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Of all the details that come across your plate when you’re buying a home, one of the questions you might be asking is, “How does buying a house affect taxes?” The short answer? Buying a home could reduce your overall tax liability if you itemize deductions and pay a large amount of mortgage interest.

There are other conditions that need to be met, and it is possible that the amount of taxes you owe will stay the same. Of course, it’s always best to consult with a tax advisor for your individual situation.

To give you a general idea about how buying a home in 2023 affects taxes, we’ve compiled everything you need to know about how tax breaks work, what you can deduct, what you can’t deduct and whether or not it will make sense to itemize deductions.

Does Buying a House Help With Taxes?

It’s possible that buying a house can help with taxes — but only for tax filers who itemize their deductions. In 2020, the most recent year with data available, more than 87% of Americans took the standard deduction rather than itemizing. This signals that it may be unlikely you’ll have enough deductions for itemizing to make sense. Of course, if it can reduce your taxes, it’s worth looking into.

You might also be wondering, “How does buying a house in cash affect taxes?” If you don’t have a mortgage, you’re not paying interest, so you’re not able to take the home mortgage interest deduction. But you’re still able to deduct property taxes if you itemize. Remember to consider this even if your property taxes are part of your mortgage payments.

How Do Homeowner Tax Breaks Work?

Tax breaks start as programs passed into law and funded by the U.S. Congress. However, it is up to individual homeowners to find and file the correct paperwork to take advantage of these tax breaks.

Tax breaks come to homeowners as either tax credits or tax deductions.

Recommended: First-Time Homebuyer Programs

The Difference Between Tax Deductions and Tax Credits

The difference between a tax deduction and a tax credit is where it lies on IRS form 1040 and how much it reduces your final tax bill or refund. This will make more sense after we explain each.

Deductions On IRS Form 1040, deductions are compiled before being subtracted from your income. This is done before tax is calculated, so having deductions can reduce the overall amount of tax you owe. But because a deduction comes before tax is calculated, the reduction in tax liability is generally less than if the amount of tax owed was directly reduced by a credit (though this depends on the amount of each).

Credits Credits are subtracted from the amount of tax you owe. If you don’t owe tax but are instead receiving a tax refund, credits can increase the amount of money coming your way from the IRS. Generally speaking, credits put more money back in your pocket. You may have heard about a first-time homebuyer tax credit. A bill was introduced in 2021 that would have provided for this benefit, but as of June 2023 it had not passed into law.

Deductions are more common; however, with the revamp of the tax code in 2017 with the Tax Cuts and Jobs Act, the standard deduction was increased substantially and fewer people find the need to itemize. Nevertheless, it’s probably a good idea to add “keep track of possible tax deductions” to your list of New Year’s financial resolutions.

What Are the Standard Deduction Amounts for 2023?

It’s important to know the standard deduction amounts so you know if taking the home mortgage loan interest deduction will make financial sense for you.

•   For single filers: $13,850

•   For head of household: $20,800

•   For married people filing jointly: $27,700

If the amount of mortgage interest you pay is far below the threshold for choosing the standard deduction, you may not be able to find enough deductions for itemizing to make sense. The increased standard deduction in 2017 made this especially true, but there are certain scenarios where you should still itemize deductions.

Recommended: What Is a Gift Tax Return and When Is It Due?

Who Should Itemize Deductions

You should itemize deductions if the amount of your deductions is more than the standard deduction. If you have any of the following situations, you may have enough qualified deductions for itemizing to make sense.

•   If you have large medical or dental expenses that are not paid for by an insurance company

•   If you paid a large amount of interest on your mortgage

•   If you donated large sums to charity

•   If you can claim a disaster or theft loss

•   If you cannot take the standard deduction

•   If you can qualify for large amounts of the “other itemized deductions” found on the IRS forms

It’s hard to say if your individual situation will make sense for itemizing deductions. It may be worth it to consult with a tax professional.

Which Home Expenses Are Tax Deductible?

When you’re looking for home expenses that are tax-deductible, the IRS defines it very narrowly. The costs that are deductible include:

•   State and local real estate property taxes up to $10,000

•   Home equity loan interest if you used the funds from a home equity loan on your property

•   Mortgage interest deduction up to defined limits:

◦   For loans taken out after December 15, 2017: You can deduct home mortgage interest on the first $750,000 of debt (for married couples filing jointly) or the first $375,000 of debt for a married person filing separately.

◦   For loans taken out prior to December 15, 2017: You can deduct home mortgage interest on the first $1,000,000 of debt (for married couples filing jointly) or the first $500,000 for separate filers.

Which Home Expenses Are Not Tax Deductible?

Most home expenses, unfortunately, are not tax deductible. These include things to budget for after buying a home. The IRS specifically outlines these living expenses that cannot be claimed as a deduction:

•   Utility expenses, like gas, water, electricity, garbage, sewer, internet, etc.

•   Home repairs

•   Insurance

•   Homeowners association or condo fees

•   Cost of domestic help

•   Down payment and earnest money

•   Closing costs

•   Depreciation

Potential tax deductions are one thing to factor into your financial considerations as you think about whether you are ready to buy a home, but they certainly aren’t what should be driving your decision to make a purchase.

How Much House Can You Afford Quiz

The Takeaway

It is possible for the amount of tax you owe to be lower after you become a homeowner — but only with certain conditions met. You’ll want to do the math and compare what your taxes will look like when you itemize deductions vs. when you take the standard deduction. That will be the best way to tell how buying a house will affect your taxes.

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.

FAQ

What is the tax break for buying a house in 2023?

If you itemize deductions on your federal return, you can claim a deduction for your mortgage interest paid on a home bought in 2023, along with state and local taxes paid in 2023.

Will my tax return be higher if I bought a house?

While there are a lot of factors that go into a tax return, generally speaking, if the deductions that come from homeownership reduce your tax liability compared to previous years while all other factors remain the same, then you should owe less (or even get money back).

What are the major tax changes for 2023?

For tax years 2022 and beyond, you can no longer claim mortgage insurance premiums as a deduction. Beyond the tax deductions that come with homeownership, major changes to taxes for 2023 include reduced amounts to the child tax credit, earned income tax credit, and the child and dependent care credit.

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Photo credit: iStock/marchmeena29

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Mortgage interest is, simply put, the money you pay the bank for the service of lending you the amount you need to buy your home. Interest is expressed as a percent of the loan amount. It is usually rolled right into your monthly mortgage payment of the principal and interest.

This means interest can be something of a hidden cost to homebuyers, especially those on the market for the first time. But it’s still an expense that can really add up. That’s why it’s important for buyers to set themselves up for the best (i.e., lowest) mortgage rate possible.

Here’s what you need to know, including:

•   What is mortgage interest?

•   How does mortgage interest work?

•   How are mortgage rates set?

•   How does an adjustable vs. fixed mortgage differ?

•   How can you get the lowest mortgage rate?

What Is Mortgage Interest?

When a bank offers a borrower a significant sum of cash to purchase a house, they’re offering a valuable service, one they expect to be paid for. While an origination or processing fee may apply, the main way a bank makes money on offering a mortgage (or any kind of loan, for that matter) is by charging interest.

Interest is generally expressed as an interest rate, or a percentage of the amount of money you borrow. A lower rate means a lower overall loan cost, since you’ll pay less interest over time.

First-time homebuyers often overlook the impact of interest on the total cost of their home purchase, but it can be significant.

•   An example: At a mortgage interest rate of 6%, a buyer could expect to pay $382,599 on a 30-year mortgage loan of $330,000 This equals a total cost of $712,599, most of which would be interest.

As you can see, it pays to find the lowest rate possible! Fortunately, there are some things you can do as a borrower to set yourself up for the lowest rate possible. It is, however, worth noting that many factors affecting interest rates are out of the borrowers’ control.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

How Are Mortgage Rates Set?

Mortgage rates are calculated using a complex set of factors including both the borrower’s financial status and the health of the economy.

While there’s a lot to say about the economy’s impact on mortgage rates, the simplest rule of thumb is this:

•   When the market is doing well, interest rates tend to be higher.

•   When the market is not doing so great, interest rates tend to be lower.

Mortgage rates also tend to increase with increasing inflation.

Many think that mortgage rates are set by the Federal Reserve (otherwise known as the Fed), but this is a misunderstanding. The Fed sets short-term interest rates that banks use between themselves, but this figure does influence the interest rates of consumer loans including mortgages. So if the Fed’s interest rate is high, chances are mortgage interest rates will be pretty high, too.

Personal financial factors that affect mortgage rates include your credit score, the size of your down payment, and whether the house will be your primary residence or a secondary home or investment property. Generally, rates are higher when the loan is a riskier investment for the bank, which can make sense. The greater the danger of default, the more the servicer wants to be sure they get paid.

Types of Mortgage Rates

There are a variety of mortgage offerings available. You may see offers with varying rates for:

•   Loans designed for lower-income earners, such as FHA, USDA, and VA loans

•   Loans of different lengths, such as a 15-year vs. 30-year home loan

•   Jumbo loans, for those borrowing a larger sum of money to finance a home.

However, one of the biggest decisions is which of the two main types of mortgages, fixed-rate and adjustable-rate, you choose.

Fixed Rate vs Adjustable Rate Mortgages

Fixed-rate mortgages, as their name implies, have one fixed interest rate over the entire lifetime of the loan. If you sign a contract for a fixed-rate mortgage at 5.75%, you can expect to pay that same 5.75% interest rate throughout its term.

Adjustable-rate mortgages, on the other hand, adjust the interest rate depending on market factors. They may start with a fixed rate for a certain amount of time, such as five, seven, or even 10 years. Thereafter, your interest rate (and therefore your monthly mortgage payment) will change over time.

These mortgages can be attractive since they often offer lower rates upfront, and they may come with rate caps to protect borrowers from excessive interest rates. It’s worth noting, though, that they can also be harder to predict and budget for in the long run.


💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

Why You Have to Pay Interest on Mortgage Loans

As mentioned briefly above, paying interest compensates a lender for extending you a chunk of cash to buy a home and pay it back over time.

Interest can be one of the key ways that banks make money. For instance:

•   A financial institution might pay customers 3% interest on the money they keep on deposit.

•   The bank might then use some of that money to fund home loans on which borrowers might pay 6.75% in interest.

•   The difference between the 6.75% that the bank is earning on loans vs. the 3% it is paying depositors is part of the way a bank profits and stays in business.

How Lenders Calculate Your Mortgage Payments

As you learned above, interest is rolled right into your home mortgage loan payment. But exactly how much of that money is interest? And how much is going toward the mortgage principal (i.e., the borrowed cost of the home itself)?

The answer depends on where in the loan’s term you are: Earlier on in the mortgage, most of your payment will go to interest. Again, this makes sense: The bank wants to make sure they get paid for their services, even if you decide to repay the mortgage early or stop paying the loan entirely.

Even in the beginning, some of your monthly payment will go to principal — along with any taxes or insurance you may also be paying as part of the mortgage.

Eventually, though, the principal will represent the majority of your payment. The moment when this happens is known as the “tipping point” of a loan — and it’s yet another reason to look for the lowest rate possible. The lower your interest rate, the more quickly your tipping point will arrive, which means you’ll grow your home equity more quickly.

How Interest Works for Different Types of Mortgages

You’ve already read about the two main types of interest: fixed-rate vs. adjustable-rate home loans. But how else does interest on a mortgage work?

Here’s one other option to know about: There is also such a thing as an interest-only mortgage, which allows the borrower to pay — you guessed it — only interest for the first three to 10 years of the loan. Interest-only mortgages can be either fixed-rate or adjustable-rate loans, as described above, but all of them carry some risks since monthly payments can rise so sharply after the initial interest-only period.

How to Get a Lower Mortgage Interest Rate

By this point, you’re probably on board with the idea of finding a good mortgage interest rate.

Given the cost of living in states across the United States — and especially in expensive states like California — keeping housing costs as low as possible is a priority.

While it’s not all under a borrower’s control, there are some ways to ensure your interest rate is as low as it can be. Here are some tips to help.

Get Your Finances in Ship Shape

Although there are lots of things you can’t control about your mortgage interest rate, it’s worth it to take advantage of the things you can. That means getting your financial profile into the best possible shape before applying for a mortgage: reviewing and building your credit score, paying down debt ahead of time, amassing a larger down payment, and, if possible, increasing your income. These steps may take some effort up front, but they can really pay off over time.

Shop Around For Lower Interest Rates

While interest rates are relatively consistent across the market, banks do compete with each other to offer the lowest rates possible — and attract more borrowers. That benefits you because it means shopping around, even just a little bit, can be worthwhile. Reducing your rate by even half a percentage point can save you tens of thousands of dollars over a 30-year loan.

Look into Paying Points

While this may not be the right option for everyone, if you can put additional funds down on some home loans, you could get a better rate. A point equals 1% of your mortgage amount, and if you can pay a point, you can usually lower the rate on your mortgage by 0.25% over the life of the loan.

Recommended: Cost of Living in California

How Mortgage Interest Deduction Works

Although it’s not a way to lower the cost of interest, the mortgage interest deduction allows you to deduct the amount of money you pay on mortgage interest from your taxable income — which lowers what you owe to Uncle Sam come April. In general, how the mortgage interest deduction works is for up to $750,000 in home loan debt.

Tips on Mortgage Interest

Here are a couple of additional ways to get the best deal possible on your mortgage rate:

•   Try the online mortgage calculators that are available. Not only can you get a feel for monthly payments in different scenarios, you can also compare different products, such as a 30-year vs. a 15-year home loan.

•   Consider whether a qualified mortgage broker could help you find offers to suit your needs. These professionals can work as an intermediary between prospective homebuyers and lenders to facilitate the process and research a variety of options.

The Takeaway

Mortgage interest is the money a bank charges for the service of providing a home loan, expressed as a percentage of the loan amount. Getting a lower mortgage interest rate is an important way to keep your home — and your life — affordable over the long run.

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.

FAQ

How is interest calculated on a mortgage?

How does interest work on a mortgage? Prevailing Interest rates are calculated as a percentage that is based on a variety of economic factors. In terms of borrowers doing the math for a specific interest rate on a certain loan, there are online tools to help with that. And while borrowers can’t control the market, they can work ahead of time to ensure their financial profile is in good shape to get the lowest interest rate possible.

How much interest is paid on a 30-year mortgage?

That depends on the rate, among other factors. For example, a 30-year mortgage for $400,000 at a rate of 6.82% and on a house purchased for $425,000 would cost $540,717 in interest. The total payment of principal and interest would be $940,717. However, if that rate were 5.50%, the borrower would spend only $417,703 in interest.

Do you pay mortgage interest monthly?

Yes, you typically pay mortgage interest monthly. Most home loans roll interest right into their monthly payment, though the amount you pay in interest versus principal will change over time.

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Photo credit: iStock/Chainarong Prasertthai

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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 .

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

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

What Are House Auctions?

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

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

Why Are Some Houses Sold at Auction?

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

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

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

•   Failed to make property tax payments

•   Had their property seized as part of a government forfeiture

•   Didn’t pay homeowners association fees as agreed

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

Recommended: What Is a HUD Home?

How Do Auctions Work?

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

Types of Auctions

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

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

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

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

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

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

Types of Bids

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

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

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

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

How Much Should I Bid?

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

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

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

Example of a House Auction

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

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

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

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

Buying a House at Auction: In Person vs. Online

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

In Person

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

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

Online

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

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

How to Find Real Estate Auctions

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

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

•   Craigslist

•   Facebook

•   Local newspaper advertisements

•   County treasurer or tax assessment notices online

•   County court websites

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

What Bidders Need to Know

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

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

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

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

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

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

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

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

Pros and Cons of Real Estate Auctions

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

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

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

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

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

Recommended: What Is a VA Loan?

Tips to Buying Auction Homes

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

•   Why is the home being sold?

•   Is it a foreclosure or bank-owned?

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

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

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

•   Does the auction house allow financing?

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

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

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

Risks of Buying Houses at House Auctions

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

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

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

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

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

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

The Takeaway

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

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What are the advantages of buying a house on auction?

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

What is the benefit of an auction house?

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

What happens when you bid at an auction?

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

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Photo credit: iStock/bymuratdeniz

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*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.

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A real estate contract is one agreement you do not want to sign without reading and understanding fully. Get it right, and you’ll likely have a smooth transaction. Miss something, and you’ll face delays, lost money, or even cancellation of the contract.

What Are Real Estate Purchase Agreements?

When buying a home, you’ll make your offer on a form standardized by your state known as a real estate purchase agreement (also commonly referred to as a real estate purchase contract, a real estate contract, a real estate sales contract, a home purchase contract, or a home contract). This legally binding agreement, in general, says the buyer will pay an agreed-on amount for the purchase of the property, and the seller will convey the title in exchange.

The purchase agreement, or contract, details the terms and conditions of the sale. The fundamentals include the parties in the transaction, a description of the property, the sales price, the closing date, and the date of the title transfer and possession.

Who Prepares the Contract?

The initial offer is most often filled out by the buyer’s real estate agent and sent to the seller for review. Sellers can ask for adjustments to dates, reject or accept contingencies, negotiate the price and repairs, or even reject the offer altogether. The contract is considered a working document until both parties reach an agreement on terms. When signed by both parties, the terms are set and the contract becomes binding.


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

Key Components of a Home Contract

There’s a lot of legal language in a home contract, but the core details are actually quite clear. These are essential details that both buyer and seller need to know so they can complete the transaction in a timely, legal manner.

1. Identity of the Parties

For a legal contract, full identification of the parties in the contract is required, and the parties to the contract must have the capacity to enter into the contract.

2. Property Details

The property must be described with certainty. This is a legal description of the property filed with the county recorder’s office.

3. Details, Rights, and Obligations

Buyers and sellers agree to certain responsibilities and obligations in entering into a real estate contract with each other.

•   Good faith. Parties should act in good faith with each other, meaning neither party should act to destroy or injure the right of the other party to receive the benefits of the contract.

•   Time is of the essence. Parties should understand that deadlines are absolute and must be met. If deadlines need to be adjusted, an addendum with the new dates can be submitted by one party to the other for consideration. A signature validates the change.

•   Legal and tax counsel. All parties should understand the legal and tax ramifications of entering into a contract and may want to consult with appropriate experts.

4. Purchase Price and Financing

Sales price, amount of down payment, and payment method are outlined in the real estate contract. An amount of earnest money is also listed on the contract. Earnest money is a deposit held in escrow by a third party that signals to the seller that the buyer is putting forth a good-faith effort to complete the purchase of the home. Earnest money may be forfeitable to the seller if the buyer does not meet the conditions of the sale. It is also refundable to the buyer under the contingencies outlined in the contract.

5. Contingencies

A real estate sales contract usually includes contingencies, which are terms the buyer or seller sets that must be satisfactorily met for the contract to become binding. One of the most common contingencies is a home inspection. If something on the checklist for a home inspection is not to the buyer’s standards, they are able to cancel the contract and have their escrow money returned to them.

Some other common contingencies are:

•   Financing

•   Sale of the buyer’s home

•   Title review

•   Appraisal

•   Survey

•   Homeowners association document review

When competing against multiple offers in a hot market, buyers have been known to waive some or all contingencies.

6. Closing Date

The closing date is the day the transaction will be finalized. Buyers often wonder how long it takes to close on a house, and the answer can vary widely depending on the property and circumstances of the buyer and seller. If you’re looking for a definitive number, national statistics show an average of 45 days to close.

On the contract, parties will agree to a closing date, identify the title company, and disclose any other terms for the final transfer of the property. At the closing, final signing and transfer of the deed occurs, the transfer of title is recorded, and the buyer often receives the keys to the house (though possession can occur in subsequent days, as per the agreement between the buyer and seller).

7. Possession Date

The possession date is the first day the buyer can occupy the home. Possession can occur immediately after closing, at an earlier date, or at a later date that is agreed on by both parties. It is most often listed as the closing date or the day after closing.

8. What Is Included in the Sale

Buyers can negotiate what is included in the sale of the property. Common items listed are the washer and dryer, refrigerator, and other heavy items that are not easily moved.

9. Closing Costs

Though exact closing costs won’t be listed in the real estate purchase agreement, the contract can be written to name who will pay for closing costs. It’s common, for example, for a buyer to offer an amount over the list price of the property and then ask the seller to help cover the buyer’s closing costs with the overage amount. Wondering how much typical closing costs are? They average 2% to 5% of the loan principal.

10. Addendums

An addendum is an additional document to the real estate purchase agreement that includes more information or buyer requests that were not included in the original contract. It has the power to override the terms of the original contract.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Can Purchase Agreements Be Canceled?

Canceling a contract is different for buyers and sellers. Buyers usually have contingency clauses built into the purchase agreements. If certain conditions of the sale are not met, the buyer can back out of the contract and have their earnest money returned. Some common reasons rest on:

•   Financing

•   Sale of their home

•   A satisfactory home inspection

•   An appraisal

•   Title work

It’s common, for example, for a buyer to cancel the real estate contract if the home has serious issues found during a home inspection. Foundation, electrical, pest, mold, or any other issue found during the home inspection will allow the buyer to cancel the contract if an inspection contingency is in place.

Buyers can also walk away from the purchase agreement for any reason, but they risk losing their earnest money or face court action if the reason and timing for breaking the contract do not fall within the contingencies outlined in the contract.

A seller, on the other hand, has fewer options for canceling the purchase agreement. Sellers can cancel the contract if the buyer fails to meet the conditions and deadlines outlined in the contract. Sellers who default on the contract for other reasons may be forced to pay the buyer an amount equal to the earnest money deposit. They could also face a lawsuit from the buyer to enforce the contract.

The Takeaway

A real estate purchase contract can be lengthy but it’s important to read and understand what you are signing, whether you are buying or selling a property, and to keep on top of the deadline imposed by the closing date in the agreement. Being smart about the contract can protect you as a home changes hands.

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.

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Photo credit: iStock/fizkes

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*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.

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