For many, downsizing is more accurately described as “right-sizing.” The idea of a smaller home is that it helps people live more compactly and reduce the typical avalanche of stuff.
It’s not about giving up everything, but instead deciding what’s really important and then finding ways to better incorporate those things into one’s lifestyle.
Shrinking a home’s total square footage might not be the right fit for everyone, but it does offer economic, lifestyle, and emotional benefits for some.
Read on to learn why less is more for the Americans who choose to downsize.
The Rise of Downsizing
Living minimally has always been a lifestyle choice, but in recent years, more and more people have opted to live with less. The minimalist lifestyle went mainstream with Marie Kondo’s The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing, which urges readers to get rid of items that don’t bring joy.
Downsizing as a trend goes hand in hand with minimalism, the urge to have fewer objects and live in a smaller space. It’s part of the cultural shift of valuing doing something over having something. Three-quarters of Americans value experiences more than things, one study showed.
That shift and home building data suggest that it’s not just empty-nesters looking to purchase a home with less square footage. The National Association of Home Builders reported the slight shrinking of the average home size in recent years.
The choice to downsize a house is personal, but it’s one that many homeowners are taking on.
Signs It’s Time to Downsize
No matter a person’s life stage, there are a few signs that may signal it’s time to downsize.
• Housing expenses are too high. The traditional notion is that no more than 30% of a person’s gross income should be spent on housing costs. (The number has been debated, but the 50/30/20 rule has wide support: 50% of post-tax income goes to essential needs, including housing, 30% to discretionary spending, and 20% to savings.)
If the cost of the mortgage, upkeep, and additional home-related expenses far exceed a 30% of a person’s budget, it might be time to think about downsizing. This could apply to a retired couple now living on a fixed income or a first-time homebuyer who has a hard time paying the mortgage without roommates.
• No ties to the location. Remote work is still common, and that could mean employees are no longer tied to their neighborhood, city, or state. Similarly, the kids might be out of school and parents no longer feel the need to stay in the school district. When a homeowner no longer feels committed to their property’s location, it might be time to consider downsizing.
• A lifestyle change. It could stem from limited mobility or simply fewer people living in the house, but if rooms or even floors aren’t being used weekly, it could be time to try a smaller space.
• Home equity could be used. Depending on the amount of equity a person has in their home and the value of the market, they could be sitting on a potentially huge payday. The proceeds from the sale of their home could be a significant down payment on a smaller property.
Downsizing can sound restricting, but there’s a lot to benefit from.
• Less upkeep. A smaller home means less upkeep overall. A bigger home requires more maintenance, cleaning, and possibly yard work.
• More affordable. A smaller home will probably come with a smaller mortgage payment or none at all. On top of that, the less space, the less things that can go wrong in the home. Additionally, a smaller space typically means lower heating and cooling bills.
• A fresh locale. In general, smaller homes typically cost less, so that could create the opportunity to move into a small place in a more desirable or exciting neighborhood. It could cost more on average per square foot, but with less square footage overall, up and coming neighborhoods might be attainable.
• Freed-up money. A smaller space with fewer expenses and less upkeep can translate to a bigger budget for travel and experiences.
The Downside of Downsizing
Downsizing has its perks, but there are a few potential drawbacks to the life choice as well.
• Less space. A smaller footprint could mean sacrificing a guest room, having fewer bathrooms, or losing some garden space. Homeowners thinking about downsizing can be forced to make tough decisions about what truly matters to them in their day-to-day living space.
• Cost of moving. Overall, downsizing is a more affordable lifestyle, but don’t discount the cost of selling a home and the costs of moving. Remember, when selling a home, real estate agent commissions and other fees can eat up to 10% of the sales price of the home. Selling should lead to a payday, but homeowners take on expenses when prepping their property for sale. Additionally, a full-service move can cost thousands, move.org notes.
• Stress of sorting through stuff. In a recent survey, 45% of respondents said moving is the most stressful event in life, ranked a hair above divorce or a breakup. Downsizing can be particularly stressful because not everything can go with you. It could mean parting with keepsakes; paring down heaps of clothes, shoes, books, holiday decorations, and the list goes on; or deciding to go without some beloved items because they simply don’t suit a smaller home.
• Staying minimalist-minded. Downsizing isn’t just a one-time choice; it’s the conscious decision to live with less. The initial work of downsizing is probably the biggest hurdle to overcome, but there’s the ongoing choice to live with less and resist buying and accumulating more stuff.
How to Downsize: Steps to Get Started
• Explore alternative housing. Before diving headfirst into downsizing, it’s worth trying out a smaller way of life. That could mean renting a smaller home for a week or two in a new neighborhood. Downsizing can mean a lot of things, from a tiny house or a condo, or moving from a four-bedroom to a two-bedroom. Getting an idea of what downsizing will mean on a personal level begins with understanding how small you’ll go.
• Start organizing. Sorting through all your worldly possessions and deciding what to get rid of can be exhausting. Getting the organizing process underway sooner rather than later can save downsizers time and energy. Starting to live with less can make the transition a little easier.
• Research your property’s value. Knowing the value of your current property, as well as the equity you have, can help create a road map to more affordable living. With an idea of the market value and the proceeds, you’ll have a good idea what your down payment could be.
The Takeaway
If you’re asking yourself “Should I downsize my home?” know that downsizing comes with benefits including less stuff, a smaller mortgage payment, and minimized upkeep, freeing up time and money for other pursuits.
Downsizing is about making everything simpler, down to the mortgage process and loan. A SoFi home mortgage loan comes with competitive rates, an easy online application, and help from start to finish.
SoFi makes mortgage shopping simple.
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.
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.
Here comes another school year, and that can mean it’s time to get shopping for some nice new pencils, notebooks, backpacks, and cool clothes. But don’t expect it to come cheap: Last year, the cost was estimated at $661 per school-age child, and this season could well top that.
No one wants to go into credit card debt to get their kid outfitted for the first day of school, so here’s help.
Read on for 31 back-to-school shopping tips that will save you money while getting your kids prepped for a great year ahead.
1. Check the Circulars
You might receive weekly circulars in the mail that include coupons to local stores that can help you save money on school supplies. If you don’t receive any circulars or you want more, using a website like Flipp can give you access to digital circulars and coupons you can use at the store.
2. Download Honey
The Honey browser extension is helpful when it comes to back-to-school savings. Installing Honey on your web browser will enable the extension to automatically search for coupon codes and deals when you check out online, saving you both time and money.
💡 Quick Tip: Help your money earn more money! Opening a high-yield bank account online often gets you higher-than-average rates.
3. Use Online Coupons
Some websites, such as Coupons.com, RetailMeNot, and Savings.com, offer online coupons. Browsing these sites may lead to savings on school supplies you need.
4. Join Target Circle
Doing back-to-school shopping at Target will let you earn rewards through Target Circle . You can access hundreds of deals as well as earn 1% back when you shop (or 5% back when you shop with your Target RedCard). You can redeem your savings on later purchases. Another perk: You may also see special discounts on back to school, such as 20% off a purchase for college students.
5. Use Cash Back Credit Cards
Making school-supply purchases with a cash-back credit card is another option to save some money. Then, you can put your savings towards future purchases or use the cashback to pay a portion of your credit card bill.
6. Get Cash Back for Shopping
On sites like Rakuten and Swagbucks , you can earn cash back when you shop at your favorite stores. Check these sites for cash back offers before heading out for back-to-school shopping.
7. Sign Up for Store Emails
If there are a few stores you know you’re going to be shopping at this year, then sign up for their email list ahead of time to receive coupons and find out when they are running sales. Some stores offer a percent-off coupon or a dollar-amount discount for signing up for their emails or texts.
8. Download Store Apps
Along with signing up for emails, you can also download store apps to receive exclusive savings and deal alerts. You may receive a one-time coupon at the beginning and then additional deals after that.
9. Ask Friends for Their Old Supplies
If you have friends who aren’t using their old supplies anymore, they may be willing to give them to you so they don’t go to waste. This could save you a lot of money, especially when it comes to paying for college textbooks.
Consider joining local parent groups on Facebook or other social media platforms to see if anyone is giving away supplies or selling them at a steep discount. Connecting with other parents before the first day of school can also be a good way to form friendships and trade back-to-school shopping tips.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 3.80% APY on savings balances.
Up to 2-day-early paycheck.
Up to $3M of additional FDIC insurance.
11. Look on Used Goods Marketplaces
You may also be able to find the supplies you need on used goods marketplaces such as Facebook Marketplace or Craigslist. Keep safety precautions in mind when meeting strangers to complete a transaction: Consider meeting at a police station, bring someone with you, and trust your instincts if you feel the situation is unsafe.
12. Wait to Make Some of Your Purchases
Your children are not going to need all of their school supplies on the first day, or perhaps even in the first month of school. Instead, you can ask your children’s teachers what they will need right away and then wait to shop for the rest of the supplies when retailers start marking down their inventory, which typically happens in September or October.
13. Create a Budget
Before setting foot into a store, come up with a back-to-school monthly budget so you know exactly how much you can spend and avoid impulse purchases. Without a plan, it can be easy to spend too much and get caught off guard when you get your credit card statement in the mail.
14. Take Inventory of What You Already Have
You may already have what you need for back to school in your home. Look around for extra pencils, art supplies, books, and other items that you thought you needed to purchase but may already own.
15. Pay With Cash
One of the old tricks for sticking to a budget and saving money is to pay with cash instead of a debit or credit card. Paying with cash may make you more mindful of your purchases because you see the cash disappear when you spend it. You might not be tempted to spend as much if you opt for good, old-fashioned dollar bills and coins.
Cash is also helpful for negotiating. Though you may not be able to negotiate prices at a big-box store, you might be able to at a local shop, flea market, or yard sale if that’s where you’re headed for school supplies. Let the merchant know how much you’re willing to pay, and they may just be willing to cut a deal with you.
17. Look for Price Matching
Some stores will match another store’s price if you show them that their competitor is offering a better price on the same product. Prior to going to the store, take a few minutes to compare prices online, and bring proof of the lower price when you shop. Price matching policies vary from store to store and can usually be found on a store’s website.
18. Buy in Bulk
When it comes to how to save on school supplies, you may be able to save big if you buy in bulk from wholesale clubs or warehouse stores like Costco or Sam’s Club. Some of the best things to buy in bulk for back-to-school include pens and pencils, folders, and notebooks. Bulk purchases of things like paper towels, toilet paper, and shampoo might also make good financial sense. Joining other parents to split costs on bulk purchases might just result in a new, like-minded friend group.
💡 Quick Tip: If you’re creating a budget, try the 50/30/20 budget rule. Allocate 50% of your after-tax income to the “needs” of life, like living expenses and debt. Spend 30% on wants, and then save the remaining 20% towards saving for your long-term goals.
19. Buy Refurbished Electronics
If you need to pick up electronics like laptops, tablets, or phones, consider buying a refurbished version instead of a new device. Certified used models are often available directly from the manufacturer or from reputable online sellers.
20. Head to the Dollar Store
While the dollar store isn’t the ideal place for all your back-to-school shopping needs, you can find a number of inexpensive items there to save money on. These items include pencils, pens, crayons, folders, and clipboards.
21. Shop on Tax-Free Days
Some states hold annual tax-free days, usually in July or August, which can be perfect for back-to-school shopping. Check online to see if and when your state offers this money-saving option.
22. Use Your Student Discount
College students may be able to use their college ID or student email address to score discounts on electronics and other items. Check out stores around your college that offer deals to students.
23. Buy Used Textbooks
Another way to score some back-to-school savings is to purchase used textbooks. BookFinder.com searches all the bookseller websites to find the best deals on your textbooks.
24. Keep Your Receipts
If you keep your receipts and find out that items you purchased have been discounted further, then you may be able to get a price adjustment or a partial refund to make up for the price difference. Policies vary by retailer, but it doesn’t hurt to check sales after you’ve made a purchase and ask the store if they offer price adjustments.
25. Buying From Thrift Stores
Thrift stores like Goodwill or Salvation Army often have back-to-school essentials like clothing and backpacks. Plus, buying used items can be environmentally friendly. Families who are facing financial difficulty affording school supplies may qualify for assistance through various charitable organizations, such as The Salvation Army or even their local school districts.
26. Find Brand Giveaways
By following brands on social media or contacting them directly, you may get free samples or promo codes to get discounts on goods.
27. Turn in Those Rebates
Sometimes, you won’t be able to access back-to-school savings at the time of purchase. Instead, you’ll need to send in rebates. Look for products that offer rebates and remember to keep your receipts and anything else required for the savings.
28. Invest in Quality Purchases
While you may want to buy everything at discount stores, poor-quality items may not even last an entire school year. For items that get a lot of use, such as a backpack, consider paying a bit more so they last. For example, you may be able to use the same high-quality, well-made backpack for several years before it wears out.
29. Use Alternatives for Your Kids’ Favorite Characters
Your child might really want a backpack with a specific character on it, but next year’s favorite character will probably be different. Buying your child a plain backpack and then adding some keychains or stickers that feature their favorite character is an inexpensive compromise that will keep your kids happy and save you big bucks.
30. Buy Reusable Items
While plastic and paper bags may be convenient, you’ll save much more money (and the environment) if you buy a reusable lunch bag and containers instead. Find a lunch bag that’s easy to clean to save time as well.
31. Hold a Clothing Swap
Kids quickly grow out of clothes, so it’s not budget-friendly to buy a lot of expensive new garments. You can invite over some friends and neighbors who have kids and swap used clothing instead. Or you might try Nextdoor and see if people in your community want to see about a trade or offloading some outgrown clothes.
💡 Quick Tip: When you overdraft your checking account, you’ll likely pay a non-sufficient fund fee of, say, $35. Look into linking a savings account to your checking account as a backup to avoid that, or shop around for a bank that doesn’t charge you for overdrafting.
The Takeaway
Taking some pre-shopping time to estimate costs is a good practice when trying to figure out how to save on school supplies. Setting a financial goal and saving a little bit at a time is a good thing to do whether the goal is purchasing school supplies or something a little more expensive.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
You probably know how easily you can tap to pay for items when shopping and click to send a friend money for your share of a dinner tab. Why can’t most of your financial transactions be that easy?
They can be. You can be freed from much of the usual day-to-day account activity by automating your finances. Doing so can eliminate your wondering whether you have paid bills on time, allocated the right amount to savings, and more.
Automating your finances can be a smart money move that saves you on late fees and reduces financial stress. It may also help you establish and stick to a budget, as well as get on a path to growing your wealth.
Deciding where and when to automate personal finances need not be complicated. Here’s a guide sharing what it means to automate your finances, the different ways you can put your money management on autopilot, and tips for making the process super simple.
What Does It Mean to Automate Your Finances?
Automating your finances means you use today’s technology to pre-schedule and preapprove transfers of your funds. It’s a “set it and forget it” way to pay bills, move money from checking to savings, and even enrich your retirement account.
The beauty of doing so means you can avoid late fees (which many of us, no matter how responsible we are, get hit with sooner or later). You may also become more organized and free your mind to ponder better things. Worrying about when bills are due is so last decade, after all!
Check out our Money Management Guide.
This article is from SoFi’s guide on how to manage your money, where you can learn basic money management tips and strategies.
What Kind of Accounts Can You Automate?
If you’re wondering what kind of accounts you can automate, you’ll probably like this answer: Almost any kind. Here’s a list of some of the most popular:
• Credit cards
• Rent or mortgage
• Utilities
• Investment accounts
• Loans (car, personal, etc.)
• Insurance
• Savings (from short-term vacation funds to your emergency fund to retirement accounts).
Automating payments can spare you late fees and overdraft charges. It can also help you streamline the process of staying active and accountable on your accounts (a great way to avoid winding up with credit charge offs).
It may also help keep your credit score from being impacted by missed payments. In fact, payment history contributes 35% to your FICO® score. You want to protect those digits.
(Btw, it’s a good idea to scan for common credit report errors on an annual basis, just to make sure nothing is amiss.)
💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open a bank account online.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 3.80% APY on savings balances.
Up to 2-day-early paycheck.
Up to $3M of additional FDIC insurance.
Different Ways to Automate Your Finances
When it comes to the set-up of automating personal finances, there are a few different techniques to try. Here, you’ll learn some of the most popular options so you can decide what’s right for you, whether it’s one method or a combination.
Option 1: Sign Up for Automatic Payments with Your Creditor
Here’s how this works: Say your wifi provider or landlord of your rental apartment gives you an automatic bill payment option.
• Through their payment portal, you’ll set up an autopay schedule, connecting the service provider to your bank account. On the agreed-upon date (say, rent is due by the 7th of every month so you select to pay on the 6th), they will automatically deduct the amount from your checking.
• In some cases, you may be assessed a fee for this privilege; it varies with the provider.
• When you opt into this kind of plan, you may be given the opportunity to have the payment charged to a credit card or deducted from an account other than your bank account. Look carefully, though; you may wind up paying additional fees for this.
You may find that some creditors don’t offer you the kind of convenience described above, but your bank may swoop in and help you pay automatically. Many major banks will issue payments on your behalf to a creditor or service provider, which can make your life infinitely easier. No more writing checks every month and digging around for stamps. The steps to take:
• Check with your bank about what they offer. Typically, they will need the account number and address of the business you are paying.
• You’ll also need to assess how long this process will take every month; it may not be instantaneous. You’ll want to make sure the money arrives on time and you are not charged any late fees so your credit score doesn’t suffer.
• Then you’ll sign up for the series of payments to be handled by your bank.
Option 3: Set Up Direct Deposit with Your Employer (if You Have the Option)
An excellent way to automate and fund your personal finances is to set up direct deposit of your paycheck (the vast majority of salaried workers are paid this way). You’ll know your salary is getting sent to your bank account and when it hits. Some pointers:
• You’ll likely need to share your account number and routing number with your employer in order to establish direct deposit.
• You may also need a voided check to get the funds moving to the right place.
• You can then schedule your automated payments for the right dates, when your balance is feeling especially flush.
• A great hack to know about: Some bank accounts will allow you access to your paycheck funds a day or two early if you sign up for direct deposit with them. That’s another great way to keep abreast of those bills.
💡 Quick Tip: As opposed to a physical check that can take time to clear, you don’t have to wait days to access a direct deposit. Usually, you can use the money the day it is sent. What’s more, you don’t have to remember to go to the bank or use your app to deposit your check.
Option 4: Set Up Automatic Retirement Contributions
It’s all too easy to think, “I’ll get around to saving for retirement…someday.” Perhaps that’s why the average American had only $65,000 stashed away for retirement according to the Federal Reserve’s most recent survey. That’s probably not enough if your dream is moving to Hawaii at age 65 and spending your days with your toes in the sand.
That’s why learning how to automate your finances for retirement savings can be such a helpful practice. Experts agree that 10% to 15% of your pretax income is a good amount to have deposited into your retirement plan every paycheck. Some tips:
• You can authorize your HR or payroll department to automatically whisk away a certain amount of your pre-tax income every paycheck and put it toward retirement. You won’t miss what never hits your checking account, right?
• Aim for the maximum amount allowed, or at least put in enough to get any company match that’s offered. Otherwise, you’re leaving free money on the table.
If you’re self-employed, you can also automate your savings with recurring transfers into such vehicles as a solo 401(k), SEP IRA, or SIMPLE IRA as you save for your future.
Option 5: Put Your Savings on Autopilot
Your non-retirement savings are another important account to automate. Again, if your salary hits your checking account, you may feel rich and go spend more than you should. By automating your savings and funneling money from your paycheck straight into an account, you may avoid going on shopping sprees.
This can be a very effective tool. In one study by financial psychologist Brad Klontz, people who visualized their goals and set up automatic withdrawals enjoyed a 73% increase in their savings after just one month.
Into what kind of account can you direct those funds? That’s up to you. Perhaps you want to have a few separate accounts that feed different goals. You might have one account for a down payment fund, one for vacation savings, and one for your child’s future educational expenses. You can direct how much and how often you want each transfer to be.
Of course, there are options about where exactly you keep your savings. Some possibilities to consider:
• Standard savings accounts are good, but a high-yield savings account can be even better. These tend to pay a significantly higher annual percentage yield (APY) than a standard account and are often offered by online vs. traditional banks.
• CD accounts can be another good option. These are time deposits, meaning you commit to keep the funds with the financial institution for a specific period of time, which may typically range from a few months to several years. In return, you are assured a specific interest rate. However, there may be penalties if you withdraw funds early.
• A TreasuryDirect account can allow you to make recurring purchases of electronic savings bonds directly from your paycheck. You can learn more about this at the TreasuryDirect website .
Option 6: Set Up Regular Contributions to Your Emergency Fund
Your emergency fund is another bundle of cash that can benefit from automated infusions of money. An emergency fund is a stockpile of easily accessed cash that can tide you over when unexpected circumstances hit. Perhaps you get a major car repair or medical bill or are laid off from your job. An emergency fund can let you pay bills without accessing a high-interest line of credit (say, ringing up too much debt on your credit card).
In terms of emergency funds, keep the following in mind:
• It’s wise to have at least a few to several months’ worth of basic living expenses in the bank. That means mortgage or rent, utilities, insurance payments, food, childcare, and other must-have goods and services, plus minimum debt payments.
• Most people can’t create this fund with a single, lump-sum deposit. Making regular transfers into your account (even if it’s only $20 per paycheck or per month) will get you started. Any contribution is better than nothing!
• Where to keep your emergency fund? Since you want it to be available almost immediately in urgent situations, a high-yield savings account or standard savings account can be a good option. Either way, you’ll earn some interest. A money market account may also serve this purpose.
Option 7: Sign Up for Automated Investing with Your Brokerage
If you currently have an investment portfolio or are planning on starting one, that’s another task that can be made simpler by technology. Automated investing can allow you to achieve consistency with minimal effort, which can help you build your net worth over time.
Some examples:
• As noted above, you might set up recurring transfers into a retirement plan that invests the funds for you.
• You can automatically transfer money from your checking account into a brokerage account.
• You might work with a robo-advisor that picks investments based on your needs and preferences and also rebalances your portfolio.
• Investing apps are another possibility. These can be as simple as the ones that round up the price of purchases and then invest the change for you.
Tips to Successfully Automate Your Finances
Now that you have a good grounding in the benefits and how-to’s of automating personal finances, consider these success strategies:
Create a Budget Based on the Balance You Get Paid
Look at where your money stands after you deduct your retirement and savings amounts. With the remaining funds, you can plan out ways to budget. There are various techniques out there, like the 50-30-20 budget rule, among others. Do an online search and see what resonates with you.
A budget will guide your saving and spending and can reveal how you are doing in terms of setting financial goals and meeting them on other fronts, such as a vacation fund or a retirement account.
It will help you handle good vs. bad debt more effectively. All are terrific ways to avoid excessive debt and build wealth.
Be Aware of All Your Bill Due Dates
As you automate your finances, do pay careful attention to the due dates on your bills. Who wants to see their hard-earned cash get drained by late fees?
• Look at the calendar; check when your paycheck hits and when certain bills are due. Some creditors may set your due date in stone; others may have some flexibility.
Similarly, some autopay portals may allow you to set the payment date; others may have a specific date on which they will debit funds.
• Make sure you understand if there’s any lag with automatic payments. Be sure they will arrive on time.
• It can be better to stagger autopayments so you don’t risk overdrawing your account. See what best suits your lifestyle and money style to keep your account in good shape.
Review Your Bank Account and Bank Statements Often to Stay on Top of Your Transactions
One of the pleasures of automating your finances is that you are freed from thinking and worrying about your money and your bills on a regular basis. However, daily life involves all kinds of money blips, from treating your bestie to a fancy birthday dinner to (ugh) having fraudulent charges appear on your credit card bill.
So do review your bank account and other statements regularly to make sure everything is as it should be and that your balance isn’t too low. Check in with your accounts often. Should you check your bank account every day? Not necessarily. A couple of times a week can be a good cadence.
Increase Your Contributions When It Makes Sense
While you’re checking your finances and bank balances, don’t overlook whether it’s time to increase your contributions. If you’ve gotten a raise or paid off a student loan, you may have funds available to save more.
Or you might find that a chunk of change has accumulated in your checking account which could do more for your finances if used elsewhere. There are times when you may want to increase your transfers to reflect your positive financial status.
The Takeaway
Automating your finances can be a great way to take control of your money and make bill paying and saving so much more convenient. That kind of organization can let you breathe easier when it comes to managing your money and be more successful in meeting your financial goals.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.
FAQ
How often should I review and adjust my automated finances?
You should review your finances and automated transactions regularly, which for some people may mean a couple of times weekly; for others, it might be every other week. Also, it’s wise to check in when you have significant changes in your life, whether you’ve gotten a raise, took out a mortgage, or moved to an area with a higher cost of living. You may want to recalibrate your transfers.
Is it safe to automate my finances?
By and large, it is safe to automate your finances. You should, however, check in regularly to make sure you are not overdrafting or getting close to it, and also to keep in touch with your money. While there is a small risk of glitches or fraud with automatic transfers, it’s not a significant concern.
What are the best tools or apps to use for automating my finances?
There are an array of tools and apps for automating your finances. A good place to start may be with your very own financial institution. They may have roundup apps, automated savings and investing products, and other tools to help you make the most of your money and grow your wealth.
Can I still make manual payments even if I have automatic payments set up?
In many cases, you will still be able to make a manual payment even if you have automated payments set up. This could occur when you have an additional bill to an account that is set on autopay, or when you have a credit and want to pay a lower amount. Check with your creditor or the financial institution handling the transfer for details on how to do this smoothly.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. 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.
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 .
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.
When you’re a renter, it can feel like all the transformative DIY projects are reserved for homeowners. But just because you rent doesn’t mean you can’t spruce up your space.
That’s right: Rental-friendly upgrades exist. And the best part? Many improvements can have a major impact on your space without blowing your budget.
1. Create an Accent Wall
Spicing up your walls doesn’t have to cost a fortune, nor must it require gallons of paint. For just a few bucks a roll, you can buy washi tape and create a custom accent wall that won’t ruin the paint job. Or, if you’re able to spend a few extra dollars, you could also invest in removable wallpaper.
2. Update Light Fixtures
Light fixtures in rentals are notoriously drab and tend to provide uneven lighting. Fortunately, there is no shortage of lighting options to help you brighten up your space. A recessed lighting conversion kit, for instance, is fairly inexpensive, easy to install, and allows you to hang a pendant or other light fixture. Not sure your landlord would approve? You can always buy some decorative lamps or even string lights to help amp up the brightness and style of any room.
3. Install Radiator Shelving
In older units, rusty radiators can be a renter’s nightmare. But luckily, there are some rental upgrades — like installing radiator shelving — that can disguise even the most unattractive units. You can DIY a custom shelving unit to work around your radiator, upgrade some shelving from a local thrift store, or even order one online.
4. Buy Matching Bookshelves
Bookshelves are a simple way to upgrade the decor and add much-needed storage space. Placing tall, matching shelves on either side of a TV, couch, or even a bed could bring some serious style (and space) to a small room, plus allow you to display photos or art without putting holes in the wall.
5. Apply Contact Paper
Do you have older appliances you’d like to freshen up? For just a couple bucks, you can invest in some stainless steel contact paper to make them at least look shiny and new again! Contact paper also comes in a wide variety of colors and styles that you can use to liven up your cabinets and refresh your countertops.
6. Replace Pulls & Knobs
This is another budget-savvy, rental-friendly upgrade that can add some flair to your home. Replace your door handles, kitchen cabinet knobs, and any other pulls with something more your style. Affordable, stylish knobs can be found on sites like Etsy and Amazon, and in stores like Lowe’s and Home Depot. Be sure to hang on to the original knobs so you can swap them back in before you move out.
7. Install a Bike Mount
If you own a bike but are short on storage, install a bike mount or other bike storage solution. Just make sure your landlord is okay with the installation since it may require some drilling.
8. Try Large Floor Mirrors
Sometimes more is more. Exhibit A: an oversized leaning mirror, which can serve double-duty as a luxe decoration and a functional mirror.
9. Invest in Houseplants
Want to add some life to your rental — literally? Look no further than a houseplant. If you don’t have a green thumb, explore hardy varieties, like air plants or even artificial plants.
10. Upgrade Your Showerhead
Installing a new showerhead is a quick, effective way to upgrade your bathroom. You could start reaping the rewards the very first time you turn on the faucet. Make sure to hang on to that original showerhead so you can reinstall it when you move out.
Need to carve out space for a home office? Or maybe even make room for a closet? Buying or creating stylish room dividers can provide an instant rental update. And when you need a larger space, simply close the dividers.
12. Use a Pantry Organization System
Help bring order to the busiest spot in your home: the kitchen. Pantry organization systems come in a variety of shapes, sizes, and varieties, so you should be able to find one that works for your home and budget.
13. Update Your Blinds
It can be easy to forget about window coverings. But freshening up your blinds or curtains can add a new visual element to the room, frame a window, or help brighten the space.
14. Install Sticker Flooring
When you’re considering places to upgrade, don’t forget to look down. Changing up the flooring — even temporarily — can make a room feel brand-new. One option to consider if you have a tile floor is removable tile stickers, which come in a variety of styles, sizes, and price points.
15. Create a Kitchen Backsplash
You can also use removable stickers to freshen up a kitchen backsplash, which is a much easier and cheaper option than replacing the tiles. New to this type of project? There are online video tutorials you can watch that will show you how to get the job done.
Don’t sleep on the small details — sometimes, they can have a major impact. One example of this is swapping out basic light switch covers with ones that match the decor of your rental. Plus, new covers are generally affordable and easy to install.
17. Buy a New Kitchen Faucet
There’s something to be said for upgrading the items in your rental that you use every day, such as the kitchen faucet. Installing a new faucet is a fairly simple DIY project, provided you know how to shut off the water to your sink and use a wrench. If you’re unsure how to do either, though, you can enlist the help of a plumber. Just be sure to put the old faucet in storage so you can swap it back before moving.
18. Find a Stylish Toilet Seat
Let’s be honest: Most rentals come with a basic toilet seat. When yours just won’t do anymore, it may be time to upgrade to something more modern and comfy. You can find a wide variety of options online or in stores.
19. Paint the Molding and Trim
Before selecting color swatches, you may want to double-check with your landlord that painting is allowed. Many landlords welcome you painting your molding and trim, since it’s an easy, affordable way to update a rental.
20. Invest in Good Rugs
Quality rugs can run well into the thousands of dollars. But there are less-expensive options that are also durable and stylish. Besides protecting your flooring, a good rug can also visually anchor a room and help absorb sound.
No matter the price of your rug, you may want to consider purchasing renters insurance to protect it and your other valuables against losses.
The Takeaway
When you’re a renter, you may not be able to rip out walls or change out kitchen cabinets. But there are still simple, effective ways to transform your space without breaking the terms of your lease. While these sorts of jobs tend to be affordable, you can easily rack up quite the bill if you plan on tackling several home improvement projects at once.
That said, if you’re ready to roll up your sleeves and get some renter-friendly updates done, see what SoFi can offer. With a SoFi Home Improvement Loan, you can borrow between $5K to $100K as an unsecured personal loan, meaning you don’t use your home as collateral and no appraisal is required. Our rates are competitive, and the whole process is easy and speedy.
Turn your home into your dream house with a SoFi Home Improvement Loan.
Photo credit: iStock/CreativaStudio
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.
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.
Buying a house can be a fraught process, but when the market is hot, the days between offer and closing can feel endless, especially if the mortgage underwriter asks you to write a letter of explanation.
But there’s no need to panic or assume that your mortgage application will fail. The lender is simply seeking clarification about any potential red flags in your financial documents or credit history.
What’s a Letter of Explanation?
A letter of explanation for a mortgage explains details of your financial situation that may need further clarification. Because a mortgage is a large loan, lenders need to know that the borrower is capable of shouldering the mortgage.
Lenders also know that life can’t be boiled down to a spreadsheet, and that it’s not unusual for a mortgage application to include things like a late credit payment or a period of job loss.
To do due diligence, the mortgage underwriter will ask you to explain the situation in a brief letter, which will be added to your mortgage application. Additional documentation and paperwork may be required.
💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.
Why Do I Need to Provide a Letter of Explanation?
Common issues that could trigger a request for a letter of explanation include:
• Questions about your income if you don’t have W-2s or are self-employed
• Negative items on your credit report
• Employment gaps
• Your living situation if you don’t pay any rent or mortgage
• A property income or loss you claim
• Credit lines opened after you’ve put in your mortgage application
• Large deposits to, and sometimes withdrawals from, your bank account
Must I Explain a Large Deposit?
If there’s a big or unexplained deposit to your bank account, your lender may want to know where the money came from — and whether that money needs to be paid back.
A lender may also question any uneven income streams, or if deposits don’t line up with your W-2s or your tax returns.
If you received cash from, say, a parent to help with a down payment or closing costs, you may also need a gift letter signed by the giver and recipient stating that the money was a gift, not a loan. Your lender may have a template for a gift letter.
Keep in mind that your lender may be more likely to scrutinize any large deposits or withdrawals within the last 60 days.
Letter of Explanation Template
A letter of explanation is not an autobiography or an admission that you did anything wrong. It’s simply a statement of the reason for any discrepancy or issue, along with any documentation, to back up your current financial picture.
You can keep a letter of explanation brief. It should include:
• Your name and address
• Your lender’s name and address
• A subject line that includes your application number and name
• A brief paragraph explaining the situation
• A polite closing
• Your signed full name
It might look like this:
Date
Lender
Lender’s Address
Lender’s Phone Number
Subject Line (RE: John Doe’s Mortgage Application)
Letter of explanation, naming the specific item being asked about and explaining it to the best of your abilities.
Sincerely,
Applicant’s Name
Applicant’s Address
Applicant’s Phone Number
Enc.: (Relevant documentation).
The tone of the letter should be polite and factual. Remember: Your goal is not to pull on the lender’s heartstrings; it’s to reassure them that your application is solid and you would responsibly pay back your mortgage on time.
💡 Quick Tip: Jumbo mortgage loans are the answer for borrowers who need to borrow more than the conforming loan limit values set by the Federal Housing Finance Agency ($806,500 in most places, or $1,209,750 in many high-cost areas). If you have your eye on a pricier property, a jumbo loan could be a good solution.
4 Tips for an Effective Letter of Explanation
Although being asked to write a letter of explanation may sound like being assigned homework, it’s actually a great opportunity: It means you might be able to qualify for the mortgage you want, even with an imperfect application. Here are some tips to help ensure you get an A+ on this particularly important homework assignment.
1. Keep It Simple
When you’re asked to explain yourself, it can be easy to jump into a broad-reaching narrative starting from childhood, but the best letters of recommendation tend to be short and simple: They clarify the situation being asked about and reassure the lender that the “red flag” situation won’t affect the borrower’s ability to repay the loan.
2. Provide Clear Details
Generally speaking, you’ll want to specifically name whatever item you’re being asked about (late payments on a credit card account ending in 0101; an employment gap between 2/20/2020 and 9/07/2020; etc.).
Then explain. For instance, if you’re being asked about an employment gap, you might let the lender know that you were let go as a result of corporate downsizing and that you freelanced while searching for a new job.
If you’re being asked about late credit card payments, you might let the lender know that you were in the hospital at that time and thus unable to make your credit card payments, or whatever the case may be.
The key is to take responsibility for the issue and provide clear, pertinent details without being too wordy.
3. Be Honest
This may go without saying, but you definitely don’t want to lie in your letter of explanation. For one thing, doing so is likely to keep you from being approved for the mortgage — and for another, it can be considered mortgage fraud, a serious crime that can come with prison time and fines.
4. Acknowledge Responsibility, but Don’t Get Emotional
When writing a letter of explanation, you may be justifying negative items in your credit history that resulted from poor decisions — or just poor circumstances. Nobody’s perfect, but a lender simply wants to make sure you won’t default on your loan.
It can be helpful to acknowledge the ways you’ve adjusted your financial habits in response to a negative item. This helps to reassure the lender that it won’t have an impact on your ability to pay your mortgage.
For example, if you’re writing a letter of explanation to address late rent payments after a layoff, you might add that you’ve since saved up an emergency fund of three months of living expenses in order to avoid being financially blindsided in the future.
However, writing an emotional sob story won’t help. Remember: It’s a good idea to keep it simple, clear, honest, and as short as possible while still covering all those bases.
Getting Your Mortgage Application in Shape
Knowing what documents you need and what a mortgage lender will look at can help get your application in strong shape before you file it. Your lender will scrutinize your credit history and any late payments, especially ones within the last 12 months. But there are ways to proactively tackle any issues on your credit reports.
• Check your credit reports. Knowing what your mortgage lender may see can help you assess where any weak points may be, and what information they may ask for.
• Call the creditor if you have a recent late payment. Creditors know that accidents happen and bills may be misplaced. If your account is otherwise in good standing, it’s possible that a creditor may erase the late payment.
• Focus on additional aspects of your credit. Making sure to pay bills on time and keeping your credit utilization below 30% can help build credit.
• Think twice about opening accounts. Before and after applying for a mortgage, it can be a good idea to be mindful of opening new lines of credit or charging an extensive amount on current cards. Suddenly taking on more debt on credit cards can raise a red flag to lenders, which may result in being asked to write a letter of explanation.
Understanding how a lender will see your mortgage application can give you confidence and may help you head off any potential problems.
A letter of explanation is when a mortgage lender needs clarity about a red flag or discrepancy that arises on your application. Knowing what to expect, having documentation ready, and answering any questions the lender may have can all be helpful in getting your home loan approved.
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.
Photo credit: iStock/scyther5
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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
