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A mortgage contingency allows homebuyers to exit the purchase contract without legal repercussions should they be unable to secure financing by the agreed-upon deadline.

Consider this scenario: You found a gem of a home that many others are eyeballing. You make an offer and cough up earnest money to show that you mean business. You’ve been preapproved for a mortgage, so financing seems a shoo-in — until you hit a snag. That’s when a mortgage contingency becomes important.

If you’re unable to obtain financing by the deadline, you can walk away from the purchase agreement and have your earnest money returned.

Some non-cash buyers consider waiving the mortgage contingency to make their offer more competitive in a hot market, but of course, that involves risk. Here’s the scoop on the financing contingency.

What Is a Mortgage Contingency?

Should something unexpected happen, like a job loss or the inability to sell an existing home, a mortgage contingency clause in the purchase agreement allows buyers to back out of the contract and have their earnest money returned. An earnest money deposit isn’t small potatoes for anyone, but that’s especially true for those who are competing against multiple offers: Buyers might lay down as much as 10% of the home’s sale price as a good-faith deposit.

A mortgage contingency also protects both buyers and sellers from uncertainty in the real estate transaction. It’s one of several contingencies that buyers might include in the contract when the property listing status changes to contingent but not yet pending.


💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

The Mortgage Contingency Clause

The mortgage contingency clause gives the buyers a time frame to go shopping for a mortgage or move beyond preapproval. Though the clause may vary from contract to contract, most will allow buyers to back out of the contract if they do not directly cause the financing to fail. The earnest money held in escrow is returned to the buyer.

Even when buyers have mortgage preapproval, financing can fall through at the last minute. This is the legal “out” if that happens.

Recommended: What Is the Difference Between Pending and Contingent Offers?

How Mortgage Contingency Works

Buyers find a home and make an offer and the seller’s real estate agent or attorney draws up a contract for the purchase of the property. Many buyers include in their offer a mortgage contingency, which has a deadline. If the sellers agree to this contingency (and other conditions of the offer), they sign the contract. The mortgage contingency becomes legally binding at this point.

Next, buyers complete a full application with the lender of their choice. The lender will review the buyer’s finances in-depth, and mortgage underwriting will make a final decision on whether or not to approve the loan.

If the mortgage is denied, the buyers are able to exit the contract and have their earnest money returned when a mortgage contingency is included.

In the absence of a mortgage contingency, the sellers would be able to keep the buyers’ earnest money and put the property back on the market to find another buyer.

How Long Does a Contingency Contract Last?

When buyers submit an offer, they will suggest a deadline for mortgage financing alongside the mortgage contingency. Typically, the time frame to secure a loan is 30 to 60 days.

Mortgage Contingency Clause Elements

Some mortgage contingency clauses are simple and give the buyers absolute discretion in obtaining financing acceptable to them. In others, financing is more specifically described. This variance depends on your contract and state law. Elements can include a mortgage contingency deadline, type of mortgage, amount needed, closing fees, and interest rate.

Mortgage Contingency Deadline

The mortgage contingency deadline is how long the buyer has to find approval for a mortgage. The deadline is often suggested by the buyer in the contract when an offer is made on the property.

When the seller signs the offer, the contingencies become legally binding and must be followed in good faith. Should a buyer need an extension of the deadline, an addendum must be submitted to and agreed upon by the seller.

Type of Mortgage

There are many different types of mortgages a buyer can use to purchase property, so while one loan may not work for a buyer’s situation, another may. Buyers may have the option of selecting a conventional or government-insured loan, a jumbo loan, a mortgage with a term of 30, 15, or other years, or an interest-only mortgage. A lender can help walk buyers through their options.

Amount Needed

A mortgage contingency clause can also designate the amount needed to secure the loan. A mortgage calculator tool can help buyers estimate how much a mortgage payment is going to be and the total amount a borrower can qualify for.

Closing Fees

The mortgage contingency can stipulate what closing fees and mortgage points are acceptable.

Maximum Interest Rate

An interest rate can be specified that the lender must provide before the mortgage contingency is satisfied. This makes it so the buyer can back out of the contract if the costs are too high.

Can You Waive a Mortgage Contingency?

Yes. Mortgage preapproval can help make your offer more competitive, but you may still waive the mortgage contingency. In that case, your earnest money is at risk, and you’re not able to renegotiate the contract if the appraisal comes in low. Keep in mind that FHA and VA loans do not allow buyers to waive the appraisal (which is an important part of the financing contingency).

Reasons to Waive a Mortgage Contingency

There are some scenarios where it doesn’t make sense to include a mortgage contingency in the contract:

•   When the buyer is able to pay cash for the property. Cash buyers do not have to include a mortgage contingency.

•   When owner financing is involved. If the current owner of the home is financing the sale, buyers do not need to include a mortgage contingency.

•   When competition is extremely high. It might be a good idea to look at this option as a last resort, but in a market where sellers only accept offers without contingencies, this could be a buyer’s only way to win the contract.

💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.

Other Common Types of Contingency Clauses

The financing contingency isn’t the only common one in a contract. Some others are:

•   Inspection contingency. This is a contingency that allows the buyer to exit the contract should the property fail a home inspection.

•   Appraisal contingency. This contingency is connected to the financing contingency. Should the property fail to appraise for the amount needed to finance the loan, the buyer would have the option of renegotiating or dropping the contract.

•   Title contingency. A property needs to be free of title defects for the sale of the property to go through.

•   Sale of home contingency. This contingency allows buyers to sell their current home before completing the purchase of a new home.

Recommended: How to Read a Preliminary Title Report

The Takeaway

A mortgage contingency protects homebuyers’ ability to get their earnest money back if financing falls through. Waiving the mortgage contingency in a hot market could put some house hunters at the front of the line, but it’s a risk only those feeling confident in their financial situation should take.

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

Can you waive a mortgage contingency?

Yes. Even if you need to obtain financing, waiving the mortgage contingency is an option.

What does no mortgage contingency mean?

No mortgage contingency means that buyers are willing to take on the risk of losing their earnest money if they are unable to secure financing by the closing deadline.

Should you waive mortgage contingency?

Homebuyers willing to take the risk of losing their earnest money to the seller to better compete are best poised to waive the mortgage contingency. Buyers who are not willing to risk their earnest money should not waive the mortgage contingency.

How long does a mortgage contingency usually take?

A mortgage contingency is usually set between 30 and 60 days.

Photo credit: iStock/kate_sept2004

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.

SOHL0124028

What’s a duplex? It’s a two-for-one special in the real estate world: two units in one building on one plot of land.

Duplexes are the perfect blend of income production and personal space for some. For others, they may be too small and involve too much maintenance.

Read on to learn what a duplex is and who should consider owning one.

Characteristics of a Duplex

Duplexes, which fall into the multifamily property category, have these common characteristics:

•   Single lot. While there are two units, they’re on the same lot.

•   Shared yard. Duplex units will typically share a yard and will have a common wall or ceiling/floor.

•   Similar size and layout. The two units in a duplex may not be exact replicas, but they often have the same square footage and a similar layout.

Types of Duplexes

Duplexes take one of these forms:

Stacked

When the two units are atop each other, that’s a stacked duplex. Occupants have a common ceiling or floor.

Side-by-Side

In a side-by-side duplex, units are next to each other. Occupants have a shared wall.

In general, the units in a multifamily property have separate entrances, kitchens, bathrooms, and utility meters.

Here’s what a duplex is not: a “twin home.” With a twin home, two homes share a wall, but each is an individually deeded home on an individual lot.

Recommended: How Government-Backed Mortgages Work

Pros and Cons of Owning a Duplex

Duplex living isn’t for all homeowners but could be the perfect fit for some. Let’s start with some upsides.

Pros of Buying a Duplex

•   House hacking. An owner can live in one unit and rent out the other, earning income to help cover a mortgage loan.

•   Affordability. Owner-occupants can use a government-backed home loan and enjoy the same low or no down payment requirement that they would with a primary home. Also, duplexes are often located in more affordable neighborhoods, and buying a two-unit property will typically cost less than buying two stand-alone single-family homes.

•   Tax advantages. Tax advantages. Owner-occupants may be able to write off mortgage interest and property tax on the half of the property they live in. If the other half is a rental, they can potentially write off repairs to that unit, any utility bills paid for it, and any management fees. The owner can depreciate the rented half of the property. It’s important to consult with a tax advisor about tax strategies.

•   Easy tenant management. For first-time landlords, living in a unit and renting the other one can be a lower-stress alternative to investment property. A resident owner can address issues immediately and keep an eye on ongoing maintenance.

•   Buying property together. Whether it’s friends owning real estate together or a multigenerational household looking for some private space, a duplex might be a perfect fit, as the property is already naturally divided into two. There’s proximity but also space.

•   A boost in getting a mortgage. With conventional or government-backed financing, you can usually use projected rental income to qualify for the loan. The lender will add a portion of the rental income to your gross income to determine your debt-to-income ratio.

Cons of Buying a Duplex

Some drawbacks also exist. They include:

•   Lack of privacy. In a duplex, occupants are on top of each other or right next door. Sharing a wall or ceiling/floor might be hard for some homeowners. If privacy is a priority, a duplex might not be the right fit. That’s also true of co-op and condo living.

•   Possibly a large down payment. If both units will be leased, you won’t qualify for a government-backed loan. You’ll likely need to put down at least 20% for a conventional loan and will pay a higher interest rate. If you do plan to live in one of the units and use a conventional loan, you may qualify to put 15% down.

•   Tricky taxes. Tax season gets more complicated for duplex owners than owners of traditional single-family homes.

•   Sharing space. Duplex owners may have to share a laundry room or backyard with the other occupants.

•   Landlord duties. Unless a duplex owner purchases the property with another party or has the property managed, they’ll have to serve as landlord for some or all of the home. That means regular maintenance and searching for tenants, which could be stressful for some homeowners.

Recommended: Pros and Cons of Different Types of Homes

Finding a Duplex

Duplexes are enticing to people looking for a starter home, other owner-occupants, and those investing in duplexes, which can make the search much more competitive.

As duplexes are often more expensive than single-family homes, figuring out your budget before the search will help (give this mortgage calculator a whirl), as will having your anticipated down payment at the ready and credit in good shape.

Having financing lined up can make the process more seamless. If the duplex will be owner-occupied, that may help determine which kind of loan to choose among the different mortgage types.

Should you go with a mortgage broker or direct lender? You can get quotes from both.

They should be able to answer your mortgage questions. And it pays to shop around for home loan offers.

Should You Own a Duplex?

Owning a duplex isn’t for everyone, but it could be the place to call home for buyers who want to dip their toes into the investment property market. Although duplexes come with quirks, some benefits (especially rental income) may outweigh the drawbacks.

If you do plan to live at the property, you might eventually outgrow it and move on. In that case, your home equity can help purchase the next home.

And that duplex and other assets can help build generational wealth.

The Takeaway

What is a duplex? Two living units in one property. Duplexes pack a two-for-one punch when it comes to real estate ownership. They aren’t the right fit for all house hunters, but so many buyers are interested in duplexes that they’re a hot ticket.

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

How can I profit from my duplex?

Duplexes can be either entirely rental properties or owners can choose to occupy one of the units. As an owner-occupant, you can use rent from the other unit to supplement or perhaps pay your monthly mortgage entirely. When the duplex is an investment property, you can collect rent on both units, with the profit potential based on the monthly mortgage payment.

How do I rent out a duplex?

There’s a high likelihood you’ll rent out one of the units year-round. However, some duplex owners use the other unit as a guest space, short-term rental, or even an artist studio, depending on their needs.

Should I sell my duplex?

Deciding whether or not to sell your property is a personal choice based on circumstances and the local market. A duplex, though, can be a good property to keep as an investment, as the two units provide a lot of flexibility for renters, Airbnb guests, and an owner’s place to live.

Photo credit: iStock/RichLegg

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-Q125-011

To make homeownership more affordable, the federal government offers programs for first-time homebuyers and buyers with low to moderate incomes. The mortgage credit certificate (MCC) program is one option that helps eligible first-time homebuyers save money on their mortgage.

This guide will unpack how a mortgage credit certificate works, the pros and cons, and claiming it on your taxes.

What Is an MCC?

A mortgage credit certificate, sometimes called a mortgage certificate credit, is designed to help homebuyers recoup a portion of the interest paid on their home mortgage loan. An MCC is a dollar-for-dollar federal tax credit of up to $2,000 on the mortgage interest paid annually. It’s a nonrefundable credit, which just means that the amount of your credit can’t exceed the amount of income tax owed for that filing year.

If you take out a mortgage to buy a home, your monthly payment has four components: principal, interest, taxes, and insurance. State and local housing finance agencies issue MCCs, and if you receive one you can claim the dollar equivalent as a tax deduction to reduce the amount you owe in federal taxes. (Not all states offer MCCs, however. Michigan offers one, for example, while Massachusetts does not.) Eligible homeowners can take advantage of an MCC even if they take the standard deduction rather than itemize deductions. If you are one of the few homeowners who itemizes, any remaining mortgage interest not accounted for in an MCC may qualify for the mortgage interest deduction.

Eligibility for this program is based on income and is generally only available for first-time homebuyers who qualify, though others may be able to buy a home in a “targeted area” designated by the state or Department of Housing and Urban Development and claim a mortgage tax credit.

Keep in mind that different mortgage types may have fixed or variable interest rates. Most fixed-rate loans are eligible for an MCC.

Recommended: First-Time Homebuyer Guide

How Does It Work?

Getting a handle on tax credits and deductions can be confusing as a new homeowner, and that’s OK.

To reiterate, an MCC lets you claim a tax credit for a portion of the mortgage interest paid in a year. This lowers your tax liability, which is the amount you owe to the federal government.

The portion of the mortgage interest you can claim with an MCC, known as the tax credit percentage, depends on the state you live in. Generally, the tax credit percentage ranges from 10% to 50% of a homeowner’s total annual mortgage interest.

The tax credit percentage, the mortgage amount, and interest rate are needed to calculate the total MCC. Note, however, that an annual MCC deduction is capped at $2,000 and can’t exceed a recipient’s total federal income tax liability after factoring in other deductions and credits.

It’s helpful to show how claiming an MCC works in practice. You’ll need to know some mortgage basics, like the interest rate, before getting started.

For instance, a homeowner with a $250,000 mortgage, 3.5% interest rate, and tax credit percentage of 20% could receive a first-year MCC tax credit of $1,750.

Here’s how to break this calculation down by steps:

1.    Determine the mortgage loan balance ($250,000), interest rate (3.5%), and tax credit percentage (20%)

2.    Multiply the loan balance and interest rate to calculate the total interest paid ($250,000 x 0.035 = $8,750)

3.    Multiply the total interest paid by the tax credit percentage to calculate the MCC tax credit ($8,750 x 0.2 = $1,750)

The $1,750 would be applied to your total federal tax bill, rather than deducted from your income. Let’s take a closer look at how claiming an MCC in this example would affect your federal income taxes.

In this example, a mortgage credit certificate could lower the amount owed in federal income taxes by $1,365. If you don’t have a mortgage yet, use this mortgage calculator to estimate your interest rate, loan amount, and, on the amortization chart, interest paid.

Mortgage Credit Certificate Pros and Cons

The mortgage credit certificate program was established by the Deficit Reduction Act of 1984 to make homeownership more affordable for low- and moderate-income first-time homebuyers. While an MCC tax credit can provide financial benefits, there are some potential drawbacks to consider, too.

Here’s a side-by-side comparison of MCC pros and cons to help you figure out if an MCC is right for you if you’re a first-time buyer.

How to Get a Mortgage Credit Certificate

Borrowers are issued an MCC through their lender before closing. Thus, it’s important to discuss options early in the process and when shopping for a mortgage.

Eligibility for an MCC varies by location. State housing finance agencies (HFAs) have established requirements for obtaining an MCC, if one is offered. These include limits on household income, loan amount, and home purchase price.

Other criteria to get an MCC include the following:

•   HFA-approved lender: The HFA may require borrowing from an approved list of lenders.

•   First-time homebuyer status: Borrowers must not have owned a principal resident in the past three years.

•   Primary residence: Only owner-occupied homes are eligible for an MCC.

•   Homebuyer education: HFAs may require borrowers to participate in education courses during the purchase process.

Claiming a Mortgage Credit Certificate on Your Taxes

To claim the MCC each year on your taxes, fill out IRS Form 8396. You’ll need to know the amount of interest you paid on the mortgage that year and the tax credit percentage set for the MCC.

Once complete, you’ll also know if any credit can be carried over for the following tax year.

The Takeaway

What is a MCC? A mortgage credit certificate is a federal income tax credit on a portion of the mortgage interest paid annually for low- to moderate-income first-time homebuyers or people purchasing a home in a targeted area.

The home buying process is a serious undertaking, especially for first-time homebuyers. To get up to speed, SoFi’s mortgage help center is a useful place to start and have your mortgage questions answered.

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

Who gives you the mortgage credit certificate?

A mortgage credit certificate program is administered by state-level housing finance agencies and issued by mortgage brokers or lenders.

Does everyone get a mortgage credit certificate?

No, mortgage credit certificates have borrower income limits and other eligibility requirements. For context, only 10,836 MCCs were issued in 2022, down from 22,298 issued in 2019, likely due to the fact that some states have discontinued their MCC program.

Can I refinance with a mortgage credit certificate?

A mortgage credit certificate does not prevent you from refinancing, but you’ll lose the MCC on your current loan. Many programs, though, allow borrowers to apply to receive a new MCC issued with their refinanced mortgage.

How do I know if I have an MCC?

Borrowers apply for an MCC prior to closing and receive a physical copy with a unique certificate number from their local or state government.

Do I lose my mortgage credit certificate if I refinance?

The original mortgage credit certificate becomes void if you refinance, but you may be able to have the MCC reissued if the principal balance on the refinanced loan is lower than the original.

Photo credit: iStock/Morsa Images

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-Q224-1839866-V1

When deciding on a duplex vs. townhouse, consider the amount of space you need, the amount of maintenance you want to do, your budget, and whether the rental component of a duplex — or Aunt Jill, Cousin Joe, or Mom next door — appeals to you.

Let’s take a deep dive into the differences between a duplex and townhouse.

What Is a Duplex?

A duplex is a single structure with two conjoined units on one plot of land. Each unit has its own entrance, kitchen, bedrooms and baths. The two units often share the yard, laundry area, and garage space, but that isn’t always the case.

A duplex shouldn’t be confused with a “twin home,” which is two homes that share a wall, but where each unit and the land it sits on is individually owned. The lot line actually runs through the common wall.

Buying a duplex is often touted as a good investment because owners can rent out one side while living in the other.

Types of Duplexes

There are two common configurations when it comes to duplex living:

•   Side by side. The shared wall is in the middle.

•   Up and down. When the units are in an upstairs and downstairs arrangement, the dividing wall is the floor/ceiling.

What Are the Pros and Cons of Duplex Living?

Duplexes are in demand, often by first-time homebuyers.

Owner-occupants have a big financing advantage: If you buy a multifamily property of four or fewer units and plan to live onsite, you can use an FHA loan with a low down payment or a VA loan, if you’re eligible, with no down payment at all.

There are other upsides, and potential downsides, you may want to consider before deciding on a townhouse vs. duplex.

What Is a Townhouse?

You get the idea about duplexes. Now let’s look at what is a townhouse. A townhouse is an individually owned home with two or more stories and at least one shared wall.

You own the inside and outside of your unit and the land it rests on, whereas a condo owner owns the interior of the condo. A townhouse has a separate entrance but may share communal spaces.

Townhouses are often found where land is in short supply. This is particularly true in areas that transition from dense, urban cities to the suburbs. They make good use of the space with their vertical nature and shared walls.

They are typically lower priced than detached single-family homes. By the way, the U.S. Census Bureau, which tracks residential construction, considers townhouses and duplexes single-family homes. Getting a mortgage on a townhouse is similar to obtaining a home mortgage loan for a freestanding house.

Townhome ownership has been rising, and the National Association of Home Builders (NAHB) says the long-term prospects for townhouse construction remain positive as homebuyers seek medium-density residential neighborhoods such as urban villages.

The NAHB reports that townhouses made up almost 15% of new single-family homes in the second quarter of 2024, and the number of new townhouses being constructed has been on the upswing in recent years.

What Are the Pros and Cons of Townhouse Living?

As the prices of traditional single-family homes have gone through the roof in most markets, townhomes have become popular as starter homes.

And downsizers may be attracted to townhouses, whose cost may be lower than their detached counterparts.

Townhouses make great use of space, but they also have less privacy, and you may need to follow the rules of a homeowners association (HOA), if one exists. (In the condo vs. townhouse comparison, condos come with an HOA, but not all townhouse communities do.)

Financing a townhouse works just like financing any single-family home. Here are pros and cons of buying a townhouse compared with a detached single-family home.

Recommended: Home Loan Help Center

Weighing the Differences Between Duplexes and Townhouse

Taking a look at living in a duplex vs. a townhouse side by side, they have commonalities but also differences. Here are some.

Structure and Design

A townhome typically is in a planned unit development where the homes share walls and community spaces. A duplex is structured to share a yard and a wall with only one neighbor.

Purchase Price

Cost will vary based on square footage, neighborhood, amenities, lot size, and other factors. A duplex will usually cost more than buying a townhouse, but the tradeoff is that you can rent out one side.

Maintenance Cost

A townhouse may have HOA dues, though they might not be ample because owners are responsible for much of their own maintenance. A duplex owner will need to maintain both units and the yard. A comparison will depend on the size and age of the properties and more.

Rental Income

If you plan to rent out a townhouse you buy, it’s a single unit. A duplex has two units, so it may be easier to make the financials work.

Privacy

With a townhome, you’ll be living in a community. Compare that with a duplex, where you’re sharing space with one neighbor.

Then again, having a single neighbor might feel less private than if you had many.

Investment Value

The ability to rent at least one side of a duplex holds more investment value than a townhome. The townhome may also have HOA rules about renting that may not jibe with your idea of how to use your property.

The Takeaway

The difference between a townhouse and a duplex is largely about what type of property fits your lifestyle. A duplex can offer a larger yard and rental potential, but a townhouse may bring that single-family home vibe at a lower price point than either a duplex or a detached single-family house.

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

Are townhomes becoming more popular?

The market share of townhomes is rising. According to the National Association of Home Builders, townhouses composed almost 15% of single-family home starts in Q2 2024 and townhouse starts were at an all-time high in a data series that dates back to 1985.

Which is a better investment: a duplex or a townhouse?

A duplex may be the better investment because you have the potential to rent out both units or live in one and collect rent from the other.

Is it faster to build a duplex or a townhouse?

A lot of factors affect how long it takes to build your new home: size, location, materials, weather, subcontractors, the city or county building department, and the complexity of your building plans. Many townhomes are built at once and may become available more quickly. Construction of a duplex is more like a house.

Photo credit: iStock/peterspiro

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-Q125-020

A mortgage commitment letter is a step beyond prequalification and preapproval and could give a homebuyer an edge in a competitive market. It lays out the loan details and indicates that a buyer has an agreement for a mortgage.

But who should obtain a mortgage commitment letter and when? Let’s take a look at those answers and more.

What Is a Mortgage Commitment Letter?

A mortgage commitment letter — conditional or final — is a step closer to finalizing a mortgage but short of “cleared to close.” The letter signals to the seller that the buyer and a chosen financial institution have forged an agreement.

Buyers may seek a conditional mortgage commitment letter when they’re house hunting, and a final commitment letter when they’re ready to make an offer on a specific home.

In both types of loan commitments, the lender outlines the terms of the mortgage.

Recommended: Buying in a Seller’s Market With a Low Down Payment

Types of Mortgage Loan Approvals

In the mortgage loan process, buyers will hear “approval” thrown around a lot. But not all approvals are built equally, and each type signifies a different part of the process.

Prequalification

Getting prequalified is often an early step for buyers in the home search. It’s quick, can be done online, and doesn’t require a hard credit inquiry.

To get prequalified, buyers provide financial details, including income, debt, and assets, but no documentation, so this step serves as an estimate of how much home they can afford.

Prequalification can help buyers create a realistic budget, but the amount, interest rate, and loan program might change as the lender gets more information.

Preapproval

Preapproval is slightly more complicated, requiring a hard credit inquiry and documentation from the buyer. Lenders may ask for the following:

•   Identification

•   Recent pay stubs

•   W-2 statements

•   Tax returns

•   Activity from checking, savings, and investment accounts

•   Residential history

Armed with this information, a lender will give buyers a specific amount they’ll likely qualify for.

Preapproval also shows sellers that a buyer is serious about a home, as it means a lender is willing to approve them for a mortgage.

Conditional vs Final Commitment

Prequalification and preapproval can be important steps during the home search. But especially in a seller’s market and in certain cities, the mortgage commitment letter can become an important tool.

While a mortgage loan commitment letter can show a seller that the buyer is serious, not all letters are the same.

A conditional mortgage approval letter, the most common type, means that the lender will approve buyers as long as they meet certain conditions.

Conditions could include:

•   No change to the buyer’s finances before the closing date

•   Proof of funds to cover the down payment and closing costs

•   Passing of a home inspection

•   An appraisal

•   Proof of homeowners insurance

•   No liens or other problems with the property title

A final commitment letter means the lender has unconditionally approved the buyer for a loan to purchase a home. However, this doesn’t mean the buyer is guaranteed a loan; it just means the lender is ready to approve the mortgage.

Having a mortgage commitment letter in hand is a good way to ensure that nothing will go wrong during underwriting.

Recommended: See Local Housing Market Trends by City

How to Know If You Need a Mortgage Commitment Letter

Buyers don’t need to provide a mortgage commitment letter to a seller. Still, that extra step beyond preapproval indicates how serious they are about a property.

Since it may require a little extra work, it shows sellers that a buyer is less likely to back out, especially due to financing issues.

A mortgage commitment letter could convince a seller to take a buyer more seriously in a seller’s market. And it could calm the nerves of buyers who face home-buying angst, including the challenge of covering a down payment and closing costs (even if they plan to roll closing costs into the loan).

How to Get a Mortgage Commitment Letter

Getting a mortgage commitment letter might sound like a hassle during an already stressful home-buying process, but doing so could save buyers time and provide a sense of relief as they creep closer to closing.

First off, buyers will need to be preapproved. If they have chosen a home, once under contract, their lender or underwriter will want more information, which may include:

•   A gift letter if another party is helping with the down payment

•   Employment verification

•   Explanation of any late payments

•   Proof of debts paid and settled

From there, it could be a back-and-forth between the lender and buyer, with the lender asking for clarification or additional documentation. Common issues that arise include:

•   Tax returns with errors or inconsistencies

•   Unexplained deposits into buyer bank accounts

•   Multiple late payments or collections on a credit report

•   Unclear pay stubs

At this point, the lender may grant a conditional commitment letter, with the caveat of additional information and an appraisal. If the buyer has an appraisal and meets lender expectations with documentation, they’re likely to get a final commitment.

Contents of a Commitment Letter

A commitment letter will vary from lender to lender but generally include the following details:

•   Loan amount

•   Loan number

•   What the loan is for

•   Mortgage loan term

•   Type of loan

•   Lender information

•   Expiration date of the commitment letter

What happens after the commitment letter? The lender and underwriter will continue to iron out the mortgage details, aiming for cleared-to-close status before the closing date on the property.

The Takeaway

A mortgage commitment letter is like a short engagement before the wedding: It signals an agreement before the real deal. Buyers in an active seller’s market might find a mortgage commitment letter advantageous.

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

How long does it take to get a mortgage commitment letter?

It typically takes 20 to 45 days to get a mortgage commitment letter. The average closing process takes 50 days.

Does a mortgage commitment letter expire?

Yes.

How long is a mortgage commitment letter valid?

Timing can vary by lender, but the length of commitment is typically 30 days.

Photo credit: iStock/MartinPrescott

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