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Sometimes, home sweet home is right under our noses. Buying a house from a relative may be the perfect solution, but everyone should be aware of how to negotiate and seal the deal.

An adult child may have her heart set on buying her parents’ home because of the memories it holds. Another might want to purchase Grandma’s home so he can retire in Florida. Others may have a relative who wants to give them a good deal.

Whatever the case, if you’re buying a house from family, you’ll want a harmonious handoff.

Buying a House From a Relative

It’s important to understand the home buying process before making any real estate purchase.

And knowing what is needed to buy a home is useful before, erm, buying a home.

Buying a house from family, though, is a bit different than a deal between strangers. First of all, whether you’re a first-time homebuyer or not, it’s important to consider how crafting the deal can affect familial relationships.

Not hiring real estate agents might keep negotiations and planning all in the … family. If that’s the case, it’s a good idea to have regular check-ins to ensure that both parties feel good about the next steps and are ready to move forward.

It can be helpful to take notes about the arrangement after an initial meeting and make a copy for everyone involved so that all important details are in writing and available for review. That way, everyone is clear on what is expected of them.

Do We Need Real Estate Agents and Other Pros?

Even though buying a house from family is a personal affair, it can be helpful to bring in professionals to make sure the process goes smoothly, everything is done legally, and both parties walk away feeling satisfied and respected.

A lawyer or real estate agent can help make sure the purchase contract is done properly, state-required property disclosures are made, and the house sells for fair market value — what the property would sell for on the open market.

A title company can protect the buyer from any liens and ensure that no one else has a claim on the home. Even with a high level of trust between family members, this can be a smart step to take to protect the buyer.

And it can be helpful to consult a tax professional in order to be aware of any tax implications of the agreement.

Determine the Purchase Price

Deciding on the fair market value can be done by reviewing comps or hiring an appraiser to conduct an objective property valuation. Keep in mind that lenders usually require an appraisal.

Once both parties have an idea of the market value, they can decide how much the buyer will pay. In some cases, this will be the fair market value. In other scenarios, a family member may offer to pay closing costs, or provide a cash gift or gift of equity (described below).

Draw Up the Purchase Agreement

When both parties are ready to move forward, it’s time to draw up a purchase agreement. The legally binding real estate purchase contract will outline the price and payment terms.

Buyers who need a home loan can send the contract to their lender when applying for a mortgage.

Prepare for Scrutiny

There are two main types of real estate transactions: arm’s length and non-arm’s length.

In an arm’s-length transaction, the buyer and seller do not have a relationship and are acting in their own self-interest.

When someone buys a home from a family member, it’s a non-arm’s-length transaction. These deals may be subject to more scrutiny because the chance of mortgage fraud increases.

The sale price of the home must equate to what it would be between strangers unless a gift of equity is on the table.

A heads-up for anyone whose elder family member needs to go to an assisted living facility or nursing home and plans to fund their stay with Medicaid: To prevent Medicaid applicants from simply giving away a home or other resources to qualify for the low-income medical program, the federal government has a “look-back period” of five years (the exception is California, which has a 2.5-year look-back period). A Medicaid applicant is penalized if assets were gifted or sold for less than fair market value during that time.

Know How the Gift of Equity Works

One thing sellers may want to consider is giving the relative a gift of equity, or selling for less than fair market value.

The maximum amount of the discount without reporting it as a gift to the IRS is $16,000 per recipient in 2022.

Spouses “splitting” gifts may contribute $32,000 a year. Spouses splitting gifts must always report the gift.

That doesn’t mean sellers have to pay a gift tax; they can apply it to their lifetime gift exclusion. The lifetime gift and estate tax exemption is $12.06 million, or $24.12 million for a couple, in 2022.

So for the vast majority of people, the gift and estate tax exemption allows for the tax-free transfer of wealth from one generation to the next. Homeownership in general helps build generational wealth.

Here’s another plus for buyers: Most lenders allow the gift to count as a down payment.

A lender will require a gift letter signed by the sellers for a cash gift or a gift of equity sale. The letter will confirm that the gift is not a loan.

Know How to Finance the Home

When buying a home from a family member, many buyers will still need to take out a home loan. Even with a discount or a special offer from a family member, it can be hard to purchase a home outright.

Go with a mortgage broker or direct lender? Each has pluses and minuses.

Any mortgage loan officer or broker should be willing to answer your mortgage questions, including those about fees, points, and mortgage insurance.

Weighing different types of mortgage loans (including conventional conforming mortgages, jumbo loans, and government-backed loans) and loan terms (usually 30 years) can help you make a more informed decision.

After applying for mortgages, you’ll receive loan estimates. It’s important to compare mortgage APRs, fees, and closing costs.

After you choose a mortgage and close on the home, your mortgage servicing outfit will handle your payments.

The Takeaway

How to buy a house from a family member? For starters, consider calling in professionals and understand the gift of equity. Buying a house from a relative can be seamless.

As you shop for a mortgage, see what SoFi offers. Why SoFi? Because the terms are flexible, the down payments are low, the closing time is guaranteed, and the rates are competitive.

Get a rate quote in just minutes.

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In addition to typical banking and lending services, some credit unions also offer student loan refinancing opportunities. Refinancing student loans means that you pool all or some of your existing federal or private student loans into a new loan with a new, private lender. The goal is to achieve some sort of advantage when you refinance: for example, a lower interest rate or a lower monthly payment by extending your loan term.

It’s important to note that if you refinance federal student loans, you will forfeit access to federal repayment plans, such as the Standard, Graduated, and Extended Repayment plans.

Keep reading to learn more about how credit unions differ from traditional banks and why you may want to consider a credit union for student loan refinance.

How Credit Unions Differ from Traditional Banks

A credit union is a financial services cooperative that exists to serve its members. Products and services of a credit union typically include member education, financial planning help, mobile and online banking, checking and savings accounts, and the usual menu of loans.

Banks deliver many of the same types of services as credit unions. Their main goals are to benefit stakeholders and customers. But credit unions differ from traditional banks in one main way — they are nonprofit, whereas traditional banks are for-profit. Take a look at the comparison table below to learn more about the differences between credit unions vs. banks.

Pros and Cons of Refinancing Student Loans With a Credit Union

Credit unions can offer benefits that other lenders might not give you, but there are some downsides to watch out for as well. It’s a good idea to take a look at both the pros and cons before refinancing student loans with a credit union.

If you’re looking for more in-depth information, SoFi offers a comprehensive student loan refinancing guide.

Finding a Credit Union That Refinances Student Loans

Which credit unions refinance student loans? It’s a good idea to consider a wide variety of lenders before you land on a credit union, including national credit unions, local credit unions, alumni credit unions, and even church credit unions. Not every credit union offers student loan refinancing, so you’ll have to do a little homework based on where you’re likely to be able to tap into membership opportunities.

By the time you finish comparing and contrasting all of your options (including interest rates), you’ll have a better idea of what type of lender you should choose. In addition to searching around for the right lender, you can do a few other things to strengthen your overall profile.

Review your FICO® credit score, the three-digit number that tells lenders how well you handle debt. Your credit score can reveal the rate and terms you will likely receive. It’s a good idea to try for the highest credit score you can get. The higher your credit score, the more favorable your terms will be, which can help you save a significant amount of money over time.

Consider paying down other debts you have, such as personal loans or credit card debt. Lenders take a look at your debt-to-income (DTI) ratio, which compares your monthly debt to the income you bring in. The lower your DTI, the better your opportunities may be.

You can also assemble the types of documents that you know your lender may need, including government-issued identification (such as your driver’s license), pay stubs from your employer, and recent tax returns. It may speed up the process of loan approval once you apply for a student loan refinance with the credit union.

Recommended: What Is a Bad Credit Score?

Comparing Credit Union Loan Terms

Loan terms refer to all the conditions and options available to you when borrowing money. The key elements you should look for in a refinance lender are:

•   Interest rate: What interest rate will you receive from the lender? You want to be able to get a lower interest rate than what you have on your current loan(s). The lower the interest rate, the more money you’ll be able to save on your loan over time.

•   Payoff amount: Know the total “payoff amount” for each loan offer. Getting a round figure from each lender will let you determine the interest amount you’ll pay over your entire loan period. A student loan refinancing calculator can also help you calculate your final costs. You can also find out whether a 20-year student loan refinance or 30-year student loan refinance makes sense for your needs.

•   Fees. Some lenders charge fees to help cover the cost of servicing a loan. These may include origination fees, prepayment penalties, and late fees.

Besides loan terms, consider asking about flexible repayment options and customer service:

•   Flexible repayment options: What happens if you have trouble making your payments? Will your lender work with you? It’s a good idea to ask questions about the types of repayment options they offer in the case of a job loss or a demotion, for example.

•   Customer service: Will you get good customer service from the credit union you’re considering? Ask for references from current customers. You may also know of student loan refinance customers in your community who already use a particular credit union and who can talk to you about their experiences.

Recommended: When Should I Refinance My Student Loans?

Alternatives to Credit Unions for Student Loan Refinancing

What alternatives to credit unions do you have, and should you refinance student loans in the first place? You can refinance with banks, online lenders, and other financial institutions.

Some online banks and lenders differ in that they cannot accept cash deposits (to savings or checking accounts) from customers. Or they may only offer loans, lines of credit, and credit cards. Because they don’t accept cash deposits, online lenders face less stringent government requirements than traditional banks and credit unions.

Before you make a final decision about a credit union student loan refinance or alternative banking solution, take a look at the interest rates, overall payoff amounts, repayment options, and customer service reviews.

The Takeaway

You can refinance private student loans with a credit union (as well as federal student loans), but it isn’t your only option. Credit unions differ from traditional banks due to their nonprofit status, membership requirements, dividends offered to members, limited product offerings, and backing by the NCUA rather than the FDIC. Shop around to find the best loan terms (interest rate, repayment period, and fees) before you settle on a lender.

If you think refinancing might make sense for your situation, consider refinancing your student loans with SoFi. You can refinance online and pay zero fees.

Photo credit: iStock/SDI Productions

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Selling a house to pay off student loans may not make the most sense for most borrowers. If you’re thinking about selling your home to pay off your mortgage debt and then buying another home after you pay off your student loans, it’s important to remember that no matter what, you’ll still have to pay back debt. Due to certain characteristics of both student loans and mortgages, it might not be advantageous to you as a borrower.

Read on to learn about mortgage debt vs. student loan debt, the challenges of selling your house to pay off student loans, and alternative options to selling your house to pay off student loans.

Paying Off Student Loans

It’s understandable that some borrowers may want to leverage the sale of a house to sweep away student loan debt. After all, student loan borrowers in the United States collectively owe about $1.6 trillion, up from $250 billion in 2004, according to Brookings and the U.S. Department of Education. Student loans take up the second largest portion of household debt after mortgages.

However, there are specific repayment plans that could help you put a plan in place to tackle the process of paying off your student loans. Here are several repayment plans available to federal student loan borrowers:

•   Standard Repayment Plan: The most common repayment option for federal student loans is the Standard Repayment Plan, which means you pay a fixed amount each month. You must make payments of at least $50 per month over a 10-year period in order to repay the loan in full.

•   Extended Repayment Plan: The federal fixed or graduated Extended Repayment Plan allows you to take up to 25 years to pay off your student loans in full. You must owe more than $30,000 to qualify under the Direct Loan or a Federal Family Education Loan (FFEL) program.

•   Graduated Repayment Plan: You can start out with a lower monthly payment and increase your payment amount every two years with the federal Graduated Repayment Plan. You’ll still pay your loans off in 10 years but the graduated repayment plan theoretically allows for your student loan payments to grow along with your salary.

•   Income-Driven Repayment Plan: The Income-Driven Repayment Plans set your monthly payments based on your income and family size. It can take up to 25 years to pay off your loan using four different options: the Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), and Income-Contingent Repayment Plan (ICR Plan). You may even be able to cancel your remaining balance after you meet certain requirements.

These plans give you opportunities to pay off your student loan debt with a goal in mind as an alternative to selling your home.

The repayment plans available for private student loans will vary based on the lender’s policy.

Mortgage vs. Student Loan Debt

Whether you choose mortgage and student loan debt, the fact of the matter is that you’ll still have debt.

One of the first things you may look into when you’re trying to decide whether to sell your house and pay off your student loan debt may be your interest rate. The interest rate is the amount you pay per month as a portion of the loan you receive from your lender. The higher your interest rate, the more you’ll pay over the life of the loan.

Mortgage lenders set interest rates based on the action on secondary markets, where bundles of loans are bought and sold as well as the amount of risk you present to a lender. Rates fluctuate depending on the 10-year Treasury yield. Mortgage lenders will also evaluate factors like your personal credit score, the type of mortgage, and loan terms, your down payment, and more when determining your mortgage interest rate.

The U.S. Department of Education also sets interest rates for federal student loans based on the 10-year Treasury note. Private student loan lenders use market factors and information they gather about you, the borrower, and your cosigner (if applicable). Private lenders also use a benchmark index rate to determine interest rates called the Secured Overnight Financing Rate (SOFR).

Student loan interest rates may be higher or lower than mortgage rates, depending on the type of mortgage loan you choose. If your student loan interest rate is higher than your mortgage, you may want to consider keeping your mortgage and refinancing your student loans to a lower interest rate.

However, the interest rate isn’t the only thing you’ll want to consider before you make your decisions about how to pay off student loans. In the next section, we’ll discuss several other important considerations before you make the big decision about whether to sell your house to pay off debt.

Challenges of Selling Your House to Pay Off Student Loans

Why may you want to avoid selling your house to pay off student loans? Let’s walk through a few reasons why you might want to consider other options.

Your Home Serves as Collateral

A mortgage is a home loan secured by the property you finance. In other words, when you get a mortgage, you put your home up as collateral. This means that when you borrow money, you agree to put an asset up to back the loan or as backing for that loan. If you fail to make your payments, your lender could take away your home through foreclosure.

Student loans are not backed by any collateral. You can’t lose your home if you’re having trouble making your student loan payments — there are benefits to having student loans!

You Lose Out on Certain Tax Benefits

If you’re not paying interest on student loans, you can’t claim the student loan interest deduction, which allows you to deduct up to $2,500 of the interest paid for student loans on Form 1040. You may deduct $2,500 or the amount of interest you actually paid during the year, whichever is less.

It’s true that you can also take advantage of the mortgage interest deduction, which is a tax deduction on the mortgage interest paid on your mortgage debt. You can deduct interest on the first $750,000 of your mortgage as long as you itemize your tax return.

However, if you’re asking, “Should I sell my house to pay off student loans?” — it may be a better idea to keep your student loan and your mortgage and get the tax benefits of both the student loan and mortgage interest deductions.

Alternatives to Selling Your House to Pay Off Student Loans

What alternatives are available if you’re thinking, “I don’t know if I want to sell my house to pay off student debt?” Let’s go over a few options.

Consolidating Student Loans

If you have multiple federal student loans from different loan servicers, you may be able to combine them into one loan with a fixed interest rate by choosing student loan consolidation. You can also change your loan term when you consolidate and also adjust the repayment terms on your loans without paying extra fees. Though it’s worth noting that it’s possible to change your repayment plan for federal student loans at any time.

You must complete the Federal Direct Consolidation Loan Application to consolidate your loans but you can only use this option for federal student loans, not private student loans. You may consider refinancing your private student loans if you are interested in changing the rates or terms on them — continue reading for additional details on student loan refinancing.

Student Loan Forgiveness

It’s important to note that most student loan forgiveness programs don’t offer complete loan cancellation right away. As mentioned earlier in the article, with an income-driven repayment plan it could take 25 years to qualify for complete forgiveness.

One of the most common types of forgiveness, Public Service Loan Forgiveness (PSLF), means you no longer have to pay your remaining federal student loan debt after you make a specified number of monthly payments. You must satisfy all of the requirements before you get your loans forgiven or canceled. Note that the program only applies to federal direct student loans, including:

•   Direct Subsidized Loans

•   Direct Unsubsidized Loans

•   Parent PLUS Loans

•   Graduate PLUS Loans

•   Direct Consolidation Loans

Pursuing loan forgiveness through a program like PSLF requires a series of on-time, qualifying payments. The program requirements can be strict so be sure to read the details closely to be sure you are fulfilling them. If you have any questions about whether you qualify for loan forgiveness, contact your loan servicer.

Refinancing Student Loans

Refinancing your student loans essentially means you trade in your current loans to a private lender and exchange them for a new loan with a better interest rate and payment plan. The goal with refinancing is to save more money over time with a lower interest rate over a fewer number of years.

The Takeaway

Ultimately, you’ll have to consider a wide variety of factors before you decide whether it makes sense to sell your house to pay off student loans, including:

•   Interest rates

•   Loan term

•   Repayment options

•   Student loan consolidation options

•   Forgiveness options

•   Refinancing opportunities

•   Tax deductions

In some situations, it doesn’t make sense to sell your house to pay off your student loans. Selling your home may mean eliminating a mortgage, but it also requires you to find a new place to live. Before you decide to sell your house to pay off student loans or buy a house again after doing so, it’s also important to remember that your home is a great investment — a nest egg that you can build on throughout your loan term.

Check out SoFi’s student loan calculator to see how you can refinance student loans and potentially secure a lower interest rate. You’ll quickly learn your estimated savings over the life of your loan. SoFi might have the answer to handling your student loans — no need to sell your home.

FAQ

Should I move to pay off student debt?

Moving to pay off your student loans is a personal choice. However, if you can find a lower-cost home, it may be beneficial for you to be able to make lower mortgage payments because you may be able to devote more money per month toward your student loan payments. Weigh the pros and cons and also find out if you’ll owe money for paying off student loans early. Most lenders don’t charge a prepayment penalty, but it’s possible that your lender could charge one.

Is it wise to sell a house to pay off debt?

Selling your home to pay off debt can be one option for eliminating some of your debt, especially if you feel that you’re paying too much for your mortgage. Downsizing can be an effective way to expedite the repayment of other debts because you can use the excess money to make extra payments. The general rule of thumb is to spend 28% or less of your monthly gross income on your mortgage payment, which includes your principal, interest, taxes, and insurance. Before you sell your home to pay off debt, consider all the angles before you take the leap.

Is it better to pay off a house before selling?

You may think it’s a good idea to pay off a house before you sell it to make a clean, fresh start before buying a new home. However, you might end up owing more at closing because you might be subject to a prepayment penalty through your lender. Check your loan terms before you decide.

Photo credit: iStock/Quils

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

As long as you meet lender requirements, it’s possible to refinance student loans without a cosigner. Refinancing means that a private lender bundles some or all of your loans, pays them off, and structures them into one new loan. A private lender can be a bank, school, credit union, or state agency. Federal student loans are funded by the federal government.

A cosigner is an individual with a good credit record who agrees to repay the loan if the primary borrower cannot. If you prefer to apply for a student loan without a cosigner, you may pay more for your loan over the long term through higher interest rates.

Keep reading for more information about student loan refinancing without a cosigner and what it involves.

What Is Student Loan Refinancing?

Student loan refinancing means that a private lender pays off your existing loans (which can be a mixture of private and federal student loans) and puts all of your loans under one roof. This means you don’t have to keep track of various loan payments.

Refinancing student loans allows you to lower your interest rates or extend your loan payoff. Your interest rate, which is a percentage of your principal amount borrowed, is the amount you pay to your lender in exchange for borrowing money. Extending your loan payoff means that you will increase the number of years you take to pay off your loan. It’s important to note that in this case, you will pay more over the life of your loan because you increase the number of years that you will pay for your loan.

You can refinance both federal and private student loans, but note that you must do so with a private lender. You cannot refinance any type of loan into a federal student loan. However, refinancing federal student loans means that you’ll lose access to federal protections such as federal loan forgiveness and income-driven repayment plans. Some lenders only refinance private student loans. Clearly, knowing if and when to refinance student loans is not a simple decision.

Benefits of Refinancing Student Loans Without a Cosigner

Take a look at the benefits of a student loan refinance with a cosigner and the drawbacks of refinancing student loans without a cosigner.

Keep in mind that if the student stops making loan payments, cosigners may end up paying back the student loan. Not making payments can damage both the student’s and the cosigner’s credit score. Your credit score is a three-digit number that shows a lender how well you pay down debt.

If this happens, it can result in a strained relationship. A student loan refinance without a cosigner may be the best option for all parties involved.

Recommended: Guide to Student Loan Refinancing

How To Refinance Student Loans in 4 Steps

Refinancing student loans without a cosigner typically follows these four steps:

1. Prequalify

By submitting some personal information, you can compare the rates among lenders. Lenders will run a soft credit check which won’t hurt your credit. Lenders will ask for your name, address, school you attended, degree achieved, total student loan debt, income, credit score estimate, and more. The information you need to provide varies from lender to lender.

Recommended: What’s the Difference Between a Hard and Soft Credit Check?

2. Get Multiple Rate Estimates

Each lender will likely give you several offers with various term lengths as well as fixed interest rates (those that don’t change) and variable interest rates (those that change depending on market fluctuations).

3. Complete the Application

Once you’ve chosen a lender and a loan, you can submit documentation that supports the soft credit check and any other information the lender needs, such as personal identification, pay stubs, or other income verification. You’ll undergo a hard credit check at this point.

4. Sign the Final Documents

Learn your final costs, or take a look at a student loan refinance calculator, to get a sense of your all-in costs so you know what you’ll have to pay every month.

What Refinancing Without a Cosigner Involves

Refinancing student loans without a cosigner involves special considerations:

Qualifying With Your Own Credit

Qualifying for a refinance with your own credit means that you aim to get a refinance using your own credit score. The credit score you need to qualify for a refinance will depend on a wide variety of factors, including your income and other information.

It’s important to put forth as high a credit score as you possibly can. The FICO® score range from 300 to 850 — 300 is the lowest and 850 is the highest credit score possible.

In addition to your credit check, you may also need to meet some basic eligibility requirements:

•   The legal age, or “age of majority,” in your state (typically 18)

•   A U.S. citizen, permanent resident, or non-permanent resident alien

•   Employed or have sufficient income from other sources

•   Graduated with an associate’s degree or higher from a qualified institution

Recommended: What is a bad credit score?

Debt-to-Income Ratio

When you get a refinance, a lender will also look at your debt-to-income (DTI) ratio. This is a percentage that tells lenders how much of your money per month goes toward monthly debts versus how much money you have coming into your household.

You can figure out your DTI by adding up your monthly debts and dividing that figure by your gross monthly income (your income before taxes). The result is a percentage, and the lower the percentage, the less risk you present to lenders. Learn more about why debt-to-income ratio matters in student loan refinancing with cosigner and without a cosigner.

Employment Status

In many cases, you must be currently employed, earn income from other sources, or have an offer of employment to start within the next 90 days in order to get a refinance. However, various lenders may have different employment stipulations. Check with your lender to learn more.

Credit History

In order to qualify for a refinance, a lender will look at your credit history, which includes your current and past credit accounts, the amount you owe, and your payment history. Your credit history reveals how responsibly you repay your debts. Credit scores come from information on your credit reports.

What If You Can’t Get Approved Without a Cosigner?

If you can’t get approved without a cosigner, you may want to look for a lender with an alternative credit check. Lenders may offer an alternative process, including simply taking a look at your grade point average, field of study, graduation prospects, and estimated future earnings to determine your eligibility for a refinance or loan. Keep in mind that these alternative requirements may require you to pay a higher interest rate for your refinance.

You may also consider going ahead with a cosigner and then later applying for a student loan cosigner release. A cosigner release means that cosigner is released from a loan as long as you meet certain requirements, such as a minimum payment requirement. Once released, the cosigner is no longer obligated to take care of your debt if you cannot repay your loan.

Alternatives to Refinancing Without a Cosigner

One of the best ways to circumvent the need for a cosigner is to work on improving your credit score. You can do that by paying off debt — paying down credit cards, paying off loans that have gone into arrears — and not taking out too many other types of loans. Your credit score will increase over time as you make positive moves.

SoFi Student Loan Refinancing

It’s possible to refinance student loans without a cosigner, but you may end up with less desirable rates than if you did opt for a cosigner. However, consider the pros and cons of applying with and without a cosigner, including the potential for a strained relationship if you fail to make timely loan repayments. Another important factor to weigh is how likely you are to benefit from the current federal student loan forgiveness plan, as well as the protections that come with federal student loans.

If you think refinancing might make sense for your situation, consider refinancing your student loans with SoFi. You can refinance online and pay zero fees, whether you choose to refinance student loans with a cosigner or not.

Photo credit: iStock/paulaphoto

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Generally, student loan borrowers with a FICO® score of 670 or higher stand a better chance at meeting a refinancing lender’s eligibility requirement. But according to an August 2020 report by the Federal Reserve Bank of New York, the average credit score across all student loan borrowers was at 656 — just a few points shy of what’s considered “good” credit.

The minimum credit score permitted to refinance varies between lenders. Whether you already have strong credit or currently don’t meet the credit score needed to refinance, there are ways to move forward with your student debt.

Credit Score Range Required for Student Loan Refinancing

You typically need what FICO calls a good credit score, which is from 670 to 739, to get approved for a competitive refinancing rate and terms. Another commonly used credit scoring model is called the VanatageScore® which sets its “good” credit range at 661 to 780.

Some lenders have more flexible credit score requirements than others and set their minimum credit score requirement at 650 which is considered “fair.”

However, higher is usually better when it comes to credit scores, regardless of the scoring model that’s used. If your credit score exceeds these ranges, and is considered “very good” or “excellent”, you may be more likely to qualify for student loan refinancing.

Recommended: What Is a FICO Score?

Why Is There a Minimum Credit Score?

Your credit score gives lenders an at-a-glance synopsis of your borrowing habits. It’s based on information from your credit report — which is a highly detailed record of activity on all of your credit accounts — and a single score tells lenders how well you’ve managed your credit and repayment thus far.

Refinance lenders establish the lowest eligible credit score they’re willing to approve and lend to better their chances of getting paid back.

Benefits of a Higher Credit Score When Refinancing

Meeting the minimum credit score requirement of your preferred refinancing lender can help you get through the door in terms of approval. However, a higher credit score improves your access to a lower interest rate and favorable terms.

Your lender’s lowest advertised refinancing rate, for example, is reserved for borrowers who’ve demonstrated excellent credit. If you don’t have established credit, some lenders let applicants apply with a cosigner.

Typically, a cosigner is someone who’s close to you like a spouse, parent, or grandparent, and has a strong credit profile. By agreeing to cosign your loan, they’re accepting financial liability to repay your loan if you fail to make payments.

Refinancing without a cosigner means that only the primary borrower is responsible for repaying the loan. Having another person who’s legally responsible for the debt is another way that lenders protect themselves from potential default. As the primary borrower, not only can a cosigner improve your chances of approval, their good credit can help you qualify for a lower interest rate.

Recommended: Guide to Establishing Credit

Tips That Can Help Improve Your Credit

If your credit isn’t high enough to meet a lender’s minimum credit score requirement, there are a few tips on how to build credit over time.

Make Timely Payments

Making full, on-time payments on your existing credit accounts is the most impactful way to improve your credit. This factor accounts for 35% of your FICO credit score calculation and is at the forefront of what lenders look at when evaluating your eligibility.

Lower Your Credit Utilization Ratio

This is the ratio of how much outstanding debt you owe, compared to your available credit. Credit utilization ratio accounts for 30% of your FICO score. Keeping your credit utilization low can be an indicator that — although you have access to credit — you’re not overspending.

Maintain Your Credit History

A factor that’s moderately important when it comes to your FICO score calculation is the age of your active accounts. Keeping older accounts active and in good standing shows that you’re a steady borrower.

Keep a Balanced Credit Mix Without Too Many New Accounts

Having revolving accounts such as credit cards, and installment credit like student loans or a car loan shows you can handle different types of credit. This factor affects 10% of your credit score calculation which isn’t as huge as your payment history but a factor nonetheless.

Additionally, although a mix of credit can help your score, opening too many new accounts in a short period can adversely affect your credit score by 10%.

Other Eligibility Requirements for Student Loan Refinancing

Lenders want to ensure that their borrowers have the ability to repay the loan, based on the loan agreement. However, your credit score isn’t the only factor that determines your ability to make payments.

Other eligibility requirements that lenders consider might include your:

•   Age

•   Status in the country (e.g. US citizen, permanent resident, etc.)

•   Employment status

•   Income

•   School that you graduated from

•   Existing debt obligations

•   Loan amount

If your situation and credit score meets the lender’s requirements, you might be approved for a student loan refinance. Before refinancing your student loans, however, use a student loan refinance calculator to understand how much refinancing can save you.

Your Options if You Don’t Meet the Credit Requirements

If your credit isn’t eligible for student loan refinancing, you still have a few options to choose from.

•   Apply with a creditworthy cosigner. As mentioned above, securing a trusted cosigner who has strong credit can potentially help you with your refinancing goal. Keep in mind that any late payments on your loan may impact your credit and your cosigner’s.

•   Request an income-driven repayment plan. You can reduce your federal loan monthly payment by requesting to be put on an IDR plan. Depending on your plan, your term will be extended to 20 or 25 years, and your payment is calculated based on a percentage of your discretionary income and your family size. This option results in paying more interest overall.

•   Ask about forbearance. If you’re experiencing a short-term financial hardship, like a job loss or sudden financial expense that’s making it hard to manage your student loan payment, forbearance might help. It pauses your payments for a temporary period, during which time interest still accrues. Ask your servicer about how to request forbearance, or contact your private lender to see if it offers this option.

Applying for Student Loan Refinancing With SoFi

Your credit score is just one factor that lenders consider when applying for a student loan refinance, but it’s an important one. Increasing your credit score before refinancing, or finding a willing cosigner with strong credit, can help you reduce your interest rate and lower your total education-related costs.

Refinancing a private student loan is advantageous if you qualify for a lower interest rate. However, determining if you should refinance your federal student loans needs more consideration. Refinanced federal loans are converted into private loans rendering you ineligible for federal benefits and programs. For example, you’ll no longer have access to programs like Public Service Loan Forgiveness or income-driven repayment plan options that help reduce your monthly payment.

If you’re still convinced that refinancing is right for you, consider a SoFi student loan refinance. SoFi offers low-interest rates and significant savings for those who qualify. Checking your rate only takes only two minutes online.

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 Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.