When you’re buying a home, you probably have a million questions that need answering, especially when it comes to getting the proper insurance to protect your investment.
Soon-to-be homeowners may see both title and homeowners insurance on the lending documentation and wonder what the difference is between the two. While both types of insurance can provide vital coverage for homeowners, they differ vastly in their purpose and protection.
What Is Homeowners Insurance?
A homeowners insurance policy protects a home and personal property from loss or damage. It may also provide insurance in the event someone is injured while they are on the property.
Here are some common things homeowners insurance may cover:
• Damage that may occur in the home, garage, or other buildings on the property
• Damaged, lost, or stolen personal property, such as furniture
• Temporary housing expenses if the homeowner must live elsewhere during home repairs
Depending on the policy, homeowners insurance may also cover:
• Physical injury or property damage to others caused by the homeowner’s negligence
• An accident that happens at home, or away from home, for which the homeowner is responsible
• Injuries that take place in or around the home and involve any person who is not a family member of the homeowner
• Damage or loss of personal property in storage
Some coverage may also apply to lost or stolen money, jewelry, gold, or stamp and coin collections.
Buying Homeowners Insurance
While someone can legally own a home without taking out homeowners insurance, the mortgage loan holder may require the homeowner to purchase an insurance policy. Typically, lenders do require this as a condition of the home loan.
It’s important to understand that homeowners need to insure the home but not the land underneath it. Some natural disasters — tornadoes and lightning, for example — are covered by typical homeowners policies. Floods and earthquakes, however, are not. If you live in an area where floods or earthquakes are common, you may want to consider purchasing extra insurance to cover damages from potential disasters.
Special coverage may also be worthwhile for those who own valuable art, jewelry, computers, or antiques.
There are two policy options that can help homeowners replace insured property in the event of damage or a loss. Replacement cost coverage covers the cost to rebuild the home and replace any of its contents, while actual cash value simply pays the current value of the property at the time of experienced loss.
When it comes time to shop for and buy homeowners insurance, start by asking trusted friends, family, or financial advisors for their recommendations. Do some online research, too. Before you make a final decision, contact multiple companies and request quotes in writing to compare their offerings. That process can give you a good idea of who is offering the best coverage for the most affordable price.
Title insurance provides protection against losses and hidden costs that may occur if the title to a property has defects such as encumbrances, liens, or any defects unknown when the title policy was first issued.
The insurer is responsible for reimbursing either the homeowner or the lender for any losses the policy covers, as well as any related legal expenses.
Title insurance can protect both the homeowner and lender if the title of the property is challenged. If there is an alleged title defect, which the homeowner may be unaware of at the time of purchase, title insurance can provide protection to cover any losses resulting from a covered claim.
The policy will cover legal fees incurred if there is a claim against the property.
Both home buyers and lenders can purchase title insurance. If the home buyer is the purchaser, they may want to insure the full value of the property. (The value of the property will affect how much the policy costs). When the lender is the purchaser, they typically only cover the amount of the homeowner’s loan. When it comes time for a home buyer to purchase title insurance, they have full choice of the insurer.
According to the Real Estate Settlement Procedures Act (RESPA) of 1974, the seller cannot require the home buyer to purchase title insurance from one certain company.
Lenders are required to provide a list of local companies that provide closing services, of which title insurance is just one. But it may be worth doing independent research. Lenders may not select their recommendations based on the home buyer’s best interest, but instead because a service provider is an affiliate of the lender and provides a financial incentive in exchange for a recommendation.
Again, it’s a smart idea to seek the counsel of friends and family and do online research to uncover competitive prices and learn which service providers have a solid reputation.
Homeowners insurance is an ongoing cost (billed monthly, quarterly, or annually) that helps cover damage or loss of the home and possessions within the home. Title insurance, on the other hand, can help protect against losses caused by defects in the title and is a one-time fee payable during the closing process. The advantage to having both types of coverage is that each policy can protect homeowners against financial loss in very different circumstances.
Shopping for homeowners insurance often requires considering several options, from the amount of coverage to the kind of policy to the cost of the premium. To help simplify the process, SoFi has partnered with Experian to bring customizable and affordable homeowners insurance to our members.
Experian allows you to match your current coverage to new policy offers with little to no data entry. And you can easily bundle your home and auto insurance to save money. All with no fees and no paperwork.
Check out homeowners insurance options offered through SoFi Protect.
Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
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.
Buying a home is probably one of the biggest financial commitments many people make in their life, and so it stands to reason that the process can be complex and lengthy. From figuring out how much you can afford to understanding how mortgages work to getting preapproved to determining where exactly to live…it’s a lot!
But by learning about the usual flow before you begin hitting the open houses, you can be well-prepared to dive into homeownership. Here, the eight steps to follow that will help make purchasing a home a smooth process.
8 Steps to Prepare for a Home Purchase
Here, the moves that will help you get ready to buy your dream property:
1. Determining Credit Score
A homebuyer’s credit score can impact their ability to secure a mortgage loan with a desirable rate. It can also affect how much they’ll be required to pay as a down payment when it’s time to close.
Credit score can be influenced by a variety of factors, from payment history to amount of debt (a.k.a. credit utilization ratio) to age of credit accounts, mix of credit accounts, and new credit inquiries.
Payment history is the main factor that affects a person’s credit score, accounting for 35% of an overall FICO® score. Missing a payment on any credit account — from unpaid student loans to credit cards, auto loans, and mortgages — can negatively impact a person’s credit score.
On the other hand, positive habits can include making on-time payments, limiting the number of new inquiries on their credit file, and working to pay down outstanding balances.
Is There a Credit Score “Sweet Spot?”
Many buyers wonder whether there’s a desired credit score range or “sweet spot” to obtain a mortgage. Typically, a credit score of 740 or higher will get the best deals (meaning lowest rates).
Credit scores can also affect the amount of the down payment itself. Some mortgage lenders require at least 20% of the house’s sale price be put down, but might offer more flexibility if the buyer’s credit score is in the higher range. A lower credit score, on the other hand, could call for a larger down payment.
Whether homebuyers have debt or not, checking credit reports is still a recommended first step to applying for a mortgage. Understanding the information on credit reports can be invaluable in knowing where you stand when qualifying for a mortgage loan rate.
2. Deciding How Much to Spend
Deciding how much to pay for a new home can be based on a variety of factors including expected and unexpected housing costs, upfront payments and closing costs, and how it all fits into the buyer’s overall budget.
Calculating Housing Costs
There are several housing costs for home purchasers to consider that might affect how much they can afford to offer for the house itself. The costs of ongoing fees like property taxes, homeowner’s insurance, and interest — if the loan isn’t a fixed-rate mortgage — can all lead to an increase in the monthly mortgage payment.
Closing costs are fees associated with the final real estate transaction that go above and beyond the price of the property itself. These costs might include an origination fee paid to the bank or lender for their services in creating the loan, real estate attorney fees, escrow fees, title insurance fees, home inspection and appraisal fees and recording fees, to name a few.
Typically, closing costs are between 3% and 6% of the loan’s amount. To get an idea on how this can impact your budget, use this home affordability calculator to estimate total purchase cost.
In addition to closing costs, expenses that potential homebuyers might want to consider are repairs and updates they might want to make to a home, new furniture, moving costs, or even commuting costs.
Finally, unforeseen costs of a major life event like a layoff or the birth of a new child might not be the first expenses that come to mind. However, some buyers could find themselves making a potential home-buying mistake by not getting their finances in order to prepare for the unexpected.
Making a list of these estimated expenses can help homebuyers calculate how much they can feasibly afford. It can also help them create a budget that could help them avoid being overextended on housing costs, especially if they might be paying other debt or saving for other financial goals.
3. Saving for a Down Payment
Saving money for a house is one of the biggest financial goals many people will have in their lifetime. And how much they’re able to offer as a down payment can significantly impact the amount of their monthly mortgage payment.
A larger down payment can also be convincing to sellers who see it as evidence of solid finances, sometimes beating out other offers in a competitive housing market.
The average down payment on a house varies depending on the type of buyer, loan, location, and housing prices. Most recently, the average down payment was 13%.
For first-time homebuyers, 13% or 20% of the price of the home can seem like a daunting figure. Many buyers find that cutting spending on luxury or non-essential items and entertainment can help them save up the funds.
Other tactics could include getting gifts and loans from family members, applying for low down-payment mortgages, withdrawing funds from retirement, or receiving assistance from state and local agencies.
For buyers who were also sellers, proceeds from another property could also fund the down payment.
4. Shopping for a Mortgage Lender
There are many mortgage lenders competing for the business of homebuyers who finance their home purchases. These lenders offer a variety of mortgages to apply for, with a few of the most common being conventional/fixed rate, adjustable rate, FHA loans, and VA loans.
Buyers might not realize they can — and should — shop around for a lender before selecting one to work with. Different lenders offer different variations in interest rates, terms, and closing costs, so it can be helpful to conduct adequate research before landing on a particular lender.
Mortgage lenders must provide a loan estimate within three business days of receiving a mortgage application. The form is standard — all lenders are required to use the same form, which makes it easier for the applicant to compare information from different lenders and make sure they are getting the best loan for their financial situation.
When a buyer is prequalified for a loan, their mortgage lender estimates the loan amount they are qualified for, based on financial information they provided.
When a buyer is preapproved, the lender conducts a thorough investigation into their finances that includes income verification, assets, and credit rating. Preapproval is not a guarantee but tells a buyer that a lender is likely to approve them for a certain amount, as long as they clear the underwriting process.
Having a preapproval letter in hand can help some buyers get ahead by appealing to the seller as a serious intention of purchase and a lender’s guarantee to back that purchase up.
6. Finding the Right Real Estate Agent
While the internet and popular real estate search websites have made it easier for homebuyers to hunt for a house online, most buyers still solicit the help of a real estate agent to find the right home and negotiate the price and purchase.
Also, many realtors are experts in their particular housing market, so for buyers who are searching in a specific location, a real estate agent may be able to offer valuable insights that might not be revealed online.
7. Exploring Different Neighborhoods
By researching neighborhoods where they might want to purchase a property (both in-person and online), homebuyers can get a better sense of what living in their future community could look like.
Many real estate websites provide comparable listings to help determine a reasonable offer amount in a given neighborhood.
Check out housing market
trends, hot neighborhoods,
and demographics by city.
They may also highlight nearby school ratings, price and tax history, commute times, and neighborhood stats like home value fluctuations or predictions, and walkability ratings.
All of this information can help paint a picture of life in the area a homebuyer chooses to settle in. Doing a deep dive into a desired neighborhood can help inform a more realistic decision on where to buy a house.
8. Kicking off the House Hunt
Once the neighborhoods are whittled down, the loan is secured, the real estate agent has been signed, and the savings are set aside, the official house hunt can begin.
With the help of a trusted real estate agent and a housing market with adequate inventory, most homebuyers can begin to book showings, attend open houses, and formally put down an offer on a house they like.
In particularly “hot” markets, houses could receive several offers, so homebuyers might want to be prepared to go through the bidding process with a few properties before they get to that glorious final sale.
Are You Ready to Buy a Home Quiz
The Takeaway
A home may well be the biggest purchase you make and the biggest asset you ever own, so it makes sense to spend some time on the home-buying process. From checking out different mortgage options to getting preapproved for a loan to attending open houses, the process is a valuable one that brings you closer to your dream 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.
SoFi Mortgages: simple, smart, and so affordable.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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.
A reverse mortgage may help older Americans who find they need more money in retirement. It’s common for inflation and rising medical costs to be issues. A reverse mortgage allows them to convert some of their home’s equity into cash, which can benefit their financial situation.
Protections established over the past few years by the U.S. Department of Housing and Urban Development (HUD) focus on lowering the risk previously associated with reverse mortgages. What’s more, the federal and state governments have taken aim at deceptive marketing practices that can minimize the complex aspects of reverse mortgage agreements.
That said, it’s wise to proceed with caution. There are still considerable cons to reverse mortgages, and borrowers may be unaware of the finer points. One important fact: It is possible to lose one’s home if you don’t comply with all the loan terms. Take a closer look at this topic here.
Why Do People Choose a Reverse Mortgage?
A reverse mortgage allows qualifying homeowners age 62 and older to convert part of the equity they’ve built up in their primary residence into money they can use to pay off their existing mortgage or for any other expenses that come up in retirement (from health-care costs to home repairs).
The big selling point for reverse mortgages is that the loan usually doesn’t have to be paid back until the last borrower, co-borrower, or eligible non-borrowing spouse dies, moves away, or sells the home. And when it is time to repay the loan, neither the borrower nor any of the borrower’s heirs will be expected to pay back more than the home is worth.
Main Types of Reverse Mortgages
There are three basic types of reverse mortgages. The most common is a home equity conversion mortgage (HECM), which is the only reverse mortgage insured by the U.S. government and is available only through an FHA-approved lender. An HECM can be used for anything, but there are limits on how much a homeowner can borrow.
Note: SoFi does not offer home equity conversion mortgages (HECM) at this time.
There are also proprietary reverse mortgages, which are private loans that may have fewer restrictions than HECMs — including how much a homeowner can borrow.
And there are single-purpose reverse mortgages, which are typically offered by nonprofit organizations or state or local government agencies that may limit how the funds can be used. Most of the time, when someone refers to a reverse mortgage, though, they’re talking about an HECM.
Reverse Mortgage Terms to Know
There are safeguards in the reverse mortgage process that protect borrowers, but there are also loan terms borrowers are required to uphold or risk defaulting and potentially triggering a mortgage foreclosure. They include:
Staying Current With Ongoing Costs
Borrowers must stay up to date on property taxes, homeowners insurance, homeowners association fees, and other costs, or they could risk defaulting on the loan. An assessment of a borrower’s ability to pay for those ongoing expenses is part of the reverse mortgage application process, and if it looks as though money might be tight, a lender may require a borrower to set up a reserve fund, called a “set-aside,” for those costs. (In this way, it’s akin to an emergency fund, which is there to cover expenses if needed.)
Maintaining Full-Time Residency
Borrowers (and eligible non-borrowers) must use the home as their primary residence — the home they occupy for most of the year. If they move out of the house or leave the home for more than six months, or receive care at a nursing home or assisted living facility for more than 12 consecutive months, it could result in the lender calling the loan due and payable.
The lender also may choose to accelerate the loan if the borrower sells the home or transfers the title to someone else, or if the borrower dies and the property isn’t the principal residence of a surviving borrower.
Keeping the Home in Good Repair
Because the home is collateral and may have to be sold to repay the loan, lenders may require borrowers to do basic maintenance that will help the property keep its value (e.g., repairing a leaky roof or fixing a problem with the electrical system). If an inspector feels the home is not being properly maintained, the lender could take action.
What Happens If a Reverse Mortgage Borrower Defaults?
If the homeowners default, the first thing that could happen is that future loan payments may be stopped. And if the problem isn’t corrected within the lender’s stated timeline, the loan may become due and payable, which means the money the lender has distributed to the borrower, plus any interest and fees that have accrued, must be repaid. In that case, the borrower typically has four options:
• They can pay the balance in full and keep their home.
• They can sell the home for the lesser of the balance or 95% of the appraised value and use the proceeds to pay off the loan.
• They can sign the property back to the lender.
• They can allow the lender to begin foreclosure.
No matter what the homeowners decide to do, the process could take months to complete. HECM lenders may offer borrowers additional time to fix the problem that put them into default, or the borrowers may qualify for extensions or a repayment plan.
But in the meantime, there could be other implications — if the homeowners are no longer getting money they need to pay their bills or if the lender reports the default to credit monitoring agencies — that could affect the homeowners’ credit scores.
A Few Alternatives to Consider
The advertisements some lenders use to sell their reverse mortgages can be convincing, and some seniors may see these loans as a convenient way to get some extra cash or as a much-needed lifeline.
But, as with any financial decision, there are advantages and disadvantages — and alternatives — to be considered. There are other ways homeowners may be able to get help that could be less complicated and less limiting than a reverse mortgage.
Here are a few options:
• Borrowers may wish to tap into their home’s equity with a traditional home equity loan or home equity line of credit. They’ll have to make monthly payments, and their income and credit history will be considered when they apply, but the terms may be more flexible and the overall cost may be lower than a reverse mortgage. Because the home is used as collateral, there’s still a risk of foreclosure.
• Low interest-rate personal loans might be another option for homeowners who qualify for a competitive interest rate based on their income and credit. Borrowers who don’t have much equity in their home may choose to look into this type of loan, which is unsecured and is paid out in a lump sum. While foreclosure is not a worry with a personal loan, there still may be consequences to the borrower’s credit rating if they don’t uphold the loan terms.
• Borrowers who are struggling to keep up with their bills in retirement may find that refinancing a mortgage with a new, lower-cost mortgage might be an option to help them lower their monthly payments and stay on track with their budget.
Or, if they need extra cash right away and can get a low enough interest rate, they may want to look into a “cash-out refinance,” which would involve taking out a new loan for a larger amount based on the equity they’ve built up during the years they’ve lived in the home.
Unfortunately, no matter which type of loan homeowners might choose, there could be risks.
The government requires a counseling session for reverse mortgage borrowers for a reason: They’re complex, and it can be helpful to have someone cover all the rules and costs involved.
Homeowners also may want to pay a financial advisor and tap their expertise about what type of loan, if any, fits with their needs, goals, and where they are in their retirement.
Though reverse mortgages are available to homeowners starting at age 62, borrowers who expect to have a long retirement may choose to wait until they’re older to tap into their home equity, so they don’t risk running out of money in their later years.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
A “secured” credit card is one that requires a security deposit — typically several hundred dollars — that is used as collateral in case the cardholder fails to make payments. If you have a brief credit history or dinged credit, a secured credit card can be a good tool for building credit.
Why care about your credit health? Because creditworthiness can come into play when applying for loans, jobs, apartments, and other situations that require a credit check. If you can’t get a regular “unsecured” credit card, a secured credit card may be a good option.
What Is a Secured Credit Card?
A secured credit card is a credit card that requires a refundable security deposit, which counts as collateral until the account is closed.
The security deposit decreases the risk for the credit card issuer, and allows people with damaged or limited credit to build a history of on-time payments. If your credit score is 600 or so (fair), you may be able to get a decent secured credit card.
Most secured cards require a minimum deposit of $200 or $300, and that amount is usually equal to your credit limit. If your deposit is on the low end, you’ll want to be careful how you use the card. Credit scoring models typically penalize utilization over 30%, so if your credit limit is $300, you may want to keep your balance under $90. A higher deposit will provide breathing room. A deposit of, say, $1,000 boosts the 30% threshold to $300.
Finally, a heads-up if your credit is bad: Unsecured cards targeting people with bad credit are notorious for high fees and confusing terms. And issuers of these cards usually don’t have good cards to upgrade to.
How Does a Secured Credit Card Work?
Here’s how a secured credit card works: You put down your security deposit, and then you get the same amount to spend as a line of credit.
If you want to increase your limit, you’ll have to contribute more to your security deposit. Secured credit card issuers don’t want to be left in the dust if you decide not to pay — or cannot pay — your balance. If that were to happen, they would just take your security deposit.
This type of card may be suitable for people who’ve gone through bankruptcy or are just starting out and have a limited credit history. Typically, a secured card is a better option than a high-interest unsecured credit card that’s targeted to people with a low credit score. That’s because a high-interest card, while enticing, can take years to pay off and end up damaging your financial reputation even further. A secured credit card poses a much lower risk.
A secured credit card looks the same as a regular credit card on a credit report — so users don’t have to worry about other lenders seeing that they have this type of card. And as long as the balance is paid in full and on time every month, your credit score should start to mend.
After using the card responsibly for a certain amount of time, a secured-card holder may be able to get an unsecured card. Your secured-card company can switch a card to unsecured as well, allowing access to a higher line of credit without a deposit.
Pros and Cons of a Secured Credit Card
Like most things in life, there are positives and negatives to this kind of card.
Pros
• Rebuild credit. Secured cards allow you to rebuild your credit history if you have limited or damaged credit. You do that by making on-time payments every month — at least the minimum payment, but preferably the full amount to avoid interest charges.
• Lower credit line. A lower limit means you’re less likely to go over it and risk running a high balance. This is helpful for people who are still learning how to use credit responsibly.
• Card benefits. Secured cards may offer basic benefits like fraud protection and cash back, just like you get with an unsecured card.
• Potential to upgrade. Some secured cards allow the holder to switch to a regular unsecured card after a period of responsible use.
Cons
• Security deposit. All secured cards by definition require the holder to provide the issuer with a cash deposit. That deposit is refunded once you switch to an unsecured card.
• Fewer rewards. Secured cards don’t offer all the bells and whistles that an unsecured card can. For instance, you may not earn travel points, receive any discounts on goods and services, or get access to airport lounges.
• Interest rate. As noted above, secured cards often carry higher interest rates than regular credit cards. (Of course, the interest rate won’t matter if you’re paying your bill in full each month.)
• Requires a hard inquiry. The issuer will need to run a hard inquiry or pull on your credit report. This usually translates to a slight drop in your credit score.
Applying for a Secured Credit Card
The application process for a secured card should be relatively quick and simple, provided you prepare what you need ahead of time.
1. Shop Around. Secured credit cards are not all the same. Look for a card with no annual fee (they’re nonrefundable) and a minimum deposit amount that meets your needs. Some cards even offer limited rewards, like cash back. Finally, make sure your payment history will be reported to the three main credit bureaus — that is how you’ll rebuild your credit.
2. Check your credit score. It’s smart to go into the application process knowing exactly what your credit score is. There are several ways to find it without having to pay a fee. The credit bureau Experian provides consumers with their FICO Score at no charge. Your bank may also provide your credit score online for free.
3. Collect your information and paperwork. Application requirements vary depending on the card issuer. To make sure you have all the documentation you need, gather the following:
– Proof of identity, such as a driver’s license, passport, or other photo ID.
– Proof of address, like a recent utility bill.
– Bank account info. If you have a checkbook, your bank info and account number appear on your checks.
– Social Security number. You don’t have to bring your card; just make sure you know your number.
4. Complete the application. You can do this in person if your credit card issuer has a branch near you. You may also do it over the phone with a customer service rep — just be aware you’ll need a way to provide your documentation, either in person or via upload. The easiest method is online, as long as you have access to a computer or smartphone that allows you to upload documents or images.
5. Provide a deposit. This is usually done via online transfer from your checking or savings account.
Tips for Bettering Your Chances at Approval
If you’re nervous about getting approved, taking these extra steps can help you maximize your odds.
1. Review your credit report. Request free reports from the three major credit agencies at AnnualCreditReport.com, and review them carefully. If you find any errors — from outdated information to unfamiliar accounts — file a dispute to have the data corrected or removed.
2. Pay your bills on time. Many people hit a financial rough patch at some point. The important thing is to show a recent history of on-time payments. If you can point to a year’s worth of good habits, credit card issuers will be more likely to consider you worth the risk.
3. Maintain a steady job. Even if you don’t have a high income, job security reassures credit card companies that you have the cash flow you need to pay your bills. Your employer may be able to give you a reference letter stating how long you’ve worked for the company and your track record of reliability and good work.
4. Become an authorized user. Got a family member or close friend with great credit? Ask them if they’ll add you as an “authorized user” on their credit card. Over time, their good habits will rub off on your credit history. And that may give you the boost you need to get approved for your own card.
Using a Secured Credit Card
Major credit card companies such as MasterCard, Visa, and Discover offer secured credit cards. This means you can use your card anywhere these brands are accepted.
Some secured credit cards offer benefits like cash back and free access to your credit score.
Many major credit cards also provide liability protection, so you won’t be responsible for fraudulent charges on your account. You may have to pay fees, such as a monthly maintenance fee, annual fee, balance inquiry fee, or an activation fee.
Though you may be able to get a secured credit card with a lower interest rate than an unsecured credit card, the average rate for secured cards is still higher, at 22.48%, than the average regular credit card interest rate of 20.09%.
It’s smart to do some online comparison shopping of different credit cards to see which one has the most appealing terms. However, it’s best not to apply for too many; one hard inquiry can cause a credit score to drop 5 to 10 points. If you apply for more than one or two cards, that could have a negative effect on your credit score.
When you start using your card, paying it on time is going to impact your credit score rating. If you may not remember to pay it each month, you could set up automatic payments to ensure your bills are up to date. You can also check your credit score every month to make sure it’s trending upward.
Building Credit with a Secured Credit Card
Secured cards are a great way to build credit if you have a low credit score or a limited credit history. How they do that is not so different from how a regular credit card works.
First, you need to pay your bills on time, each and every month. Missing one payment will undo all your good work up to this point. If you don’t trust yourself to remember every single time, there’s a simple solution. Set up automated payments through your bank so that your card is paid on the same day each month. You can choose to pay the minimum, a set amount over the minimum (say, $100), or the whole balance. Hot tip: Paying off the balance each month will save you money on interest.
Second, avoid running up a high balance. In this case, a high balance just means an amount approaching your credit limit (the same amount as your security deposit). Try to keep your credit utilization — the percentage of credit that you actually use — below 30%. If your credit limit is $500, the most you should charge per month is $150 (this assumes you have no other debt). As you rack up a history of on-time payments, you can request a higher limit, though that will require a higher deposit.
Denial of a Secured Credit Card
Even though getting a secured credit card with limited or damaged credit history is possible, an applicant may still be denied. Anyone who is denied a card should receive a letter from the credit card issuer explaining why. Perhaps they didn’t fill out the application properly and all they need to do is fix it, or their credit score wasn’t high enough.
If the reason has to do with the applicant’s credit report, they can get free access to their report through AnnualCreditReport.com and see their entire credit history. For example, the credit report may reveal that the credit utilization ratio, or the amount of debt compared with the amount of credit a person has, is too high. An applicant could start paying down debt more aggressively in order to bring down the credit utilization ratio and have a better chance of being approved for a secured credit card.
Another factor that may cause a denial is if an applicant doesn’t make enough income or can’t prove income. The credit score just may be too low as well.
The Takeaway
A “secured” credit card is one that requires a security deposit that is used as collateral in case the cardholder fails to make payments. Secured cards have more relaxed application requirements than unsecured cards, making them popular with people who have limited or damaged credit histories. Some secured cards offer the same conveniences as regular credit cards — from cash back to rental car coverage — without the risk of running up a huge bill. Most secured cards report to the major credit bureaus, allowing holders to build up a positive credit history over time.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Do secured credit cards build credit?
Many secured credit cards can help you build credit. Before you apply, check that the card issuer reports to the three main credit bureaus. Then, make sure you make on-time payments each and every month.
How does a secured credit card differ from an unsecured credit card?
A secured credit card requires a cash deposit that is equal to your credit limit. This serves as collateral in case you are unable to pay your bill. The deposit is refunded if you close the card or switch to a regular unsecured card. Secured cards typically have low credit limits, higher interest rates, and few perks or rewards.
How do I close a secured credit card?
To close your card, call the number on the back or log in into your account online. Or you may choose to cut up the card without officially closing it, so that your credit history doesn’t take a hit.
How can I change a secured credit card to an unsecured card?
If you have a record of on-time payments with your secured card issuer, ask them if they offer an unsecured upgrade. Some card issuers want to see a year or so of good credit habits before switching you to an unsecured card.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.
Finding the perfect home to buy is no small feat: so many online searches, drive-bys, and open houses. Then comes the time-sucking process of finding the right mortgage. A matchmaker called a mortgage broker can help.
The broker goes fishing for multiple loan offers from different types of lenders in pursuit of the best deal.
How exactly does a mortgage broker work? Keep reading to discover more about mortgage brokers, how to find one, and the pros and cons of working with one.
First, Mortgage Basics
Whether a consumer chooses to work with a mortgage broker or not, it’s best to know what it means to take out a mortgage.
These are some of the basics.
Loan term: This refers to how long borrowers have in order to repay their loan. A typical term is 15 or 30 years.
There are advantages and disadvantages to choosing a shorter or longer loan term. For shorter terms, the monthly payments are higher but the interest rates are usually lower, and the total cost of the loan is lower.
For longer-term loans, the total cost is higher and generally the interest rates are higher, too, but monthly payments are lower.
Fixed rate vs. adjustable rate: The chosen interest rate dictates whether the interest rate will change over time or stay consistent, if the monthly principal and interest payment will change, and how much interest will be paid over the life of the loan.
Typically, fixed-rate mortgages have no surprises but carry a higher rate than the initial rate of an adjustable-rate mortgage, or ARM. Fixed interest rates don’t change over time, and the monthly principal and interest payment remain the same.
With an ARM, after an initial period, the interest rate can fluctuate based on the market, which can lead to the monthly principal and interest payments increasing or decreasing over the life of the loan.
In short, a mortgage broker is a middleman between the homebuyer and mortgage lenders. While requirements vary by state, typically brokers are trained professionals who must obtain certain licenses.
When you plan to buy a home, it can be smart to research multiple lenders. Doing so allows you to see which lender is offering the best rate and fees for your particular financial situation and down payment.
This can be a time-consuming process that requires submitting multiple documents and applications. A mortgage broker can do all of the work associated with applying for the consumer.
Because mortgage brokers generally have partnerships with multiple lenders, they can help find the best financial fit for their clients while saving them the time it would take to do the work themselves.
Why use a mortgage broker? It’s not for everyone, but there are some benefits worth considering.
Provides more access. Because of their professional relationships, mortgage brokers usually have more access to different lenders than the average person does—some that many consumers don’t even know exist because they offer home loans only through mortgage brokers.
May find better rates and terms. Mortgage brokers may be able to find lower rates and fees than the average homebuyer could find on their own.
Keeps it simple. As mortgage brokers are experts in their field, they can make the entire process simpler to understand. They’ll break down the differences between lenders and help their clients understand mortgage jargon. It’s worth noting that consumers should still educate themselves so that they have a good understanding of the process.
Saves time.Buying a home is time-consuming and can be stressful. A broker will research rates, fees, and minimum credit score requirements so that clients don’t have to.
Cons of Using a Mortgage Broker
There are also some downsides worth considering before pursuing this path.
Cost can vary. Before agreeing to work with a broker, ask how they make their money. In some cases, the lender pays the mortgage broker, and in others, the client pays the broker. If payment is the client’s responsibility, ask if they charge a flat fee or earn a commission.
Lenders usually pay a higher commission than borrowers do. Lenders typically pay between 0.5% and 2.75% of the loan amount. When a client pays a commission, a broker usually charges an origination fee of less than 3% of the loan amount.
The housing market in a particular area can influence what a broker charges.
Conflicts of interest may arise. While at first glance it may seem more beneficial to work with a mortgage broker who is paid by the lender, give this some thought. Is the broker biased toward lenders that pay the commission? Researching brokers before working with them and asking for referrals can help. Do some digging to see if past clients found them to be trustworthy.
Some lenders don’t work with mortgage brokers. Some lenders only work with brokers, and some never work with them. People who hire a mortgage broker may miss out on certain opportunities.
How to Shop for a Mortgage Broker
The search for the right mortgage broker should not be taken lightly. Doing research and considering options are important steps toward making the experience a positive one.
One of the first steps to take toward finding a good mortgage broker is to ask for references from trusted friends, family members, or colleagues who have recently bought homes with the help of a mortgage broker.
To widen the search, there are also websites that host customer reviews of local mortgage brokers. While any broker may have a few negative reviews, look for patterns in the reviews to make sure that negative experiences are the exception, not the norm.
Treat shopping for a mortgage broker like an interview. Ask about their certification and experience, commissions, and what the homebuying process would look like in tandem with them.
You may be able to find out if a broker is licensed through the National Mortgage Licensing System & Registry.
Finding a Mortgage Without a Mortgage Broker
People who aren’t interested in working with a mortgage broker can shop for a mortgage on their own from a commercial bank, credit union, or private lender.
Prequalifying, based on self-reported data, will give you an idea of how big a loan you may qualify for—a ballpark figure. (Prequalifying involves a soft credit inquiry, which does not affect a credit score.)
If you’re serious, preapproval is the next step, when lenders verify your employment status, income, credit history, and debt to determine how much you can reasonably afford to borrow. If approved, you’ll receive a conditional commitment in writing for an exact loan amount. (Applying with too many lenders may result in score-lowering hard inquiries, but having many offers in hand provides negotiating leverage with individual lenders.)
Working with an online lender may be a good option for soon-to-be homeowners. SoFi aims to make applying for home mortgage as painless as possible, while offering competitive rates and exclusive member discounts.
Applicants don’t have to worry about pesky hidden fees or prepayment penalties.
The Takeaway
What is a mortgage broker? A go-between between the loan seeker and lenders. There are many pros and cons to consider. A mortgage broker can be just the ticket for some home buyers but not all.
Looking for a mortgage without using a broker? SoFi can help simplify the home loan process.
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Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
