Wait for underwriting. Since the loan isn’t contingent upon an appraisal, income, or credit, your loan will be ready to process more quickly than other types of loans. Alas, it’s still a government-backed loan, so you could be waiting 30 days or more.

•   Close on the loan. Once underwriting has approved your loan, you can close and start making your new payment.

Upfront and Closing Costs

When you refinance with an FHA loan, you’ll need to pay an upfront mortgage insurance premium on the new FHA loan. You may be able to get a refund on a part of your mortgage insurance premium that you previously paid.

You also need to pay other closing costs, such as title insurance. Since the loan amount can’t be greater than the existing loan balance, these closing costs cannot be wrapped into the loan. However, you may see lenders offer no-closing-cost loans in exchange for a higher interest rate.

The Takeaway

An FHA Streamline Refinance makes sense in certain situations, but it’s not always the right option. Going through the FHA Streamline process makes sense if you don’t want your credit pulled or you’re looking to save time or money on a refinance. These types of refinances don’t require an appraisal and there are fewer closing costs as a result.

However, you can’t get rid of your monthly mortgage insurance payment and you won’t be able to refinance to a higher loan amount if you need more than $500 cash out. It’s common to see borrowers refinance to conventional mortgages over FHA mortgages to eliminate mortgage insurance and take cash out.

It all comes back to your goals. If you want a mortgage without the mortgage insurance premium or need cash out, you’ll want to look into other types of mortgages. But if you want to keep an FHA mortgage and go through minimal underwriting, then an FHA Streamline may be the right move for you.

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

Another perk: FHA loans are assumable mortgages!

FAQ

Can you remove mortgage insurance with an FHA Streamline Refinance?

No, you can’t remove mortgage insurance from an FHA Streamline Refinance. All FHA loans require mortgage insurance, even if you’re replacing one FHA loan with another.

How long does an FHA Streamline Refinance take?

Give it around 30 days. How long it takes to close on an FHA Streamline Refinance depends a lot on your lender, and it can be quicker due to the limited underwriting requirements. When there’s no appraisal, no loan-to-value ratio, and no credit requirement, the loan can be completed faster than when it was originally funded.

Can you get cash out with an FHA Streamline Refinance?

The maximum amount of cash you can take out from an FHA Streamline Refinance is $500. If you need more, you’ll want to look for another mortgage.

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Photo credit: iStock/Jacob Wackerhausen

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.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

SOHL-Q324-002

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Homebuyers have a variety of financing options to consider. If you’re a current homeowner, a bridge loan and a home equity line of credit (HELOC) are two possible choices that let you use the equity in your home to finance your next home purchase.

But there are key distinctions in how these funds can be used, as well as pros and cons for each. Let’s take a closer look at how bridge loans and HELOCs compare.

What Is a Bridge Loan?

Bridge loans, sometimes referred to as swing loans, interim financing, or gap financing, are a short-term, lump-sum financing option that’s typically used to purchase a new home before the sale of an existing property.

If you’re figuring out how to buy and sell a house at the same time, coming up with a down payment on the new house when you haven’t yet received payment for your current house can be challenging. This is when a bridge loan could come in handy — by filling the gap in funding so you can secure your new home without having to make a sale-contingent offer or feel pressured to accept a low bid on your current home.

Borrowers typically approach bridge loans in one of two ways: A common scenario involves using a bridge loan to cover just the down payment and closing costs on a new home. Alternatively, borrowers can apply for a larger bridge loan — potentially up to 80 percent of the value of both properties. With this second approach, borrowers pay off the entire mortgage on their current home and apply the remaining funds toward closing on their new home.

When comparing a bridge loan vs. a HELOC, note that both financing options are often secured using an existing home as collateral. An important difference is that bridge loans aren’t meant to be used for long-term financing, as they come with relatively higher interest rates and loan terms between six months and a couple years.

What Is a Home Equity Line of Credit?

A home equity line of credit, or HELOC, is a type of financing that leverages home equity to fund a variety of expenses. Borrowers can typically take out between 75% to 85% of their home equity — the value of their home minus the mortgage balance — with a HELOC.

A HELOC works much like a credit card, providing a revolving line of credit that can be drawn upon as needed. However, a HELOC offers lower interest rates than a credit card since it’s secured by an existing property.

When you consider a HELOC, there are two phases to keep in mind: the draw period and the repayment period. During the draw period, which often spans 10 years, borrowers can access available funds as needed while only having to pay interest on the amount that’s withdrawn.

Once the draw period ends, funds can no longer be withdrawn and the repayment period kicks in. Borrowers will need to make regular payments on the principal, plus interest, until the balance is paid off. On a HELOC with a 10-year draw period, borrowers can expect to have a 20-year repayment period. This extended repayment time frame is a notable distinction between a bridge loan vs. a HELOC.

You may have heard about a home equity loan, which also uses your home as collateral. When comparing a HELOC vs. a home equity loan, some key differences are that with the latter, funds are disbursed immediately as a lump sum and repayment begins right away. If you’re weighing a bridge loan vs. home equity loan, note that home equity loans usually have fixed interest rates and terms ranging from five to 30 years.

Recommended: Home Loan Help Center

Pros and Cons of Each Financing Option

Both bridge loans and HELOCs can provide quick and flexible financing. But each comes with its advantages and drawbacks.

Pros

Here’s a look at the benefits for each financing option.

Bridge Loan:

•   Quick access to funds for time-sensitive transactions

•   Avoids the need to make a sale-contingent offer on a new home

•   Could help buyers put 20% down and avoid private mortgage insurance

•   Faster processing than conventional mortgages

•   Often begin with more affordable, interest-only payments

HELOC:

•   Flexibility to draw on credit line whenever you need it

•   Lower interest rates than bridge loans

•   Interest is only charged on the funds you withdraw

•   Longer repayment period than bridge loans

•   Interest can be claimed as an itemized tax deduction if used for home improvements. (This tax benefit is slated to expire after 2025.)

Cons

Here are some potential disadvantages to consider when comparing a bridge loan vs. a home equity line of credit.

Bridge Loan:

•   Higher interest rate than other second mortgage options

•   Shorter repayment period than a HELOC

•   Often requires borrowers to also use the lender for their new home mortgage

•   Puts home at risk of foreclosure for missed payments

•   Limited borrower protections if sale of old home falls through

HELOC:

•   Typically have variable interest rates that are subject to change over the repayment period

•   Risk of running up balance quickly

•   Potential for large jump in payment amount when moving from the draw to the repayment period

•   Uses a home as collateral like a bridge loan

•   May include prepayment penalties for paying off the balance early

Is a Bridge Loan or HELOC Better for You?

It’s important to consider what you’ll be using financing for and your ability to repay the money you borrow when deciding whether a HELOC vs. bridge loan is a better bet. Situations that require funds over a longer period of time, or at different times, could be a good fit for a HELOC. Home renovations are a popular use for HELOCs, since the costs and timeline may be subject to change as the project unfolds. Funds from a HELOC may be used for other expenses like medical bills, tuition, or making a down payment if the line of credit provides sufficient funds. Note that these expenses are not eligible for a tax deduction.

A bridge loan, by comparison, is ideal for borrowers looking to buy and sell a home at the same time. Since bridge loans often start with interest-only payments, they can be an affordable option if borrowers can sell their old home soon after buying a new one. If there’s a good chance that the original residence won’t be sold for an extended period, it might be more cost-efficient to go with a home equity line of credit vs. a bridge loan.

Standard Qualifications and Requirements

Before you consider borrowing against your home equity and putting your property on the line, look closely at the qualifications and requirements. Both bridge loans and HELOCs require that borrowers have at least 20% equity in their home. Lenders factor in your creditworthiness for either loan, too. For a bridge loan, borrowers typically need a minimum credit score of 700, though some lenders may allow borrowers with lower scores. While it’s possible to qualify for a HELOC with a credit score of 620, this comes at a higher interest rate.

Requirements on how the funds are spent differs between the financing types. A HELOC offers greater flexibility in how the funds are spent, whereas bridge loans may be limited to the purchase of a new home while selling an existing property.

Application Process

Early on in the home-buying process, you’ll want to look into applying for financing. For either a bridge loan or a HELOC, you’ll need to provide documentation of homeownership, proof of income, mortgage statements showing you’ve been making on-time payments, and information on any existing debts. With either form of financing, lenders may require a home appraisal to determine the property’s market value, which is the basis for the loan or line of credit amount.

The application and underwriting processes for a bridge loan and HELOC are usually quicker than conventional mortgages, making them an ideal choice if a homebuyer needs to act fast.

Recommended: Mortgage Prequalification vs. Preapproval

The Takeaway

Both a bridge loan and a HELOC can provide quick access to financing to buy a home. There are pros and cons to each financing type, so it’s important to determine which works best for your financial situation. Remember that both financing options use your current home as collateral, meaning that lenders can foreclose on your house if you fall behind on payments.

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.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Can you pay off bridge loans and HELOCs early?

Yes, both types of financing can be paid off early. Note that some lenders may charge prepayment fees if you pay off a HELOC within the first few years of the repayment period.

What is the average interest rate on a bridge loan?

The interest rates on bridge loans are generally 2% higher than prime mortgage rates.

What happens if you take out a HELOC, but don’t use it?

You may have to pay an inactivity fee if you open a HELOC and don’t use it. Minimal withdrawal requirements are typically outlined in your HELOC contract.

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Photo credit: iStock/MicroStockHub

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.

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.

SOHL-Q324-007

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If you have military experience, a loan from the U.S. Department of Veterans Affairs could help you take a giant step toward becoming a homeowner. VA loans come with a number of benefits — notably, they require no down payment. But first, you need to understand the VA loan pros and cons to make sure it’s the right choice.

What Is a VA Loan?

A VA loan is a federally guaranteed loan administered by the U.S. Department of Veterans Affairs. Even though the VA sets the basic eligibility requirements and guarantees the loan, borrowers actually apply to private lenders for these loans, after first obtaining a certificate of eligibility from the VA.

Definition of a VA Loan

What is a VA loan? It’s a type of mortgage designed to help improve access to home ownership for veterans, service members, reserve members, National Guard members, and surviving spouses. It comes with several noteworthy characteristics that make it attractive for homebuyers, like having no down payment requirement and limited closing costs.

Eligibility Requirements

In order to get preapproved for a VA loan, you must get a Certificate of Eligibility that ensures you meet the service qualifications. Here are the basic requirements for each type of borrower:

•   Veteran: Served at least 90 continuous days of active-duty service.

•   National Guard: Served at least 90 days of active duty (there are additional eligibility options if you served before August 2, 1990).

•   Reserve members: Served at least 90 days of active duty (there are additional eligibility options if you served before August 2, 1990).

•   Spouses: You’re the surviving spouse of a veteran or the spouse of a veteran who is missing in action or being held as a prisoner of war.

Lenders also evaluate your VA loan approval and mortgage amount based on your credit score, income, debt, and assets. The VA does not impose a minimum credit score requirement, although many lenders require a credit score of at least 620.

VA Loan Benefits

Are VA home loans good? They do come with a number of benefits. A big one is that there’s no down payment required. As long as your debt-to-income ratio can handle the mortgage payments, you can borrow up to the full sales price of the home with a minimal amount of cash at closing.

Pros of VA Loans

Here is what to think about as you weigh VA home loan pros and cons:

•   No down payment requirement: You don’t have to put down any cash on your home purchase. Conventional loans typically require at least 3% down for first-time homebuyers and FHA loans require 3.5% down for all borrowers.

•   No mortgage insurance: Other mortgages require that you pay private mortgage insurance when your down payment is less than 20%. There is no comparable fee with a VA loan.

•   Lower interest rate: Not only are VA loan interest rates usually lower than conventional loan rates, you can apply for a VA Interest Rate Reduction if rates drop after closing.

•   Flexible credit requirements: Lenders usually require a minimum credit score of 620. But technically, there is no minimum set by the government.

•   No use limits: You can get a VA loan multiple times throughout your life; in fact, there are no limits on how many times you can use one to buy a home.

Cons of VA Loans

In addition to these advantages, there are also some potential drawbacks of choosing a VA loan for your mortgage.

•   Funding fee: This is a one-time fee that is paid either at closing or rolled into your mortgage balance. The fee varies depending on how many times you’ve used the VA loan and the size of your down payment. For instance, a first-time VA loan borrower with a 0% down payment would pay a 2.15% funding fee.

•   Strict appraisal process: All mortgage lenders require an appraisal, but your appraiser must be VA-approved with this type of loan.

•   Property eligibility requirements: The home inspection must also meet VA-specific requirements, which means you can’t finance a major fixer-upper. For instance, it needs a working HVAC system, no lead paint, and adequate roofing, among other criteria.

VA Loans vs. Conventional Loans

When comparing a VA loan vs. a conventional loan, there are some significant differences to consider.

Down Payment Requirements

A VA loan has no minimum down payment requirement, while a conventional loan requires at least 3% down for first-time homebuyers. In the first quarter of 2024, the median home sales price was about $420,000. With a conventional loan on that amount, a first-time homebuyer would need a down payment of at least $12,600.

Credit Score Requirements

Although there’s no agency-mandated minimum credit score for VA loans, most lenders set a minimum of 620 — the same you’ll typically find with a conventional mortgage.

Mortgage Insurance

Although you may be required to pay a one-time funding fee with a VA loan, there’s no ongoing mortgage insurance like you may have to pay with a conventional mortgage.

Private mortgage insurance (PMI) is required with a conventional loan if your down payment is less than 20%. You may have a one-time, upfront payment at closing, or your PMI may be split up between up-front and monthly premiums that are rolled into your mortgage payment.

When to Choose a VA Loan

VA loans pros and cons may matter more or less depending on your personal situation. Some examples of when a VA loan may be the best choice include:

•   Buyers who don’t have cash for a down payment or want to preserve cash for other goals may want to go with a VA loan after they weigh VA home loan pros and cons.

•   Buyers who can’t make a 20% down payment (who would have to pay for private mortgage insurance if they obtained a conventional mortgage loan) might find a VA loan especially appealing.

Alternatives to VA Loans

Even if you’re eligible for a VA loan, it still makes sense to look at other options. Three other common types of mortgages include FHA loans (backed by the Federal Housing Administration), conventional loans, and U.S. Department of Agriculture loans.

FHA Loans

An FHA loan is another federally guaranteed mortgage with flexible credit requirements. To qualify for a minimum down payment of just 3.5%, you need at least a 580. But you can still qualify with a 500 credit score, as long as you pay at least 10% down.

With a lower down payment, you must pay a mortgage insurance premium. There is an upfront fee at closing, as well as a monthly fee. If your down payment is less than 10%, the fee stays on for the life of the loan unless you refinance to a new mortgage.

Conventional Loans

Some conventional mortgages allow for a down payment as low as 3% for first-time homebuyers, though others may require 5%. You must pay private mortgage insurance for down payments under 20%, but that fee usually drops off once you have 20% equity in your home. The credit requirements are usually a little higher with conventional loans.

USDA Loans

A USDA loan is designed for individuals looking to buy a home in a rural area. You can explore eligible properties on the USDA website. However, you also need to meet certain income limits based on your county and family size in order to qualify for this 0% down payment mortgage.

The Takeaway

Weigh VA loan pros and cons to make sure you choose the best mortgage for your personal financial situation. Among the things you’ll want to consider are your credit score and how much, if anything, you have saved for a down payment on a new home.

SoFi offers VA loans with competitive interest rates, no private mortgage insurance, and down payments as low as 0%. Eligible service members, veterans, and survivors may use the benefit multiple times.

Our Mortgage Loan Officers are ready to guide you through the process step by step.

FAQs

How hard is it to get a VA loan?

VA loans have more flexibility with application requirements compared to other types of loans, as long as you meet the military service requirements. There may also be additional restrictions on the type of home you buy, especially if you’re eying a fixer upper.

Are down payments required for a VA loan?

No, you may get a VA loan with no down payment, as long as your debt-to-income ratio suggests that you can make the monthly mortgage payments.

What credit score do I need for a VA loan?

The VA itself does not require a minimum credit score but most lenders look for a minimum credit score of 620 for VA loans.

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Photo credit: iStock/sommart

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.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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To qualify for a mortgage, borrowers need a good credit score and sufficient savings for a down payment. A rent-to-own agreement is an alternative path to homeownership that involves renting a home with either the option or the requirement to buy the property by the end of the lease.

You probably haven’t seen many rent-to-own homes advertised on typical real estate sites, so you may be wondering, how do I find rent-to-own homes? And how does the process work? Here’s a closer look at how rent-to-own homes work, strategies for finding them, and tips for negotiating a rent-to-own agreement.

Understanding Rent-to-Own Homes

Rent-to-own homes, also known as lease-to-own homes, give renters a way to buy a home while living in it. If you’re on the fence about whether to buy or rent a home, this could potentially be a good option to try out a property and build up your finances before committing to homeownership.

Typically, the rent-to-own agreement outlines the duration of the lease, monthly rent, home sale price, and the option-to-buy fee. The latter effectively serves as security deposit for the renter’s right to buy the home at the end of the lease. This cost will likely be a minimum of 1% of the home price, and can often be applied toward the down payment later on.

With a rent-to-own arrangement, the monthly payment may include both rent that’s paid to the seller and a contribution toward a future down payment on the property, known as a rent credit.

There are two common types of agreements on rent-to-own homes: a lease-option agreement and a lease-purchase agreement.

A lease-option agreement grants some flexibility by allowing the renter to choose whether they ultimately buy the home when the lease expires. Both the home selling price and timeline for deciding to buy are included in the signed agreement, so it’s important to negotiate with the owner beforehand.

On the other hand, a lease-purchase agreement obligates the renter to buy the home at the end of the lease. Thus, it’s worth looking into mortgage preapproval beforehand to be prepared to obtain a home loan. Also make sure you can afford the purchase price outlined in the agreement. Completing a home inspection is good practice to identify any necessary repairs or expenses you would be on the hook for as the new owner.

Recommended: How Much Should You Spend on Rent?

Benefits of Rent-to-Own

A rent-to-own agreement can offer benefits for both the seller and homebuyer.

It can be challenging to save for a house while renting. A rent-to-own agreement can be structured to allocate a portion of rent toward a down payment each month, putting renters in a better financial position to buy their home. Making regular rent payments can also build up the renter’s credit score — a key factor lenders look at to determine mortgage qualification. Renters could save on moving costs, too, in the lease-to-own homes scenario, as they’ll already be inhabiting the home by the time they purchase it.

For the seller, a rent-to-own arrangement provides rental income from tenants who are motivated to pay on time and maintain the property. These agreements can also bypass real estate listing fees if structured as for-sale-by-owner. Additionally, sellers can lock in the sale price in the agreement, providing peace of mind and a clear picture of their return on investment when the property is sold.

Recommended: What Are the Different Types of Home Mortgage?

Potential Risks and Considerations

There are also some possible drawbacks to account for when pursuing a rent-to-own agreement.

On the buyer side, the combined cost of rent and contributing toward a future down payment can be steep. If a renter decides not to buy, they could lose out on the money paid toward the option fee and down payment. And if personal finances change and they fail to qualify for a mortgage or miss rent payments, the agreement could be canceled and they’ll forfeit their opportunity to purchase the property.

Changes in home value could be a potential risk for buyers and sellers alike. If the property drops in value, buyers could have trouble qualifying for a mortgage or be required to put more toward a down payment. For sellers, agreeing on a sale price one or more years prior to selling the home could mean missing out on a higher return on investment if the property value increases beyond what is set in the agreement.

Recommended: How to Get a Mortgage

Online Resources for Finding Rent-to-Own Homes

Looking to find legit rent-to-own homes but don’t know where to start? There are a variety of online resources to get started and narrow your search.

Dedicated Rent-to-Own Listing Sites

There are online portals and listing sites catering to prospective buyers looking for rent-to-own properties. Accessing these sites generally comes with a monthly cost, though there may be promotions for limited trials. Some popular sites include Hidden Listings, HomeFinder, and Rent-to-Own Labs, to name a few.

Real Estate Search Engines

Using a real estate search engine can help identify potential rent-to-own properties. Homes that are in foreclosure or listings that have been sitting on the market for a long time could be open to a rent-to-own agreement. Keep in mind that cold calling sellers about rent-to-own agreements can be a time-consuming approach.

Social Media and Online Forums

Aspiring homebuyers can broaden their search by looking for rent-to-own listings on online forums or specialty groups and pages on social media. These platforms enable buyers to take the initiative in making their own post that outlines the type of property and agreement they’re interested in.

When engaging on these channels outside your known network, practice extra due diligence in reviewing leads and opportunities to avoid rent-to-own scams.

Working with Real Estate Agents

Real estate agents may know how to find rent to own homes in your target area. Listing agents may have clients or contacts selling rent-to-own homes.

If you have a specific property in mind, a real estate agent could help negotiate the rent-to-own contract with the seller, although you’ll still want to consult a real estate lawyer to review the final agreement before you sign. Keep in mind that this may include commission versus pursuing a for-sale-by-owner situation.

Alternative Strategies for Finding Rent-to-Own Opportunities

There are other options that could help unearth rent-to-own homes: Spreading the word in your own personal network is a good place to start. And if you’re in an existing rental agreement or in the market for a new place to rent, asking about rent-to-own ahead of signing a lease could open up an opportunity with a landlord who may be looking to sell in the near-term.

There are real estate brokerages and companies that offer rent-to-own programs, too.

The Takeaway

The upfront cost of a down payment and credit requirements can be barriers to financing a home purchase. Rent-to-own homes offer another avenue for aspiring buyers to make homeownership a reality. There are multiple strategies buyers can implement to find a rent-to-own arrangement, including checking out online portals, contacting sellers directly, and working with a real estate agent or brokerage. When you’re ready to move forward with a rent-to-own arrangement or any home purchase, make sure you understand your home loan options.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Are there any risks involved with rent-to-own homes?

One potential risk with rent-to-own homes is paying an option-to-buy fee that may be non-refundable if you opt not to buy the property. If the property decreases in value between signing the agreement and applying for financing, the buyer may have trouble qualifying or have to put more money toward a down payment.

What are the requirements to qualify for a rent-to-own home?

The requirements to qualify for a rent-to-own home are negotiated with the seller, but may include an upfront option-to-buy fee, credit check, and demonstrating sufficient funds to cover rent.

What happens if you can’t buy the home after renting?

If you can’t buy the home after renting, you likely won’t be able to recoup any money you’ve already paid the seller, including the option-to-buy fee and rent credit.

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Photo credit: iStock/Drazen Zigic

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.

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.

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

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