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If you’re tackling school debt and looking for ways to maximize your tax refund, one avenue to consider is the student loan interest deduction. This benefit allows you to take a tax deduction for the interest you paid on student loans that you took out for yourself, your spouse, or your dependents. The deduction can lower how much of your income is taxed, which could result in a lower overall tax bill.

However, there’s a limit to how much you can deduct each tax year, and you must meet certain criteria in order to get the deduction. Let’s look at how the student loan interest deduction works and how to qualify for it.

Are Student Loan Payments Deductible?

Typically, when you repay a student loan, your monthly payment goes toward the original amount you borrowed plus origination fees (the loan principal) and the amount a lender charges you to borrow it (interest). With the student loan interest deduction, you are only allowed to deduct the amount you paid in interest, not the full amount of the loan payment.

Is Student Loan Interest Deductible?

The student loan interest deductible allows you to subtract up to $2,500 or the total amount of interest paid on student loans — whichever is lower — from your taxable income. Private and federal loans may qualify for this benefit. The deduction is considered “above the line,” which means you don’t have to itemize your taxes to take advantage of it.

Note that there are income phaseouts based on your modified adjusted gross income (MAGI). A borrower can claim the full credit if their MAGI is $80,000 or less ($160,000 or less if you’re filing jointly). The deduction is gradually reduced if your MAGI falls between $80,000 and $90,000 ($160,000 and $180,000 if you’re filing jointly). The deduction is eliminated for borrowers with a MAGI of more than $90,000 ($180,000 or more if you’re filing jointly).


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Who Can Deduct Student Loan Interest?

Not everyone is able to claim the student loan interest deduction. In order to be eligible for it, you must meet certain criteria:

•   You paid interest on a qualified student loan for you, your spouse, or your dependents in the previous tax year. (A qualified student loan is a loan taken out to pay for qualified education expenses like tuition, housing, books, and supplies. The loan must be used within a “reasonable period” after it’s taken out.)

•   You’re legally required to pay interest on a qualified student loan.

•   Your MAGI in the 2023 tax year is less than $90,000 (or less than $180,000 if you’re filing jointly).

•   Your filing status is anything except married filing separately.

•   If you’re filing taxes jointly, neither you nor your spouse can be claimed as a dependent on someone else’s tax return.

Your eligibility may be impacted if your employer made payments on your student loans as part of a work benefit.

What to Know About the Student Loan Interest Deduction Form

If you pay $600 or more in interest on qualified student loans during a tax year, your loan servicer should send you IRS Form 1098-E. This student loan tax form is usually sent out around the end of January.

If you don’t receive a 1098-E form, you should be able to download it from your loan servicer’s website. To find out who your loan servicer is, log on to the Federal Student Aid website, and the information will be listed in your dashboard. You can also call the Federal Student Aid Information Center at 800-433-3243.

Keep in mind that if you didn’t make payments on your federal student loans because of the Covid-related payment pause — or if you didn’t pay $600 in interest during the tax year — you may not get a 1098-E form. However, you can contact your servicer to find out how much interest you paid during the year if you’re planning to report it on your taxes.

Recommended: How Student Loans Could Impact Your Taxes

Additional Education Tax Breaks

The student loan interest deduction isn’t the only benefit worth knowing about. You may also want to see if you qualify for certain education tax credits, which represent a dollar-for-dollar reduction in your overall tax burden. They can directly lower the tax amount you owe. Here are two to consider.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a credit for tuition and other qualified educational expenses paid during the first four years of a student’s college education. The credit is worth up to $2,500 per eligible student. Once your tax bill hits zero, you could earn 40% of whatever remains (up to $1,000) as a tax refund.

You must meet certain requirements in order to qualify for the AOTC. You must:

•   Pursue a degree or other recognized education credential

•   Be enrolled at least half time for at least one academic period beginning in the tax year

•   Have no felony drug convictions at the end of the tax year

•   Haven’t claimed the AOTC for more than four tax years

As with the student loan interest deduction, your income matters. To claim the full credit, your MAGI must be $80,000 or less ($160,000 or less if you’re filing jointly) in the 2023 tax year. The credit amount begins to decrease if your MAGI falls between $80,000 and $90,000 (over $160,000 but less than $180,000 if you’re filing jointly). The credit is eliminated if your MAGI is over $90,000 ($180,000 if you’re filing jointly).

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) works a little differently. The credit is worth 20% of the first $10,000 of qualified educational expenses, or a maximum of $2,000 per year. Unlike the AOTC, which only applies to the first four years of a student’s college education, the LLC includes undergraduate, graduate, and professional schools, and courses needed to acquire job skills. There’s no limit to the number of years you can claim it.

However, the LLC has a lower income limit, which means it could be more difficult to qualify for. For instance, in 2022, the credit amount gradually decreased if your MAGI fell between $80,000 and $90,000 ($160,000 and $180,000 if you filed jointly) in the 2022 tax year. The credit was eliminated if your MAGI is $90,000 or more ($180,000 or more if you filed jointly).

Strategies to Lower Monthly Student Loan Payments

Borrowers looking to save beyond tax time may want to explore ways to lower their monthly student loan payments.

One option to consider is a Direct Consolidation Loan. This loan is offered through the Department of Education and lets you combine different federal student federal loans into a single loan, resulting in one monthly payment. It can also lower your monthly payment amount, allow you to switch from a variable to a fixed interest rate, and help set up loans that are eligible for forgiveness.

Another strategy to think about is refinancing your student loans with a private lender, resulting in one new loan, hopefully with a lower interest rate. Just realize that if you refinance a federal student loan, you will lose access to federal protections and programs, such as the Covid-related payment pause, the Public Service Loan Forgiveness program, and income-driven repayment plans. And if you’re refinancing to get a lower monthly payment, know that you may pay more interest over the life of the loan if you refinance with an extended term.

Recommended: 7 Tips to Lower Your Student Loan Payments

The Takeaway

The student loan interest deduction can lower how much of your income is taxed, which could result in a lower overall tax bill. Depending on your income, you can deduct up to $2,500 of the interest paid on your loans. If you earn more than $90,000 a year (or $180,000 if you’re filing jointly), you are not eligible. Education tax credits, like the American Opportunity Tax Credit and the Lifetime Learning Credit, could also help lower your tax bill. Like the student loan interest deduction, you must meet certain criteria to be eligible.

There are different strategies that may help you lower your monthly payments so you can save outside of tax time. A Direct Consolidation Loan, for example, lets you combine multiple federal loans into a single loan and switch from a variable to a fixed interest rate.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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Whether you’re a new grad who wants to get a grip on how much you owe and set up a payment plan or a working professional who wants to find out how much you’ve paid off of your total balance, keeping tabs on your student loan numbers is an important part of financial wellbeing. But for something that is so important, it can be surprisingly confusing to locate all your student loan information.

Student loan holders can view their federal student loans via the Federal Student Aid website (FSA), which is run by the Office of the U.S. Department of Education. It offers a convenient option for getting a comprehensive picture of all federal loans.

The FSA website can show you information on your federal student loans like:

•  The number and types of loans you have

•  The initial amount of your loans

•  Your current loan balances

•  The interest rates on your loans

•  If any of your loans are in default

•  The name of your loan service provider and their contact information

Using the Federal Student Aid website

In order to see your loan information on FSA, borrowers will need to create a new account; current registrants can log in with their email, phone number, or FSA ID username and password. In addition to student loans, the site also has valuable resources including repayment plans and loan counseling.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Where Do I Pay My Student Loans?

Even though you can obtain all the information about your student loans through the FSA website, that is not actually where you pay your student loans. Once you’re logged in, borrowers should be able to see the name and contact information for their student loan service provider. The student loan service provider is the entity charged with collecting loan payments.

Once you know who your student loan servicer is, you should be able to set up an online account directly with the loan servicer. Some student loan servicers also offer the option to set up automatic bill pay.

If you’d rather go old school, don’t worry, your student loan servicer’s website should also have information about making payments in other ways, like check or bank transfer.

How Do I Pay My Student Loans?

Once you know how to view your federal student loans, you may still be wondering how exactly to pay them off. Viewing your federal loans is just the first step; next, you need to strategize your student loan repayment. One of the first things you may want to do is consider your different repayment plan options. As a note, you can use our student loan calculator to get estimates of what your monthly payments could look like under the various plans.

The federal government offers a handful of options when it comes to federal student loan repayment. These repayment plans are designed for people with different types of financial situations and priorities, from those who want a straightforward way to pay off their loans in a 10-year period to those looking for income-driven repayment plans.
Here’s a quick rundown of the repayment options offered for federal student loans:

•   The Standard Repayment plan is the default loan repayment plan for federal student loans. Borrowers pay a fixed amount every month within 10 years in order to pay off their loan(s).

•   The Extended Repayment is similar to the Standard Repayment plan but instead of making payments over 10 years, the payments are extended up to 25 years.

•   The Graduated Repayment Plan also offers a 10-year repayment option. Under this plan, monthly loan payments start at a lower amount and are then increased every two years for up to 30 years.

There are also four income-driven repayment plans–— Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Under these plans, monthly payments are determined as a percentage of the borrower’s monthly income. Depending on the plan, borrowers have up to 25 years to repay their loans.

If you’re just starting to pay back your student loans after graduation, you’ll likely be automatically assigned to the Standard Repayment plan. You can change the repayment plan you are enrolled in at any time.

The federal government may also have options for you to consolidate your student loans into a Direct Consolidation Loan, which would allow you to group all your loans together into a single loan from the government, with an interest rate that’s the weighted average of all your loans’ interest rates, rounded up to the nearest eighth of a percent.

In addition to the repayment plans offered by the federal government, you might also consider refinancing your student loans with a private company. Loan refinancing pays off your current federal and private student loans with a new loan from a private lender.

The private lender will review factors like your credit history and income potential to determine your new terms. For some borrowers, student loan refinancing may result in a lower interest rate, lower monthly payments, or even a shorter repayment term—which could mean you spend less money in interest over the life of the loan. Conversely, if you refinance with an extended term, you may pay more interest over the life of the loan.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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As you prepare for life after graduation, one important step is figuring out whether you’re required to make monthly student loan payments right away or you have what’s called a “grace period.” The same question applies to students taking a break from going to school full time.

Below, we’ll explain what a grace period is, when it starts, and how you might extend yours. You’ll also find a simple financial to-do list to tackle before you start making student loan payments.

What Is a Grace Period for Student Loans?

A student loan grace period is a window of time after a student graduates and before they must begin making loan payments. The intent of a grace period is to give new graduates a chance to get a job, get settled, select a repayment plan, and start saving a bit before their loan repayment kicks in. Most federal student loans have a grace period, as well as some private student loans.

Grace periods also apply when a student leaves school or drops below half-time enrollment. Active members of the military who are deployed for more than 30 days during their grace period may receive the full grace period upon their return.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How Long Is the Grace Period for Student Loans?

The grace period for federal student loans is typically six months. Some Perkins loans can have a nine-month grace period. When private lenders offer a grace period on student loans, it’s usually six months, too.

Keep in mind that, as noted above, not all student loans have grace periods.

Does My Student Loan Have a Grace Period?

Whether you have a grace period depends on what kind of loans you have. Student loans fall into two main buckets: federal and private student loans.

Federal Student Loans

Most federal student loans have grace periods.

•   Direct Subsidized Loans and Direct Unsubsidized Loans have a six-month grace period.

•   Grad PLUS loans technically don’t have a grace period. But graduate or professional students get an automatic six-month deferment after they graduate, leave school, or drop below half-time enrollment.

•   Parent Plus loans also don’t have a grace period. However, parents can request a six-month deferment after their child graduates, leaves school, or drops below half-time.

Keep in mind: Borrowers who consolidate their federal loans lose their grace period. Once your Direct Consolidation Loan is disbursed, repayment begins approximately two months later. And if you refinance, any grace period is determined by your new private lender.

Private Student Loans

The terms of private student loans vary by lender. Some private loans require that you make payments while you’re still in school. When private lenders do offer a grace period, it’s usually six months for undergraduates and nine months for graduate and professional students.

Here at SoFi, qualified private student loan borrowers can take advantage of a six-month grace period before payments are due. SoFi also honors existing grace periods on refinanced student loans.

If you’re not sure whether your private student loan has a grace period, check your loan documents or call your student loan servicer.

Recommended: Student Loan Forgiveness for Current Students

Does Interest Accrue During the Grace Period?

During the student loan payment pause, which lasted from March 2020 to September 1, 2023, interest did not accrue on federal student loans. However, that’s not the way it usually works.

For most federal and private student loans, interest is charged during the grace period — even though you aren’t making payments on the loan. In some cases, this interest is then added to your total loan balance (a process called “capitalization”), effectively leaving you to pay interest on your interest.

In July 2023, federal regulations changed so that the interest that accrues during a borrower’s grace period is not capitalized. According to the federal student aid website, “the interest that accrues during your grace period will be added to the outstanding balance of your loan, but it will not be capitalized.”

How to Make the Most of Your Student Loan Grace Period

If you are in a financially tight spot after you graduate or during your break from school, a student loan grace period can offer much-needed breathing room. Here’s how you can put your grace period to good use:

Get Your Finances in Order

Take this time to create a new post-grad budget. Which approach you use is up to you: the 70-20-10 Rule, the Kakeibo method, zero-based budgeting. The important thing is to determine your monthly income and expenses, setting aside enough to pay down debts and save a little.

Set Up Autopay

Missed loan payments can incur penalties and hurt your credit score. Setting up autopay means one less thing you have to remember. Some student loan lenders will even discount your interest rate for setting up automatic payments (like SoFi!).

Consider Making Payments Ahead of Time

Just because you don’t have to make payments toward student loans during a grace period doesn’t mean you can’t. If you are in a financial position to make payments — even interest-only payments — during a grace period, you should. It can help keep your loan’s principal balance from growing if you have private loans and the accruing interest is capitalizing during your grace period. (Learn more in our take on making minimum student loans payments.)

Look into Alternative Repayment Plans

Once your grace period is over for your federal loan, you’ll be automatically enrolled in the Standard Repayment plan. However, if you’re concerned about making your payments, several income-driven repayment plans are available. These plans reduce your payment to a small percentage of your discretionary income. The Department of Education introduced a new IDR plan recently called the Saving on a Valuable Education (SAVE). With SAVE, borrowers get the lowest monthly payments of all the IDR plans — sometimes as low as $0. (Note that the lowest payments will arrive in July 2024, when the minimum payment for SAVE participants drops from 10% to 5% of discretionary income.)

Consider Consolidating or Refinancing Your Student Loans

These two terms are often used interchangeably, but there are important differences between them. Both consolidation and refinancing combine and replace existing student loans with a single new loan.

A Direct Consolidation Loan allows you to combine several federal student loans into one new federal loan. The resulting interest rate is the weighted average of prior loan rates, rounded up to the nearest ⅛ of a percent. However, as noted above, borrowers who consolidate their federal loans lose their grace period.

Student loan refinancing is when you consolidate your student loans with a private lender and receive new rates and terms. Your interest rate — which is hopefully lower — is determined by your credit history.

Can You Extend Your Student Loan Grace Period?

If your loan doesn’t qualify for a grace period or you want to extend your grace period, you have options. You may still delay your federal student-loan repayment through deferment and forbearance.

What’s the difference? Both are similar to a grace period in that you won’t be responsible for student loan payments for a length of time. The difference is in the interest.

When a loan is in forbearance, loan payments are temporarily paused, but interest will accrue during the forbearance period. This can lead to substantial increases in what you’ll pay for your federal loans over time. You’ll want to consider forbearance very carefully, and look into other options that might be available to you, like income-driven repayment plans. (The good news is that the interest that accrues during forbearance no longer capitalizes.)

During deferment, by contrast, interest will not accrue – at least, not for Direct Subsidized Loans, Subsidized Federal Stafford Loans, Federal Perkins Loans, and subsidized portions of Direct Consolidation Loans or Federal Family Education Loan Program (FFEL) Consolidation Loans. Other types of federal loans may still accrue interest during deferment, and that interest will capitalize upon exiting deferment unless you were enrolled in an income-driven repayment plan.

While grace periods are automatic, you’ll need to request a student loan deferment or forbearance and meet certain eligibility requirements. In some cases — during a medical residency or National Guard activation, for example — a lender is required to grant forbearance.

The Takeaway

Federal student loan grace periods are typically six months from your date of graduation, during which you don’t have to make payments. Most federal student loans have grace periods (though sometimes they’re dubbed “deferments” instead). Private student loan terms vary by lender. However, some lenders, like SoFi, match federal grace periods for undergrad loans.

During your grace period, you may want to make payments anyway, even interest-only payments, to prevent your balance from growing. The grace period is a good time to create a new budget, choose a repayment plan, and set up autopay. Student loan payments and interest were on pause between March 2020 and September 2023, but they have resumed.
If you have trouble making your payments, you have options, from income-driven repayment to consolidation to refinancing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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Buying a house at auction could be a great opportunity to scoop up a deal on a property. When homes are auctioned off, either due to foreclosure or other reasons, the highest bidder gets the property. Once the property is yours, you could move in, rent it out, or fix and flip it.

How does a house auction work? In terms of the mechanics, they’re not that different from other types of auctions. If you’ve ever been to an estate auction or charity auction, for example, then you might already have an idea of what to expect. But the dollar amounts are likely higher than you would encounter in a typical auction, so if you’re considering buying a house at auction, it’s wise to study the landscape before you start. Here’s what you need to know.

What Are House Auctions?

An auction is a sale that’s open to the public in which something is sold to the highest bidder. House auctions are regulated by state laws. An auction house or company can run the auction on behalf of whoever owns the home, which may be a bank, lender, or individual. How does an auction house work? Auction companies typically get a share of the sale proceeds in exchange for running the auction.

Real estate auctions can save buyers the time and stress of house-hunting for weeks or months on end. If you’re paying cash for the home — and most auction winners do — you don’t have to go through the home mortgage loan process either.

Why Are Some Houses Sold at Auction?

There are different reasons why a home may be sold at auction, but it’s often due to financial hardship on the part of the owner. For example, a home could be auctioned for sale if the owner:

•   Defaulted on the mortgage payments and the home is in foreclosure

•   Agreed to a short sale with the bank in order to avoid foreclosure

•   Failed to make property tax payments

•   Had their property seized as part of a government forfeiture

•   Didn’t pay homeowners association fees as agreed

In other instances, a homeowner may decide to put a property up for auction simply to unload it quickly. If someone inherits a home, for instance, they might decide to auction it off so they can walk away with cash in hand rather than listing the property on the market and waiting for it to sell.

Recommended: What Is a HUD Home?

How Do Auctions Work?

How does an auction work for a house? It’s not that different from any other type of auction. The auction company can announce the date and time of the auction beforehand, giving prospective bidders a chance to research the details of the property. People place bids on the property, either in person or online, by a prearranged deadline, and the person submitting the highest bid wins.

Types of Auctions

House auctions can be absolute, minimum bid, or reserve. How the auction is structured can depend on the seller’s preferences. Here’s how each type of auction works.

•   Absolute auction. In an absolute auction, the property is sold to the highest bidder. Unless there are no bidders at all, a sale is guaranteed.

•   Minimum bid auction. In a minimum bid auction, the auction company sets a minimum bid amount. Bidders must then submit starting bids that are equal to or above that amount.

•   Reserve auction. In this scenario, a minimum bid is not published but the seller reserves the right to reject any bids that don’t meet their reserve price — sometimes as much as several days after the auction concludes. This means there is no guarantee that the property will actually be sold, even to the highest bidder.

House auctions can be held online or in person. The format may depend on the auction house or again, the seller’s preferences.

Most auctions, including house auctions, also involve a buyer’s premium in addition to the so-called “hammer price” (the winning bid). The buyer’s premium is typically a percentage of the hammer price, usually under 10%. The premium is not part of your bid, but you should know what it is and factor that into your overall budget for bidding so that you don’t exceed your resources.

Types of Bids

In addition to there being different types of house auctions, there can also be different types of bids. The seller has the option to choose whether they’d like bids to be blind or open.

•   Blind bids. In a blind bid auction, bids are not disclosed. In other words, you won’t know what the person next to you is bidding. This type of bidding requires buyers to be able to make an educated guess in order to avoid overpaying for a property.

•   Open bids. In an open bid auction, bidders can see what price everyone else is offering for a property. This type of arrangement offers transparency and makes it less likely that you’ll overbid, however, it can lead to a bidding war if there’s a lot of competition for a property.

If you’re researching how buying a house at auction works, it’s important to know which type of bid arrangement the auction house uses beforehand. Otherwise, you could end up in a situation where bidding gets tricky and you risk going over budget or losing the property.

How Much Should I Bid?

There is no simple answer to this question, as the amount you’ll need to bid to win a house at auction can depend on the terms of the auction itself. If you’re in a minimum bid auction, for instance, then you’ll need to bid at least enough to meet the seller’s base requirements. However, you may need to bid well above the minimum to win the auction.

Doing your research before auction day can help you get a better idea of how much to bid on a house at auction. If you know, for example, that there’s still $100,000 remaining on the mortgage of a foreclosed home then you might set that amount as your maximum bid if there is no minimum.

However, you’d also want to know what the home is worth. If the property’s appraised value is only $70,000, then you’d likely want to adjust your maximum bid down. The more you know about the property, the easier it becomes to establish your minimum and maximum thresholds for bidding.

Example of a House Auction

How does buying a house at auction work in real life? Again, it can depend on several factors, including the state the auction is being held in, the auction company that’s being used, the seller’s preferences, and the home itself. Here’s an example of what an absolute, open-bid auction might look like.

You, along with other prospective buyers, are bidding on a home with no minimum. You know from your research that the property has an appraised value of $80,000 so you decide your maximum bid will be $70,000. Another buyer makes an opening bid of $30,000, which is followed by bids of $35,000, $42,000, $53,000, and $60,000 from the remaining bidders.

At this point, you decide to bid $63,000, which is still under your maximum bid threshold. As the auction continues, buyers one and two stop making new bids. Buyer three counters with $65,000 and you bid $67,000. Buyer three bumps their bid to $69,000, which prompts you to go to $70,000.

If there are no more bids, then you win the property and move on to the next step, which is to arrange payment with the auction company. If buyer three counters with $72,000, you’d need to decide if you want to go above your maximum bid or let the property go.

Buying a House at Auction: In Person vs. Online

Auction companies can host home auctions in person or online. The process is still largely the same, though there are some differences to know.

In Person

At an in-person auction, you and other interested bidders will meet at an appointed date, time, and place to make your bids. An auctioneer will run the auction and accept bids, according to the seller’s preferences. Should you win an in-person home auction, you’ll need to make arrangements for payment that day.

Attending an in-person auction can be more stressful if you’re in an open bidding situation and it starts to get competitive. You might be driven by emotion to make a bid that you otherwise wouldn’t if you felt less pressure to secure a particular property.

Online

Online house auctions also require you to show up at an appointed day and time to place your bids but you’re able to do it from the comfort of home or wherever you happen to be at the moment, as long as you have a strong internet connection. You and other buyers can make bids on the property and again, the winner gets the home.

Buying a house at auction online may be more convenient if you’re not able to go to the auction site in person. You could bid on homes on your lunch break at work or while you’re waiting in the carpool line to pick up kids from school. You may feel less pressure since you’re not surrounded by other eager buyers shouting out bids.

How to Find Real Estate Auctions

There are several ways to find real estate auctions near you, starting with an online search. You can visit real estate auction websites and filter for properties near you by your current location. Auction websites may also allow you to filter by property type or opening bid so you can narrow down your search to find properties that fit your budget. The number of properties available is driven in part by foreclosure rates in each state.

You can also look for home auctions near you using other means, including:

•   Craigslist

•   Facebook

•   Local newspaper advertisements

•   County treasurer or tax assessment notices online

•   County court websites

If you know a local real estate agent, you might also contact them to ask if they know of any upcoming property auctions. Finally, you can ask around with friends, family, or coworkers to see if anyone in your circle has a lead on a home that may be going up for auction.

What Bidders Need to Know

Before buying a house at auction, there are a few rules to be aware of. If you’re a first-time homebuyer or investor, here’s what you’ll need to know.

•   You don’t need a real estate agent to buy a house at auction, though it might be helpful to talk to one informally about how the auction works or the details of a home you’re interested in.

•   Houses sold at auction are usually as-is, meaning that if you buy a home that needs repairs, you’re responsible for making them.

•   Depending on the reason for the auction and who the seller is, you may not be able to get a full home inspection (or any inspection) before buying.

•   You may need to bring cash to the auction house to make a down payment or pay in full for any properties you win.

•   If you’d like to attend a house auction online, you may first need to demonstrate to the auction company that you’re a qualified, legitimate buyer.

•   Failing to follow through on the purchase after winning can result in the loss of any down payment or deposit you’ve made and you could also be barred from participating in future auctions.

It’s usually a good idea to read through the auction company’s policies beforehand so you know what obligations you have in attending the auction and if you win a bid.

Pros and Cons of Real Estate Auctions

Should you buy a house at auction? There are some advantages and disadvantages involved. On the pro side, you could buy a home for much less than what you could purchase one for on the open market. Homes that sell at auction may sell for below their appraised value, which could make it easier to find a bargain on a property. That might appeal to you if home prices are where you live have put home buying out of reach.

How much money you can save when buying a house at auction can depend on how motivated the seller is to get rid of it as well as the overall demand for properties in that area. When you compare the cost of living by state, the cost of living in California is much higher than other areas, largely because of how competitive the housing market is.

In terms of the downsides, most homes at auction are sold as-is. You run the risk of buying a home that looks like a great deal on paper, only to find out that it needs extensive repairs in order for it to be livable. If you’re trying to make some quick money with a fix and flip investment, for example, the final profit may fall short of your goals.

Another concern is ensuring a clear title on the property, particularly if it is in foreclosure or bank-owned. Order a title report on the property and look for secondary mortgage or tax liens. Sometimes the auction agreement will make the buyer responsible for these costs, so it’s a good idea to read the agreement carefully and to buy title insurance as well.

Unless the auction house offers a financing option, you’ll need to have cash on hand to complete the purchase. Coming up with tens of thousands of dollars to buy a home in cash may not be realistic for the average buyer. Last but not least, house auctions aren’t guaranteed. You’ll still need to go through escrow and closing on the property and, during that time, if the original homeowner is able to work out an agreement with the lender or bank that allows them to keep the home, your efforts to try to buy it could come to nothing. Think of winning a house auction as winning the right to buy the house, not winning the house itself.

Recommended: What Is a VA Loan?

Tips to Buying Auction Homes

If you’re interested in how to buy a foreclosed home or bank-owned property at auction, it pays to do your research as mentioned. For example, you might ask these questions before the auction.

•   Why is the home being sold?

•   Is it a foreclosure or bank-owned?

•   Will I be able to inspect the property beforehand or is it being sold as-is?

•   What type of auction is it and are bids open or blind?

•   How much cash will I need to bring? How much would I need to have easily at hand in the event that I have the winning bid?

•   Does the auction house allow financing?

•   What happens if the owner is able to reclaim the property?

The other tip to keep in mind is to know what you can comfortably bid, based on your budget. A real estate agent can also give you some valuable insight into the condition of the local housing market, which may make it easier to identify a good or bad buy.

If you go into a house auction without a firm limit set, it’s easy to go over budget and potentially end up paying too much for a property.

Risks of Buying Houses at House Auctions

House auctions are not risk-free, as you’re not always guaranteed total transparency. Some of the biggest risks to be aware of include:

•   Buying a home as-is, only to find out it needs a lot of work to make it livable. Big-ticket problems that may not be immediately visible might include mold, a defective septic system, or electrical problems.

•   Getting caught in a bidding war and paying too much for a property

•   Tying up all of your cash in an investment property that may take months to become profitable

•   Having your bid superseded if the homeowner is able to work out a last-minute agreement with the bank or lender

Being aware of the risks can help you to decide if buying a house at auction is right for you. And remember that there are other ways to invest in property, without having to own it directly. For example, you might collect dividends from a real estate investment trust (REIT), hold real estate mutual funds or exchange-traded funds (ETFs) in your brokerage account, or buy property alongside other investors through a real estate crowdfunding platform. If you are open to investing in commercial real estate, real estate options contracts are, well, another option.

The Takeaway

If you’re interested in how to buy a house on auction for yourself, it’s important to know what the risks are and what the process involves. At the end of the day, you might find that it’s easier to go the traditional route for buying a home.

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

FAQ

What are the advantages of buying a house on auction?

Buying a house at auction could save you money if you’re able to pay less for a property than you would on the open market. Home auctions can offer opportunities for investors or would-be first-time buyers to save money on the purchase of a property.

What is the benefit of an auction house?

Houses sold at auction can be more affordable than homes sold on the open market. That’s an advantage if you’d like to buy a home, either to live in or as an investment property, but high prices are keeping you out of the housing market.

What happens when you bid at an auction?

When you make a bid on a house at auction, your bid can be topped by another prospective buyer or accepted if it’s the highest bid. If you make a winning bid, then you can move to the next phase, which involves signing the necessary paperwork and arranging payment to assume ownership of the home. \

Photo credit: iStock/bymuratdeniz

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

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