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If you’re looking for a well-priced home and wouldn’t mind a fixer-upper, you might benefit from a HUD home, which is a property that was foreclosed on and is now being sold by the US Department of Housing and Urban Development.

HUD homes can offer affordable deals, especially to those buyers who don’t mind fixing up a property, and you might find lower down payments and help with closing costs in some cases. But HUD houses aren’t for everyone, so read on to learn the details and the pros and cons.

What Is the Department of Housing and Urban Development?

HUD was created in 1965 as part of President Lyndon B. Johnson’s war on poverty. Its current stated mission is “to create strong, sustainable, inclusive communities and quality affordable homes for all.”

HUD oversees mortgage insurance programs for lower- and moderate-income families; public housing, rental subsidy and voucher programs; and many others. In this way, it helps to improve deteriorating properties.

💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

What Are HUD Homes?

Here’s the definition of a HUD home: The one- to four-unit residential properties that HUD sells come into HUD’s possession as a result of defaults on mortgages insured by the Federal Housing Administration (FHA), which is part of HUD.

Owner-occupants get first dibs, after which bidding opens to investors. HUD pays the lender what is owed and then sells the properties to the public to make up the deficit from the foreclosure.

You can look at available properties at the HUD Home Store but must have a HUD-approved real estate broker or agent submit a bid for you.

Recommended: FHA Loan Mortgage Calculator Table

Who Can Qualify for a HUD Home?

If you have the cash or can qualify for a loan, you may buy a HUD home.

Following the priority bidding period for owner-occupants, HUD-approved nonprofit organizations, and government entities, unsold properties are available to all buyers, including investors.

If you will be an owner-occupant, you must plan to live there for at least a year and can’t have purchased another HUD home within the last two years.

If you will need an FHA loan or other mortgage, expect to pass income and credit checks.

If you are buying as an investor, you’ll need to wait 30 days before bidding on a single-family HUD home listed as “insured” or “insured with escrow,” up from 15 days as of January 3, 2024. Homes with those designations are eligible for FHA-insured financing, meaning they may only need cosmetic repairs or nonstructural repairs of up to $10,000.

If the home is listed as “uninsured,” buyers cannot get a typical FHA loan, but they may be able to use an FHA 203k loan — a program that allows buyers to make repairs after closing and finance the cost into their loan.

Recommended: The Most Affordable Places to Live in the US

HUD Assistance Programs

HUD sweetens the pot to help make the dream of buying a home come true.

•   With the Dollar Homes program, low- or moderate-income families can purchase a HUD-owned home for $1. The Dollar Homes are single-family homes that have been in foreclosure and the FHA has been unable to sell for six months. The vacant homes have a market value of $25,000 or less.

•   The Good Neighbor Next Door Program rewards law enforcement officers, K-12 teachers, firefighters, and emergency medical technicians with a 50% discount on the list price of the home. It must be the homebuyer’s principal residence for three years.

HUD requires that you sign a second mortgage and note for the discount amount. No interest or payments are required on this “silent second,” provided that you fulfill the three-year occupancy requirement.

•   You might also find that the FHA HUD $100 Down Program is available in some areas. This involves buying a home with just $100 down vs. the usual requirement.

Buying a HUD Home

Buying a home is a big deal, especially if you’re a first-time homebuyer. How to buy a HUD home, though? Know that buying a HUD home is different from purchasing other properties. For one thing, it has to be sold at auction. If you get the winning bid, HUD contacts your agent and gives you a settlement date, often about 30 to 60 days to close.

Do keep in mind that with HUD, you get what you get. These homes are sold as is. At least go in with your eyes wide open about what you’re purchasing.

Finding HUD Homes

HUD homes exist in their own universe. You can’t find them just anywhere like other homes. You can find them on the agency’s website, the HUD Home Store, and in links to listings of homes being sold by other federal agencies.

Financing

You can finance a HUD home like any other home, though the lender will need to be HUD-approved. You may want to start by finding down payment assistance programs.

Also search for options like an FHA loan, which may be easier to obtain if you have credit issues, costs may be lower, and a lower down payment may be required than elsewhere. You might want to look into FHA 203k loans as well.

If you’re a veteran, a current member of the armed forces, or the spouse of a service member, consider looking into VA loans that might offer you better terms than other loans.

Getting preapproved for a loan is a good practice generally and particularly when you’re going after a HUD home. You’ll want to be ready to pounce if you get the green light on the home you’ve got your heart set on.

Recommended: Home Loan Help Center

HUD Homes vs Conventional Homes

Ready to compare HUD homes vs. conventional homes? Here’s the intel in chart form.

Pros and Cons of HUD Homes

Now, here’s how the pros and cons of HUD homes stack up.

First, the pros of HUD homes:

•   A low down payment can make purchasing a home more affordable.

•   There’s help with closing costs, which can make a big difference in home-buying expenses.

•   Homes may be priced below market value, making them more within reach for limited budgets.

•   Also, you may get a jump on the marketplace because investors must wait 30 days to shop.

As for the cons, here are the key ones:

•   Home is sold in “as is” condition, which can mean there’s a lot of work (DIY projects or otherwise) to be done.

•   You must use a HUD-approved real estate agent or broker, which can limit options.

•   Limited supply, sold at auction, so you may not have your pick of properties.

•   There are restrictions. As the owner-occupant, you need to live there for at least a year (three for the Good Neighbor program), and you can’t purchase another HUD home for at least the next two years.

The Takeaway

Whether you’re buying a HUD home for your own use or as an investment, getting financing lined up is essential. Getting pre-qualified and then pre-approved for a home loan lay the groundwork.

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 does HUD do?

HUD is an agency of the federal government that is responsible for national policy and programs that address housing needs in the US.

How do you qualify for HUD housing in California?

Requirements will vary depending on where in the state you live, so check with your local housing authority. For example, a family’s gross annual income must be below 50% of the Area Median Income (AMI) in Los Angeles County.

What are the different types of HUD?

There are several types of HUD programs, including FHA Mortgage and Loan Insurance, Section 8, Public Housing, and Fair Housing Assistance Program.

Photo credit: iStock/CatLane

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.

SOHL0124001

A 5/1 adjustable-rate mortgage (ARM) is a mortgage whose interest rate is fixed for the first five years and then adjusts once a year. Adjustable-rate mortgages often have lower initial interest rates than other loans and they can be a good choice for a short-term homeowner.

While most borrowers will opt for a conventional 30-year fixed-rate mortgage, some buyers are drawn to the low teaser rate of an ARM.

Here’s a closer look at adjustable-rate mortgages and the 5/1 ARM in particular.

Adjustable-Rate Mortgages, Defined

An adjustable-rate mortgage typically has a lower initial interest rate — often for three to 10 years — than a comparable fixed-rate home loan.

Then the rate “resets” up (or down) based on current market rates, with caps dictating how much the rate can change in any adjustment.

With most ARMs, the rate adjusts once a year after the initial fixed-rate period.

Recommended: Fixed Rate vs. Adjustable Rate Mortgages: Key Differences to Know

What Is a 5/1 ARM?

Adjustable-rate mortgages come in the form of a 3/1, 7/1, 10/1 (the rate adjusts once a year after the initial fixed-rate period), 10/6 (the rate adjusts every six months after 10 years), and more, but the most common is the 5/1 ARM.

With a 5/1 ARM, the interest rate is fixed for the first five years of the loan, and then the rate will adjust once a year — hence the “1.” Adjustments are based on current market rates for the remainder of the loan.

Because borrowers may see their rate rise after the initial fixed-rate period, they need to be sure they can afford the larger payments if they don’t plan to sell their house, pay off the loan, or refinance the loan.

How 5/1 ARM Rates Work

An ARM interest rate is made up of the index and the margin. The index is a measure of interest rates in general. The margin is an extra amount the lender adds, and is constant over the life of the loan.

Caps on how high (or low) your rate can go will affect your payments.

Let’s say you’re shopping for a 5/1 ARM and you see one with 3/2/5 caps. Here’s how the 3/2/5 breaks down:

•   Initial cap. Limits the amount the interest rate can adjust up or down the first time the payment adjusts. In this case, after five years, the rate can adjust by up to three percentage points. If your ARM carries a 4.5% initial rate and market rates have risen, it could go up to 7.5%.

•   Cap on subsequent adjustments. In the example, the rate can’t go up or down more than two percentage points with each adjustment after the first one.

•   Lifetime cap. The rate can never go up more than five percentage points in the lifetime of the loan.

When Does a 5/1 ARM Adjust?

The rate will adjust annually after five years, assuming you don’t sell or refinance your home before you hit the five-year mark.

Pros and Cons of 5/1 ARMs

Borrowers should be aware of all the upsides and downsides if they feel a call to ARMs.

Pros of a 5/1 ARM

A lower interest rate up front. The initial five-year rate is usually lower than that of a fixed-rate mortgage. This can be an advantage for new homeowners who would like to have a little extra cash on hand to furnish the home and pay for landscaping and maintenance. And first-time homebuyers may gravitate toward an ARM because lower rates increase their buying power.

Could be a good fit for short-term homeowners. Some buyers may only need a home for five years or less: those who plan to downsize or upsize, business professionals who think they might be transferred, and the like. These borrowers may get the best of both worlds with a 5/1 ARM: a low interest rate and no risk of higher rates later on, as they’ll likely sell the home and move before the rate adjustment period kicks in.

A 5/1 ARM borrower may be able to save significantly more cash over the first five years of the loan than they would with a 30-year fixed rate loan.

Modern ARMs are less dicey. The risky ARMs available before the financial crisis that let borrowers pay just the interest on the loan or choose their own payment amount are no longer widely available.

Potential for long-term benefit. If interest rates dip or remain steady, an ARM could be less expensive over a long period than a fixed-rate mortgage.

Cons of a 5/1 ARM

Risk of higher long-term interest rates. The good fortune with a 5/1 ARM runs out after five years, with the possibility of higher interest rates. We’ve all seen how rising inflation affects mortgage rates. While no one can see what the future holds, it’s possible that the loan could reset to a rate that leads to mortgage payments the borrower finds uncomfortable or downright unaffordable.

Higher overall home loan costs. If interest rates rise with a 5/1 ARM, homeowners will pay more over the entire loan than they would have with a fixed-rate mortgage.

Refinancing fees. You can refinance an ARM to a fixed-rate loan, but expect to pay closing costs of 2% to 6% of the loan. A no-closing-cost refinance offers no real escape: The borrower either adds the closing costs to the principal or accepts an increased interest rate.

Possible negative amortization. Payment caps limit the amount of payment increases, so payments may not cover all the interest due on your loan. The unpaid interest is added to your debt, and interest may be charged on that amount. You might owe the lender more later in the loan term than you did at the start. Be sure you know whether the ARM you are considering can have negative amortization, the Federal Reserve advises.

Possible prepayment penalty. Prepayment penalties are rare now, but check for any penalty if you were to refinance or pay off the ARM within the first three to five years.

Recommended: Mortgage Prequalification vs. Preapproval

Comparing Adjustable-Rate Mortgages

When you take out a mortgage, you choose a mortgage term. Most fixed-rate mortgage loans, and ARMs, are 30-year loans.

5/1 ARM vs. 10/1 ARM

A five-year ARM has a five-year low fixed rate followed by 25 years with an adjustable rate. A 10-year ARM offers 10 years at a fixed rate, then 20 years of adjustments.

In general, the shorter the fixed-rate period, the lower the introductory rate.

5/1 vs. 7/1 ARM

Same song, different verse. The 7/1 ARM has a seven-year fixed rate instead of five for the 5/1 ARM. The initial interest rate on the 7/1 probably will be a little higher than the 5/1.

Is a 5/1 ARM Right for You?

Is a 5/1 ARM loan a good idea? It depends on your finances and goals.

In general, adjustable-rate mortgages make sense when there’s a sizable interest rate gap between ARMs and fixed-rate mortgages. If you can get a great deal on a fixed-rate mortgage, an ARM may not be as attractive.

If you plan on being in the home for a long time, then one fixed, reliable interest rate for the life of the loan may be the smarter move.

An ARM presents a trade-off: You get a lower initial rate in exchange for assuming risk over the long run.

Your best bet on ARMs?

•   Talk to a trusted financial advisor or housing counselor.

•   Get information in writing about each ARM program of interest before you have paid a nonrefundable fee.

•   Ask your mortgage broker or lender about anything you don’t understand, such as index rates, margins, and caps. Ask about any prepayment penalty.

•   If you apply for a loan, you will get more information, including the mortgage APR and a payment schedule. The annual percentage rate takes into account interest, any fees paid to the lender, mortgage points, and any mortgage insurance premium. You can compare APRs and terms for similar ARMs.

•   It’s a good idea to shop around and negotiate for the best deal.

The Takeaway

A 5/1 ARM offers borrowers a low initial rate but risk over the long run. Tempted by a sweet introductory rate? It’s a good idea to know how long you plan to stay in the home and to be clear about how rate adjustments might affect your monthly payments.

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

FAQ

Is it a good idea to have a 5/1 ARM?

Whether a 5/1 ARM is a good idea for you will depend on how long you plan to stay in the house. If you think you will move or refinance before the initial low interest rate ends after five years, then a 5/1 ARM could be a good fit for you.

Can you pay off a 5/1 ARM early?

Maybe. Some mortgages have prepayment penalties, meaning you would pay a fee if you refinanced or paid off the mortgage during the first five years. Prepayment penalties are not as common now as they were in the past, but they do still exist so read the fine print in your loan documents.

How long does a 5/1 ARM last?

Most mortgages, even adjustable-rate mortgages, are 30-year loans. A 5/1 ARM would have one fixed payment for the first five years, then the monthly payment would adjust annually for the remaining 25 years of the loan.

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.

SOHL-Q324-032

You can buy a car with a credit card in certain circumstances, or at least cover a portion of the purchase, such as the down payment. However, it’s likely not a good idea. That’s because you’ll face high credit card interest charges and potentially fees, and you’ll drive up your credit utilization (that is, if your credit limit is even high enough to cover a car purchase).

Before swiping your card for a new set of wheels, pause to ask yourself whether this is really the best way for you to purchase your vehicle. There are alternative options to help you purchase a car that may not cost you to the same extent.

What to Know About Buying a Car With a Credit Card

In short, the benefits of using a credit card to buy a car will likely outweigh the perks. That being said, it is possible to do — assuming your credit limit is high enough and that you can find a dealership that will accept credit card payments for car purchases. Not all dealerships do, and many that do will tack on a fee for credit card payments.

Perhaps the biggest draw to buying a car with a credit card is the potential to earn rewards. You might also be able to take advantage of a promotional offer that features 0% interest for a limited period of time. But be sure to consider those perks against the risks. If you don’t pay off your full balance before interest kicks in, you’ll be paying at a high rate — much steeper than car loans, for instance. You also could do damage to your credit if you’re late on payments or if your automobile purchase eats up too much of your credit limit.

Buying a Car With a Credit Card

If, after considering the drawbacks, you decide you want to use a credit card to buy a card, here’s a step-by-step look at how to do so.

1. See if the Dealership Takes Credit Card Purchases

You’ve decided how much you want to spend on a new car, and you’ve negotiated a fair price with a dealer. But before slapping down your plastic to buy a new or purchase a used car, you’ll first need to check with your car dealership to verify that they accept credit card purchases. Additionally, you’ll need to find out which cards they accept and how much of the total purchase price they will allow you to charge.

If you go to a dealer that won’t accept credit card purchases, or that limits the amount, you’ll have to decide whether to pay another way or to go to another place that sells the car you want and allows credit card purchases.

2. Check Your Credit Limit To Determine if It’s High Enough

If you’ve selected a car at a dealership that takes credit card payments, your next step is to check your credit limit to determine whether it’s high enough to use one card. You may need to spread out the purchase across different types of credit cards.

If your combined limits aren’t enough, you could pay the difference with a cashier’s check and still reap some of the rewards available through credit card use. Or, you could ask your credit card companies to increase your credit limits.

3. Notify Your Credit Company

It makes sense to notify your credit card issuers that you intend to use your credit cards to make a large purchase. If you don’t regularly make large purchases on your credit cards, the transaction might get flagged as potentially fraudulent and could get declined.

4. Get Strategic With Credit Card Rewards and Promos

At a car dealership that does let you pay for a car with a credit card — or at least a portion of it — you might consider using a card that offers credit card rewards. If you have cash to pay the charge before it starts accruing interest, you’re basically getting a no-interest, short-term loan while taking advantage of credit card perks.

5. Determine How You’ll Pay Off Your Balance in Time

Before handing over your credit card to buy a car, make sure you know how you’ll pay off your balance. Ideally, you’ll pay it off in full by the statement due date, so as to avoid accruing interest on what’s likely already a hefty charge. Or, if your credit card has a 0% introductory APR offer that you’re taking advantage of, determine how you’ll pay off the full balance before the standard interest rate kicks in and interest charges start accruing.

If you’re not sure you can pay off your car before interest kicks in, you might reconsider whether you realistically can use a credit card to buy a car. Instead, you might consider ways to save money on your car purchase, such as buying a high-mileage car or weighing the cost of leasing vs. buying a car.

Recommended: What Is a Charge Card?

Why Some Car Dealers Don’t Accept Credit Cards

On the surface, it might seem odd that auto dealers wouldn’t accept credit cards. After all, they want to make a sale, right? Of course they do, but, like other merchants, auto dealers must pay credit card processing fees for each credit card transaction they make. These fees tend to be between 1.5% and 4%, and they can add up pretty quickly when you consider that cars can cost in the tens of thousands of dollars. By rejecting credit cards, dealers can save themselves the expense and hassle of paying these fees.

If a dealer that normally doesn’t allow credit card purchases makes an exception, expect them to tack on convenience fees of a few percentage points to help them cover the cost of the transaction. Pay close attention to these fees because they may offset any benefit you might gain from using a rewards card.

If a dealer that normally doesn’t allow credit card purchases makes an exception, expect them to tack on convenience fees of 2% to 4% to help them cover the cost of the transaction. Pay close attention to these fees because they may offset any benefit you might gain from using a rewards card.

How Much Will Buying a Car With a Credit Card Cost You?

The cost to buy a car with a credit card can exceed the vehicle’s sticker price. For one, it’s likely that you’ll see a convenience fee added to your bill. Some dealerships may have this already baked into their prices, but for others that don’t commonly accept credit cards, they’ll add it on themselves to cover their processing costs. Typically, convenience fees run anywhere from 2% to 4% of the purchase amount, which may be enough to offset any credit card rewards you’d earn.

Second, your costs could increase thanks to interest charges. If you buy a car with a credit card and then don’t immediately pay off the full statement balance, interest can start to accrue. Average credit card interest rates are around 24% as of January 2025. That can start adding up fast on a car purchase that’s likely in the tens of thousands of dollars.

Pros of Car Buying With a Credit Card

Under certain circumstances, using a credit card to buy a vehicle may be a strategy you’d consider, especially if you have enough money to pay off the balance in full when your statement comes. Here’s a look at the upsides to buying a car with a credit card.

Fast and Easy Way to Buy a Car

With a credit card, you’ll have a fast and easy way to purchase your car of choice. You can skip the hassle of filling out loan paperwork and waiting to find out if you’re approved.

Potential to Earn Rewards

By purchasing a car with a credit card, you may earn rewards — something you wouldn’t get if you simply used a cashier’s check to buy the car. But before you get too swept up in your purchase’s rewards potential, see if the amount you’ll earn in rewards will offset how much you may end up paying in fees or interest.

Take Advantage of a Zero-Interest Promo

You may have slightly longer to pay off your purchase if you use a no-interest credit card. Often, these 0% interest offers last for a certain period of time, usually anywhere from six to 21 months. In order to avoid interest payments, you must finish paying off your vehicle in that time period. Still, it offers a little leeway.

Keep in mind that this strategy may be riskier than paying off your full balance immediately though. If, for some reason, you can’t pay off the balance within the introductory no-interest period due to unforeseen circumstances, the card will revert to its regular rate, which may be quite high. Should that happen, the situation can go downhill from there. Some credit card companies will then charge the full interest rate on the entire purchase, not just on the remaining balance.

Recommended: When Are Credit Card Payments Due?

Cons of Car Buying With a Credit Card

In contrast to the few upsides, there are a number of major drawbacks to turning to your credit card to make a car purchase.

High Credit Card Interest Rates

The biggest reason not to buy a car with your credit card is that credit card interest rates are typically much higher than other available options. The average credit card APR was 24% in mid January 2025. In contrast, for those with prime credit scores, the average interest rate for an auto loan to purchase a new car was 6.70%, while for used cars it was 9.63%.

Credit Card Fees

You also might get stuck with some costly fees by buying a car with a credit card. For starters, there’s the previously mentioned fee that the dealership will likely charge you for the convenience of using your credit card. As noted, convenience fees typically run 2% to 4% of the purchase amount.

That’s not the only fee you might run into either. For example, let’s say that your strategy is to purchase a car on your current credit cards, then transfer the balance to a zero-interest credit card. Besides the challenges listed above, you may add balance transfer fees to the mix. These fees can be as high as 5%, which, on a $20,000 car, is $1,000.

Potential to Harm Your Credit Score

Another major downside of purchasing a car with a credit card is that it can majorly increase your credit utilization, which accounts for 30% of your FICO® score. With the price of a car, it can be easy to push your credit utilization ratio way past the recommended 30%, which could translate to negative effects to your credit.

Further, if you miss payments or are late making them, that could lead to further damage to your credit score.

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

No Addition to Your Credit Mix

Here’s something else to consider: Having different kinds of debt can actually help with your credit score. So using an installment loan, such as a traditional auto loan, to buy your car instead of a credit card may be helpful to your overall long-term financial situation. And if you have a good enough credit score to get approved for an auto loan with lower interest rates than the average credit card interest rate, you could come out ahead.

Other Options for Buying a Car

While technically you can pay for a car with a credit card, it might not be your best option. Here are a couple of alternatives to consider.

Auto Loan

If you decide to finance some or all or all of your auto purchase, you can apply for a car loan through the dealership or other lenders. Auto loans are typically secured loans that use the vehicle as collateral. So, if you fail to make payments, your lender has the option to repossess the vehicle to cover some of your debt.

Dealers are often able to get same-day financing approved, but there may be some pressure to buy while the salesperson takes advantage of your excitement. Banks and private lenders may take longer to approve an application, but sometimes offer better deals on terms or interest rates. Taking emotion out of the equation when buying a car will allow you to compare rates and terms to get the best deal for your financial situation.

Personal Loan

You may also want to consider buying a car with a personal loan, which is an unsecured loan that’s not backed by collateral. Personal loans can be used to cover many expenses, including the cost of buying a car.

Because they are unsecured, interest rates on personal loans may be higher than other auto financing options, depending on the applicant’s creditworthiness.

The Takeaway

While you can buy a car with a credit card, there are potential pitfalls and fees to be aware of as you make your decision about how to pay. If you find a dealership that accepts credit card payments and you decide it’s the best path for you, make sure to take the necessary steps of checking in on your credit limit, alerting your credit card company, and making a plan for prompt repayment. It might, however, be better to select another option to cover your car purchase, and reserve your credit card for other spending.

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

Do car dealers accept credit cards?

It depends. Many dealers won’t accept credit cards due to the processing fees they’d incur, but some do. In those cases, dealers may pass the cost along to the consumer in the form of a convenience fee.

Can you use a credit card for a car down payment?

It’s more common for dealers to allow you to use a credit card to pay for a portion of your purchase, such as your down payment, as opposed to the entire car purchase. Still, some dealers won’t accept credit cards at all.

Is it better to pay for a car with a credit card or loan?

It’s likely better to use a loan to pay for a credit card. That’s because loans tend to have significantly lower interest rates than credit cards.

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.

SOCC-Q125-013

Ready to buy your own home? There’s a lot to consider, especially if this is your first time applying for a mortgage and you’re carrying debt. While having debt is not necessarily a deal-breaker when you’re applying for a mortgage, it can be a factor when it comes to how much you’ll be able to borrow, the interest rate you might pay, and other terms of the loan.

Understanding how the home loan process works can help you decide whether it’s better to pay off debt or save up for a downpayment on a home. Here’s what you need to know.

How to Manage Debt before Buying a Home

Understand Your Debt-to-Income Ratio

When lenders want to be sure borrowers can responsibly manage a mortgage payment along with the debt they’re carrying, they typically use a formula called the debt-to-income ratio (DTI).

The DTI ratio is calculated by dividing a borrower’s recurring monthly debt payments (future mortgage, credit cards, student loans, car loans, etc.) by gross monthly income.

The lower the DTI, the less risky borrowers may appear to lenders, who traditionally have hoped to see that all debts combined do not exceed 43% of gross earnings.

Here’s an example:

Let’s say a couple pays $600 combined each month for their auto loans, $240 for a student loan, and $200 toward credit card debt, and they want to have a $2,000 mortgage payment. If their combined gross monthly income is $8,000, their DTI ratio would be 38% ($3,040 is 38% of $8,000).

The couple in our example is on track to get their loan. But if they wanted to qualify for a higher loan amount, they might decide to reduce their credit card balances before applying.

That 43% threshold isn’t set in stone, by the way. Some mortgage lenders will have their own preferred number, and some may make exceptions based on individual circumstances. Still, it can be helpful to know where you stand before you start the homebuying process.

Recommended: How to Prepare for Buying a New Home

Consider How Debt Affects Your Credit Score

A mediocre credit score doesn’t necessarily mean you won’t be able to get a mortgage loan. Lenders also look at employment history, income, and other factors when making their decisions. But your credit score and the information on your credit reports will likely play a major role in determining whether you’ll qualify for the mortgage you want and the interest rate you want to pay.

Typically, a FICO® Score of 620 will be enough to get a conventional mortgage, but someone with a lower score still may be able to qualify. Or they might be eligible for an FHA or VA backed loan. The bottom line: The higher your score, the more options you can expect to have when applying for a loan.

A few factors go into determining a credit score, but payment history and credit usage are the categories that typically hold the most weight. Payment history takes into account your record of making on-time or late payments, or if you’ve filed for bankruptcy.

Credit usage looks at how much you owe in loans and on your credit cards. An important consideration in this category is your credit utilization rate, which is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. Put more simply, it’s how much you currently owe divided by your credit limit. It is generally expressed as a percent. The lower your rate, the better. Many lenders prefer a utilization rate under 30%.

Does that mean you should pay off all credit card debt before buying a house?

Not necessarily. Debt isn’t the devil when it comes to your credit score. Borrowers who show that they can responsibly manage some debt and make timely payments can expect to maintain a good score. Meanwhile, not having any credit history at all could be a problem when applying for a loan.

The key is in consistency — so borrowers may want to avoid making big payments, big purchases, or balance transfers as they go through the loan process. Mortgage underwriters may question any noticeable changes in your credit score during this time.

Recommended: What Credit Score is Required to Buy a House?

Don’t Forget, You May Need Ready Cash

Making big debt payments also could cause problems if it leaves you short of cash for other things you might need as you move through the homebuying process, including the following.

Down Payment

Whether your goal is to put down 20% or a smaller amount, you’ll want to have that money ready when you find the home you hope to buy.

Closing Costs

The cost of home appraisals, inspections, title searches, etc., can add up quickly. Average closing costs are 3% to 6% of the full loan amount.

Moving Expenses

Even a local move can cost hundreds or even thousands of dollars, so you’ll want to factor relocation expenses into your budget. If you’re moving for work, your employer could offer to cover some or all of those costs, but you may have to pay upfront and wait to be reimbursed.

Remodeling and Redecorating Costs

You may want to leave yourself a little cash to cover any new furniture, paint, renovation projects, or other things you require to move into your home.

Be Aware of Housing Market Trends

Trends in the housing market may help you with prioritizing saving or paying down debt. So it’s a good idea to pay attention to what’s going on with the overall economy, your local real estate market, and real estate trends in general.

Here are some things to watch for.

Interest Rates

When interest rates are low, homeownership is more affordable. A lower interest rate keeps the monthly payment down and reduces the long-term cost of owning a home.

Rising interest rates aren’t necessarily a bad thing, though, especially if you’ve been struggling to find a home in a seller’s market. If higher rates thin the herd of potential buyers, a seller may be more open to negotiating and lowering a home’s listing price.

Either way, it’s good to be aware of where rates are and where they might be going.

Inventory

When you start your home search, you may want to check on the average amount of time homes in your desired location sit on the market. This can be a good indicator of how many houses are for sale in your area and how many buyers are out there looking. (A local real estate agent can help you get this information.)

If inventory is low and buyers are snapping up houses, you may have trouble finding a house at the price you want to pay. If inventory is high, it’s considered a buyer’s market and you may be able to get a lower price on your dream home.

Price

If you pay too much and then decide to sell, you could have a hard time recouping your money.

The goal, of course, is to find the right home at the right price, with the right mortgage and interest rate, when you have your financial ducks in a row.

If the trends are telling you to wait, you may decide to prioritize paying off your debts and working on your credit score.

Remember, You Can Modify Your Mortgage Terms

If you already have a mortgage, you may be able to make some adjustments to the original loan by refinancing to different terms.

Refinancing can help borrowers who are looking for a lower interest rate, a shorter loan term, or the opportunity to stop paying for private mortgage insurance or a mortgage insurance premium.

Consider a Debt Payoff Plan

If you decide to make paying down your debt your goal, it can be useful to come up with a plan that gets you where you want to be. Many of the financial changes would-be buyers make to save money for a home will also work to help you pay down debt. In an April 2024 SiFi survey of 500 prospective homeowners, cutting back on nonessential expenses was the most popular step — 49% of people had tried it. Almost as many (41%) had taken on an additional job or side hustle. And more than one in four people (26%) had downsized their current living situation to cut costs.

As you think about saving to pay down debt, remember that not all debt is not created equal. Credit card debt interest rates are typically higher than other types of borrowed money, so those balances can be more expensive to carry over time. Also, loans for education are often considered “good debt,” while credit card debt is often viewed as “bad debt.” As a result, lenders may be more understanding about your student loan debt when you apply for a mortgage.

As long as you’re making the required payments on all your obligations, it may make sense to focus on dumping some credit card debt.

Recommended: Beginners Guide to Good and Bad Debt

The Takeaway

Should you pay off debt before buying a house? Not necessarily, but you can expect lenders to take into consideration how much debt you have and what kind it is. Considering a solution that might reduce your payments or lower your interest rate could improve your chances of getting the home loan you want.

When you consolidate your credit card debt, you typically take out a personal loan, ideally with a lower rate than you’re paying your credit cards, and use it to pay off all of your credit cards. You then end up with one balance and one payment to make each month. This simplified the debt repayment process and can also help you save money on interest.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

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.

A mortgage servicer is a company that manages a home loan; they may send your statement and collect and process your payment every month, as well as provide customer support.

A mortgage servicer is often different from your lender, or the institution that approved your application and loaned you the funds to buy your property.

To help you understand the finer points of mortgage loan servicing, here’s a handy guide to help.

What Is Mortgage Servicing?

A mortgage servicer is the company that manages your mortgage payments. A mortgage servicer is not necessarily the same as a mortgage lender; nor is the company the holder of your mortgage note.

Because of the way the mortgage market works, a servicer is needed to ensure that all the correct parties are paid on time and that any issues with the borrower or the loan are handled properly.


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

How Does Mortgage Servicing Work?

Mortgage servicing begins after you close on your loan. At this point, a servicer may take over from the lender to manage the day-to-day needs of the loan.

The mortgage note likely will have already been sold on the secondary mortgage market to a government-backed home mortgage company such as Fannie Mae or Freddie Mac. These companies then bundle similar mortgage types and sell them as investments.

On the borrower’s side, here’s how it works: One company gives them a loan, one company holds their mortgage note, and yet another company is responsible for taking care of the administrative tasks of the loan (though some borrowers will have the same lender and servicer).

Most borrowers will only see who the company taking care of these tasks is. That’s the mortgage servicer, which collects your payments, responds to your inquiries, and ensures that the proper entities are paid, including the owner of your mortgage note and all parties that need to be paid from your escrow account.

Recommended: What Is Mortgage Underwriting?

Which Parties Are Involved in Mortgage Servicing?

Mortgage servicing has a few layers.

Servicer

The servicer collects payments and sends money to the mortgage note holder and the entities paid from an escrow account for property tax, homeowners insurance, any mortgage insurance premiums, any HOA (homeowners association) dues, etc.

Lender

When it comes to mortgage servicer vs. mortgage lender, the lender originated your loan. It may be the same entity that services your mortgage loan, but the lender also can transfer or sell the rights to service your mortgage. Even if your loan stays with the same company, the person who originated your loan won’t be who you contact when you need to make a payment.

Investor

Investors buy your mortgage when it is bundled with other mortgages of the same type from one of the government-backed home mortgage companies (such as Fannie Mae or Freddie Mac) and some financial institutions. Holders of deed in lieu of foreclosure.

If a homeowner is unable to continue payments and foreclosure is unavoidable, the servicer initiates the process and maintains the property until it is sold.

Maintain Escrow Accounts

Mortgage servicing companies are also responsible for maintaining escrow accounts.

They will take your mortgage payment, which is usually divided into principal and interest that goes to the holder of your mortgage note, and a payment into an escrow account for taxes, insurance, and any mortgage insurance and HOA dues. By maintaining the escrow account, the mortgage servicer can ensure that all the entities are paid on time.

Not all mortgages require an escrow account. Whether a new home loan will require one is among the mortgage questions to ask your lender.

Keep in Touch With Borrowers

In the event a new servicer is secured, the transfer must be done in a timely manner that enables the new servicer to comply with applicable laws and duties to the consumer. Borrowers should receive a letter at least 15 days before the date of the transfer.


💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

Do I Need to Know Who My Mortgage Servicer Is?

Yes, it’s good to have this information. Your mortgage servicer is your primary point of contact for paying back your mortgage. It is essential that you know who your servicer is and where to send your mortgage payments.

It is possible for the rights of servicing your mortgage to be transferred to another company. In this case, the terms of your mortgage won’t change, just the company that administers your mortgage.

Recommended: 6 Simple Ways to Reduce Your Mortgage Payment

How to Find Out Who Your Mortgage Servicer Is

There are several ways to find out who your mortgage servicer is. Here’s where to look:

Billing Statement

At closing, you provided an address where the servicer should send statements. The name and contact information of your mortgage servicer will be included in the statements sent to you. This is how most new homeowners find their servicer’s information.

Payment Coupon Book

In addition to a mortgage statement you’ll receive every month, you’ll also typically be mailed a coupon book at the beginning of your mortgage servicing.

MERS Servicer Identification System

The MERS® Servicer ID is a free service where you can find the name of your servicer or mortgage note holder. You can call 888-679-6377 or input your information online .

To find your servicer with this system, you’ll need to provide one of these three things:

•   Property address

•   Borrower name and Social Security number

•   The unique mortgage identification number

The Takeaway

A mortgage servicer handles the day-to-day management of a mortgage, sending out statements and collecting payments, for instance. They are an important part of making sure a home loan runs smoothly.

Before mortgage servicing is even a thought, you’ll need to find a mortgage. And that means finding the right lender.

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

Why do I need a mortgage servicing company?

A mortgage servicing company ensures that your payments get to the right parties. Many mortgages are not held by the lending institutions that originated them; instead, they’re sold as investments on the secondary mortgage market.

Can my mortgage servicer change?

Yes. Your mortgage servicer may transfer the mortgage servicing rights for your loan to another company. Your old servicer generally should send a notice at least 15 days before the transfer of the servicing rights.

Is my mortgage servicer different from the lender?

Often, yes. Your mortgage servicer can be the same company as the one that originated your loan, but it’s not unusual for another servicer to take over the management of payments.

Photo credit: iStock/LaylaBird

*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.

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.

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