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Putting an offer on a home involves more than naming a price. Assuming that you’ve been preapproved for a mortgage and that you’ve found a home in your price range, there’s a customary method to follow in submitting an offer that stands out but also protects you.

In a hot market — where you might encounter a bidding war, compete against cash buyers, or be asked to waive a contingency — it can be vital to know the process. But even in a less heated market, it’s important to know what making an offer on a house involves, the steps for making an offer in real estate, and what to do if you change your mind when making offers in real estate (it happens!). Read on for tips that will get you from homebuyer to homeowner.

Making an Offer on a House

So let’s say you’ve found that mid-century marvel or stately townhome of your dreams. You’re ready to go for it. Here’s how the process of making an offer in real estate typically goes.

1. Determine Your Offer Price

A home’s listing price is often set by comparing it to similar homes in the area that are for sale, then adjusting up or down based on additional amenities or detrimental issues. But as the old saying goes, “A home is generally worth what someone is willing to pay for it.”

You might find a property that’s fairly well-priced and consider coming in close to asking, or you may want to adjust your offer if you feel that it’s priced too high or needs a lot of work.

There are lots of things to consider when trying to find the right offer price.

•   A common way to break down a listing amount is by price per square foot, but that often includes only the heated, livable spaces. A home can (and should) be priced higher than average for the area if it includes extra rooms like a garage or attic, outbuildings, or extra land, which add to its value. Superior workmanship or permitting in place for potential changes can also play a role in increasing a price.

•   Check the home’s history on the multiple listing service. It records every transaction related to the house, including previous buy and sell dates, price fluctuations, and how long the home has been on the market. It can give you a good idea of where the sellers are coming from in terms of what they paid for the property.

•   Take a look at other properties in the area that have recently sold. Is the price per square foot more or less than the home you have your eye on? One key to an accurate read on the local market is to ensure that you’re comparing apples to apples when it comes to the number of bedrooms, bathrooms, square footage, garage space, and other amenities. Your broker can likely provide what are known as “comparables” for the area to help with this process.

Recommended: Mortgage Preapproval Need to Knows

2. Incorporate All the Fees

It can also be important to look at factors not directly related to the price of the property that could affect your overall cash flow. One big consideration is closing costs, which typically average 2% to 6% of the total cost of the home. So let’s say you are considering a $400,000 mortgage loan; the closing costs (origination fees, title search, any points, and more) would be between $8,000 and $24,000.

It’s also important to estimate the amount of money you’ll spend making repairs or changes to the property once you move in. As long as the repairs are not related to health or safety issues, which could affect financing, one tactic could be to lower your offer price in order to free up cash for future upgrades.

Or you might plan on getting a home improvement loan after buying the house, provided you have enough equity to access those funds.

3. Determine Your Earnest Money Deposit

The next step in making an offer in real estate is to figure out your earnest money. What’s earnest money? It’s a good-faith deposit that buyers place with the offer up front, usually amounting to around 1% to 3% of the offer price, to show that they are serious, especially when there are multiple offers on a property.

It’s held in escrow by the title company. Showing purchase intent in this way can help a buyer get to the top of the seller’s list.

Customs and laws pertaining to an earnest money deposit can vary from state to state, and even from county to county, so it’s important to understand the rules that determine when the money is (and isn’t) refundable.

4. Protect Yourself With Contingencies

The time between a signed offer and closing day is called the due diligence period, and it’s when the buyer will normally set up a home inspection and possibly a land survey or other inspections for specialty items, such as a septic system or a pool, and the lender will order an appraisal.

Because the contract is signed before inspections and the appraisal take place, contingencies give you an out if you discover a deal-breaker.

Here are the most common contingencies when making offers in real estate:

•   Financing This lays out the specifics of the financing that will be used by the buyer, which must be fully approved by the lender within the contingency period. This protects the buyer in case financing falls through.

•   Appraisal If the appraisal comes back lower than the agreed-upon price, the seller and buyer may find themselves renegotiating.

•   Inspection The buyer usually has 10 days after signing the contract to order an inspection, and the contingency remains in place until it comes back without uncovering any major issues with the property that were previously unknown. Based on the findings, the buyer can cancel the contract or negotiate repairs or the purchase price. (If the seller agrees to pay, these are called seller concessions.)

•   Title search A preliminary title report shows the home’s past and present owners and any liens or judgments against the property. If any title disputes are unable to be resolved before closing, you have the option to exit the sale.

In some situations, the list of contingencies can be long. But once they’re all satisfied and lifted during the given timeframes, the option to buy turns into a binding commitment to purchase the home.

5. Submit a Written Offer

In real estate, the best way to make an offer official is to put it in writing. If you’re working with a real estate agent, the agent will have a form that you can fill out together that lists the offer price and contingencies and covers all the state rules and regulations.

If you’re flying solo, working with a real estate lawyer or title company can help to ensure that your offer covers all the necessary legal language and is legally valid.

This concept goes both ways. As the buyer, it’s a smart idea to make sure all correspondence, counteroffers, and property disclosures are put in writing by the seller as well.

Recommended: How to Win a Bidding War

6. Move Ahead, Move On, or Move Things Around

Once you submit your written offer, one of three things is likely to happen: The sellers sign the document and enter into a binding contract, they reject the offer outright, or they submit a counteroffer.

In this last case, the sellers might counter back with changes that are better suited to them. (If your offer includes a price reduction to accommodate repair costs, for example, the seller might ask for the full asking price and offer a credit back at closing instead.)

A counteroffer puts the ball back in the buyer’s court for approval, rejection, or another counteroffer, and it can keep going back and forth until both parties agree to the terms and sign the document or one party calls it a day.

What If You Change Your Mind About Buying a House?

Contingencies give you a way out in the event of some unforeseen issue, but what if you just decide you don’t want the house? Cold feet can be a real thing!

Although the laws vary by state on this topic as well, in most instances a buyer is allowed to withdraw an offer until the moment the offer is accepted. However, once the offer document is signed by both parties, it’s considered a binding agreement.

At that point, the sellers may be well within their rights to walk away with your earnest money if you don’t decide to move forward.

The Takeaway

How to make an offer on a house? It pays to understand comps, contingencies, the temperature of the market, earnest money, and counteroffers. You’ll consider your price, keeping track of all fees that will be involved, and make your bid in writing, typically with what’s known as an earnest money deposit. Then sit back and await the seller’s response.

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

FAQ

Should I use a real estate agent to buy a house?

An agent familiar with the local market can help you determine the right offer amount and hold your hand during the negotiation process, which is especially helpful in a hot (seller’s) market. An agent can also help coordinate everything leading up to the closing and ensure that you (and your financing) meet critical deadlines.

Is a deposit required when making an offer on a house?

Yes, your offer will come with what is called earnest money, a good-faith deposit of 1% to 3% of the proposed purchase price, which will be held in escrow during negotiations about the house.

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 for more information.

SOHL-Q324-052

With the median U.S. home sale price sitting at $412,300 in mid-2024, most people will need a mortgage to fund their purchase, and the majority of them will choose a fixed-rate loan, in which the interest rate does not fluctuate over the life of the loan.

But if you’re preparing to take the homeownership plunge, how do you know which kind of loan is right for you and what are the pros and cons of fixed-rate mortgages? Let us be your guide.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is, as its name suggests, a mortgage loan whose interest rate is fixed across the lifetime of the loan. The rate is stated at the time the documents are signed and does not change at any point throughout the loan term (provided that all payments are made in full and on time). Fixed-rate mortgage terms can be 10, 15, 20, or 30 years. A mortgage calculator can help you work through the different monthly payments for each and see what best suits your situation.

Fixed-Rate Mortgages vs Adjustable-Rate Mortgages

If you’re deciding between a fixed-rate vs. adjustable-rate mortgage (or ARM), the difference is that with an ARM, the interest rate can move up or down according to the market. The rate is calculated according to the index and margin — the index is a benchmark interest rate based on market conditions at large, and the margin is a number set by the lender when the loan is applied for.

You may see options like a 5/1 ARM, which means the rate is set for the first five years of the loan and then adjusts annually after that.

Long story short: A fixed-rate mortgage offers you a predictable interest rate and monthly payment, whereas an adjustable-rate mortgage can shift over the course of the loan term according to external factors, like inflation affecting the APR.

It is, however, important to understand that your total monthly housing bill can still change, even with a fixed-rate mortgage, if, for example, your property taxes or homeowners insurance rates change or if you miss several payments.

Recommended: Home Loan Help Center

Types of Fixed-Rate Mortgages

There are a few variables to fixed-rate mortgages.

•   Conventional Loans: Conventional fixed-rate mortgages are offered by banks, credit unions, and other lending institutions. They typically have stringent requirements about credit score and debt-to-income ratio (or DTI) that an applicant must meet.

•   Government-Insured Loans: FHA, USDA, and VA mortgages tend to have less tough requirements and target certain kinds of homebuyers, like those with lower income, in the military (past or present), and living in rural areas. They may offer no or low down payment and other perks, too.

•   Conforming and Non-Conforming Loans: Mortgages can also be considered “conforming” or “nonconforming,” depending on whether or not they meet the guidelines established by the Federal Housing Finance Agency (commonly known as Fannie Mae and Freddie Mac). In 2024, the conforming loan limit for one-unit properties was $766,550, or $1,149,825 in areas deemed “high cost.”

Of course, homes costlier than these limits exist, and it is possible to take out a mortgage to buy one. Those loans are considered “nonconforming” and are also sometimes called “jumbo loans.”

Because the loans are so large, eligibility requirements tend to be more stringent, with borrowers usually needing a down payment well above 3%, cash in the bank, and a solid credit score.

Example of a Fixed-Rate Mortgage

Here’s an example of how a fixed-rate mortgage might work if you buy a house for $428,700 with 20% down and take out a 30-year fixed-rate home loan. Your mortgage principal will be $342,960, and at a rate of 6.72% with a solid credit score of 740+, your monthly payment (not including any taxes or insurance) will be $2,217.

As you make your loan payments, at first most of the money goes towards interest. This is because the interest is “front-loaded,” to use the industry lingo. Perhaps 90% of your payment will be paying interest and 10% will be applied to the principal. As you get to the end of your loan payment, these figures may well be reversed. That is, 10% of the $2,217 goes towards interest and 90% toward the principal.

Pros and Cons of Fixed-Rate Mortgages

Fixed-rate mortgages are more common among homebuyers because of the predictability they offer. Still, there are both drawbacks and benefits to pursuing this kind of home loan.

Benefits of Fixed-Rate Mortgages

Because homebuyers who take out fixed-rate mortgages will know their rates at the time they sign on the dotted line, these loans provide long-term predictability and stability — which can help people who need to fit their housing expenses into a tight budget.

Fixed-interest mortgages, and other types of fixed-rate loans, shield borrowers from potentially high interest rates if the market fluctuates in such a way that the index significantly rises.

Drawbacks of Fixed-Rate Mortgages

Although fixed-rate mortgages are more predictable over time, they tend to have higher interest rates than ARMs — at least at first. Sometimes an ARM might have a lower interest rate but only for a relatively brief introductory period, after which the rate will be adjusted.

If the index rate falls in the future, homebuyers might end up paying more in interest than they would have with an ARM.

Because lenders risk losing money on fixed-interest mortgages if index interest rates go up, these loans can be harder to qualify for than their adjustable-rate counterparts.

How to Calculate Fixed-Rate Mortgage Payments

Now that you know what a fixed-rate mortgage is and how it functions, you might wonder how much it could cost you. If you are curious about what fixed-rate mortgage payments would look like at different home price points, for varying terms, you use an online mortgage calculator or, for an even more detailed look at what you’ll pay each month, check out a mortgage calculator with taxes and insurance.

When Is a Fixed-Rate Mortgage the Right Choice?

Fixed-rate mortgages offer long-term predictability, which can be a must for those who need budget stability. Furthermore, fixed interest rates can be beneficial for those who plan to stay in their home for a longer period of time — say, at least seven to 10 years.

Here’s why: Homebuyers with 30-year fixed-rate loans may need that long to build home equity (remember: during the initial years of the loan most of your payments go toward interest, not equity).

Finally, if homebuyers suspect that interest rates are about to rise, a fixed-interest loan can be a good way to protect themselves from those increasing rates over time.

That said, there are some instances in which an ARM may be a better choice. If a homebuyer is planning to sell in a short amount of time, for example, the low introductory interest rate on an adjustable-interest loan could save them money (as long as they can sell the property) before the rate can tick upward.

Recommended: First-Time Homebuyer Guide

The Takeaway

Fixed-rate loans, in which the interest rate holds steady for a loan term of 10, 15, 20, or 30 years, are popular in part because their costs are predictable. But when you’re in the market for a home, shopping for the right loan is almost as important as shopping for the house itself, so an adjustable-rate mortgage might be worth a look too, especially if you need a lower monthly payment and don’t plan to stay in the home for very long.

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

FAQ

Can you refinance a fixed-rate mortgage?

Yes, you can refinance a fixed-rate home loan. Because refinancing means taking out an entirely new loan and involves some upfront costs, it’s important to make sure that these costs don’t outweigh the savings you will enjoy due to, say, a lower interest rate or a shorter loan term (two of the chief reasons people opt to refinance).

How does a fixed-rate mortgage work?

With a fixed-rate mortgage, your interest rate — and thus your monthly loan payment amount — holds steady for the duration of the loan, which might be 10, 15, 20, or 30 years. Many borrowers like having one of their largest household expenses be predictable.

What are the disadvantages of a fixed-rate mortgage?

The biggest drawback of a fixed-rate mortgage is that the interest rate will likely be higher than that of an adjustable-rate loan. And if you sign on to a fixed-rate mortgage and interest rates drop significantly, you may find yourself looking at a refinance sooner than you would like.

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 for more information.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

SOHL-Q324-044

For about 80% of homebuyers, purchasing a home means taking out a mortgage — and a conventional 30-year fixed-rate mortgage is the most popular kind of financing.

Conventional mortgages are those that are not insured or guaranteed by the government.

But the fact that conventional mortgages are so popular doesn’t mean that a conventional home loan is right for everyone. Here, learn more about conventional mortgages and how they compare to other options, including:

•   How do conventional mortgages work?

•   What are the different types of conventional loans?

•   How do conventional loans compare to other mortgages?

•   What are the pros and cons of conventional mortgages?

•   How do you qualify for a conventional loan?

How Conventional Mortgages Work

Conventional mortgages are home loans that are not backed by a government agency. Provided by private lenders, they are the most common type of home loan. A few points to note:

•   Conventional loans are offered by banks, credit unions, and mortgage companies, as well as by two government-sponsored enterprises, known as Fannie Mae and Freddie Mac. (Note: Government-sponsored and government-backed loans are two different things.)

•   Conventional mortgages tend to have a higher bar to entry than government-guaranteed home loans. You might need a better credit score and pay more in interest, for example. Government-backed FHA loans, VA loans, and USDA loans, on the other hand, are designed for certain kinds of homebuyers or homes and are often easier to qualify for. You’ll learn more about them below.

•   Among conventional loans, you’ll find substantial variety. You’ll have a choice of term length (how long you have to pay off the loan with installments), and you’ll probably have a choice between fixed-rate and adjustable-rate products. Keep reading for more detail on these options.

•   Because the government isn’t offering any assurances to the lender that you will pay back that loan, you’ll need to prove you are a good risk. That’s why lenders look at things like your credit score and down payment amount when deciding whether to offer you a conventional mortgage and at what rate.

Conventional vs Conforming Loans

As you pursue a home loan, you’ll likely hear the phrases “conventional loan” and “conforming loan.” Are they the same thing? Not exactly. Let’s spell out the difference:

•   A conforming loan is one in which the underlying terms and conditions adhere to the funding criteria of Freddie Mac and Fannie Mae. There’s a limit to how big the loan can be, and this figure is determined each year by the Federal Housing Finance Agency, or FHFA. For 2024, that ceiling was set at $766,550 for most of the United States. (It was a higher number for those purchasing in certain high-cost areas; you can see the limit for your specific location on the FHFA web site.)

So all conforming loans are conventional loans. But what is a conventional mortgage may not be conforming. If, for instance, you apply for a jumbo mortgage (meaning one that’s more than $766,550 in 2024), you’d be hoping to be approved for a conventional loan. It would not, however, be a conforming mortgage because the amount is over the limit that Freddie Mac or Fannie Mae would back.

Types of Conventional Loans

When answering, “What is a conventional loan?” you’ll learn that it’s not just one single product. There are many options, such as how long a term (you may look at 15- and 30-year, as well as other options). Perhaps one of the most important decisions is whether you want to opt for a fixed or adjustable rate.

Fixed Rate

A conventional loan with a fixed interest rate is one in which the rate won’t change over the life of the loan. If you have one of these “fully amortized conventional loans,” as they are sometimes called, your monthly principal and interest payment will stay the same each month.

Although fixed-rate loans can provide predictability when it comes to payments, they may initially have higher interest rates than adjustable-rate mortgages.

Fixed-rate conventional loans can be a great option for homebuyers during periods of low rates because they can lock in a rate and it won’t rise, even decades from now.

Adjustable Rate

Adjustable-rate mortgages (also sometimes called variable rate loans) have the same interest rate for a set period of time, and then the rate will adjust for the rest of the loan term.

The major upside to choosing an ARM is that the initial rate is usually set below prevailing interest rates and remains constant for a specific amount of time, from six months to 10 years.

There’s a bit of lingo to learn with these loans. A 7/6 ARM of 30 years will have a fixed rate for the first seven years, and then the rate will adjust once every six months over the remaining 23 years, keeping in sync with prevailing rates. A 5/1 ARM will have a fixed rate for five years, followed by a variable rate that adjusts every year.

An ARM may be a good option if you’re not planning on staying in the home that long. The downside, of course, is that if you do stay put, your interest rate could end up higher than you want it to be.

Most adjustable-rate conventional mortgages have limits on how much the interest rate can increase over time. These caps protect a borrower from facing an unexpectedly steep rate hike.

Also, read the fine print and see if your introductory rate will adjust downward if rates shift lower over the course of the loan. Don’t assume they will.

Recommended: Fixed-Rate vs Adjustable-Rate Mortgages

How Are Conventional Home Loans Different From Other Loans?

Wondering what a conventional home loan is vs. government-backed loans? Learn more here.

Conventional Loans vs. FHA Loans

Not sure if a conventional or FHA loan is better for you? FHA loans are geared toward lower- and middle-income buyers; these mortgages can offer a more affordable way to join the ranks of homeowners. Unlike conventional loans, FHA loans are insured by the Federal Housing Administration, so lenders take on less risk. If a borrower defaults, the FHA will help the lender recoup some of the lost costs.

But are FHA loans right for you, the borrower? Here are some of the key differences between FHA loans and conventional ones:

•   FHA loans are usually easier to qualify for. Conventional loans usually need a credit score of at least 620 and at least 3% down. With an FHA loan, you may get approved with a credit score as low as 500 with 10% down or 580 if you put down 3.5%.

•   Unlike conventional loans, FHA loans are limited to a certain amount of money, depending on the geographic location of the house you’re buying. The lender administering the FHA loan can impose its own requirements as well.

•   An FHA loan can be a good option for a buyer with a lower credit score, but it also will require a more rigorous home appraisal and possibly a longer approval process than a conventional loan.

•   Conventional loans require private mortgage insurance (PMI) if the down payment is less than 20%, but PMI will terminate once you reach 20% equity. FHA loans, however, require mortgage insurance for the life of the loan if you put less than 10% down.

Recommended: Private Mortgage Insurance (PMI) vs Mortgage Insurance Premium (MIP)

Conventional Loans vs VA Loans

Not everyone has the choice between conventional and VA loans, which are backed by the U.S. Department of Veterans Affairs. Conventional loans are available to all who qualify, but VA loans are only accessible to those who are veterans, active-duty military, National Guard or Reserve members, or surviving spouses of those who served.

VA loans offer a number of perks that conventional loans don’t:

•   No down payment is needed.

•   No PMI is required, which is a good thing, because it’s typically anywhere from 0.58% to 1.86% of the original loan amount per year.

There are a couple of potential drawbacks to be aware of:

•   Most VA loans demand that you pay what’s known as a funding fee. This is typically 1.25% to 3.3% of the loan amount.

•   A VA loan must be used for a primary residence; no second homes are eligible.

Conventional Loans vs USDA Loans

Curious if you should apply for a USDA loan vs. a conventional loan? Consider this: No matter where in America your dream house is, you can likely apply for a conventional loan. Loans backed by the U.S. Department of Agriculture, however, are only available for use when buying a property in a qualifying rural area. The goal is to encourage people to move into certain areas and help them along with accessible loans.

Beyond this stipulation, consider these upsides of USDA loans vs. conventional loans:

•   USDA loans can offer a very affordable interest rate versus other loans.

•   USDA loans are available without a down payment.

•   These loans don’t require PMI.

But, to provide full disclosure, there are some downsides, beyond limited geographic availability:

•   USDA loans have income-based eligibility requirements. The loans are designed for lower- and middle-income potential home buyers, but the exact cap on income will depend on your geographic area and how many household members you have.

•   This program requires that the loan holder pay a guarantee fee, which is typically 1% of the loan’s total amount.

Benefits and Drawbacks of Conventional Mortgages

Now that you’ve learned what is a conventional loan and how it compares to some other options, let’s do a quick recap of the pros and cons of conventional loans.

Benefits of Conventional Loans

The upsides are:

•   Competitive rates. Rates may seem high, but they are still far from their high point of 16.63% in 1981. Plus, lenders want your business and you may be able to find attractive offers. You can use a mortgage calculator to see how even a small adjustment in interest rates can impact your monthly payments and interest payments over the life of the loan.

•   The ability to buy with little money down. Some conventional mortgages can be had with just 3% down for first-time homebuyers.

•   PMI isn’t forever. Once you have achieved 20% equity in your property, your PMI can be canceled.

•   Flexibility. There are different conventional mortgages to suit your needs, such as fixed- and variable-rate home loans. Also, these mortgages can be used for primary residences (whether single- or multi-family), second homes, and other variations.

Drawbacks of Conventional Loans

Now, the downsides of conventional loans:

•   PMI. If your mortgage involves a small down payment, you do have to pay that PMI until you reach a target number, such as 20% equity.

•   Tougher qualifications vs. government programs. You’ll usually need a credit score of 620 and, with that number, your rate will likely be higher than it would be if you had a higher score.

•   Stricter debt-to-income (DTI) ratio requirements. It’s likely that lenders will want to see a 45% DTI ratio. (DTI is your total monthly recurring payments divided by your monthly gross income.) Government programs have less rigorous qualifications.

How Do You Qualify for a Conventional Loan?

Conventional mortgage requirements vary by lender, but almost all private lenders will require you to have a cash down payment, a good credit score, and sufficient income to make the monthly payments. Here are more specifics:

•   Down Payment: Many lenders that offer conventional loans require that you have enough cash to make a decent down payment. Even if you can manage it, is 20% down always best? It might be more beneficial to put down less than 20% on your dream house.

•   Credit score and history: You’ll also need to demonstrate a good credit history to buy a house, which means at least 620, as mentioned above. You’ll want to show that you make loan payments on time every month.

Each conventional loan lender sets its own requirements when it comes to credit scores, but generally, the higher your credit score, the easier it will be to secure a conventional mortgage at a competitive interest rate.

•   Income: Most lenders will require you to show that you have a sufficient monthly income to meet the mortgage payments. They will also require information about your employment and bank accounts.

The Takeaway

A conventional home loan — meaning a loan not guaranteed by the government — is a very popular option for homebuyers. These mortgages have their pros and cons, as well as variations. It’s also important to know how they differ from government-backed loans, so you can choose the right product to suit your needs. Buying a home is a major step and a big investment, so you want to get the mortgage that suits you best.

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

FAQ

What is the minimum down payment for a conventional loan?

In most cases, 3% of the purchase price is the lowest amount possible and that minimum is usually reserved for first-time homebuyers — a group that can include people who have not purchased a primary residence in the last three years.

How many conventional loans can you have?

A lot! The Federal National Mortgage Association (FNMA, aka Fannie Mae) allows a person to have up to 10 properties with conventional financing. Just remember, you’ll have to convince a lender that you are a good risk for each and every loan.

Do all conventional loans require PMI?

Most lenders require PMI (private mortgage insurance) if you are putting less than 20% down when purchasing a property. However, you may find some PMI-free loans available. They typically have a higher interest rate, though, so make sure they are worthwhile given your particular situation.

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 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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOHL-Q324-043

With a purchase-money mortgage, the seller finances part or all of the property for the buyer, who usually does not qualify for traditional financing.

Keep reading to learn about the benefits and drawbacks of a purchase-money mortgage.

What Is a Purchase-Money Mortgage?

A purchase-money mortgage is also known as owner financing. The seller extends credit to the buyer to purchase the property. This can be a portion of the sales price or the full price.

In other words, the buyer borrows from the seller instead of from a traditional lender. The seller ultimately determines the interest rate, down payment, and closing costs. Both parties sign a promissory note.

They record a deed of trust or mortgage with the county. The seller usually retains title until the financed amount is paid off.

A purchase-money mortgage is a nontraditional financing method that may be needed when the buyer cannot obtain one of the other different mortgage types for purchasing the property.

The promise to pay is secured by the property, so if the buyer stops paying, the seller can foreclose and get the property back.

Recommended: How to Buy a Foreclosed Home the Simple Way

Purchase-Money Mortgage Example

Not all buyers have financial situations that make it easy for them to get a conventional mortgage. Even diligent shopping for a mortgage may not help them get the home loan they need.

If a buyer has a profitable business, for example, but doesn’t have two years of tax returns to prove steady cash flow, most mortgage lenders won’t take on the risk.

Enter a purchase-money mortgage. With the right property, seller, and situation, a buyer could finance the home with a purchase-money mortgage. The seller would offer terms to the buyer — usually a higher interest rate and a short repayment term, with a balloon mortgage payment at the end — and the buyer would enter into the agreement. The seller would hold title until the loan payoff.

Buyers and sellers who work with seller financing often intend for the purchase-money mortgage to be refinanced into a traditional mortgage with a lower mortgage payment at a later date.

Types of Purchase-Money Mortgages

Purchase-money mortgages can come in several forms.

Land Contract

A land contract (also called a contract for deed) is simply a mortgage from the seller. The buyer takes possession of the property immediately and pays the seller in installments.

Land contracts are often for five years or less, ending with a balloon payment.

Lease-Purchase Agreement

In a lease-purchase agreement, the buyer agrees to rent the property for a specified amount of time and then enter into a contract to purchase the property at a price that’s the current market value or a bit higher.

For this and a lease-option agreement, the seller typically requires a substantial upfront fee, an above-market lease rate, or both. Part of the monthly rent payment goes toward the purchase price.

Lease-Option Agreement

A lease-option agreement is similar to a lease-purchase agreement in that the buyer agrees to first rent the property for a specified amount of time. But with this agreement, the buyer has the option to purchase the property instead of making a commitment to purchase it.

Benefits of Purchase-Money Mortgages for Buyers

•   Buyers, including first-time homebuyers, may be able to obtain housing sooner than if they were to wait to qualify for a traditional mortgage through a lender.

•   The down payment may be more flexible for a purchase-money mortgage.

•   Requirements may be more flexible.

•   No or low closing costs.

Benefits of Purchase-Money Mortgages for Sellers

•   The seller may be able to get the full list price from a buyer who needs the seller’s help to obtain a mortgage.

•   The seller may be able to make some money by acting as the lender, including asking for a down payment and a higher interest rate.

•   Taxes may be lower as the amount is financed over time.

Recommended: How to Navigate the Mortgage Preapproval Process

Weighing the Pros and Cons of Seller Financing

If you have the option of financing with a purchase-money mortgage, you will want to look at all the angles. It may also be useful to use a mortgage calculator tool to help you determine what a potential payment on a purchase-money mortgage might be.

The Takeaway

If you’re able to secure financing from a seller, a purchase-money mortgage may be a good fit — if you have an exit plan in a few years. It’s smart for both buyers and sellers to know the risks and rewards of a purchase-money mortgage.

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

FAQ

Who holds the title in a purchase-money mortgage?

The seller controls the legal title; the buyer gains equitable title by making payments.

Can a bank issue a purchase-money mortgage?

Yes, but it is not common. A buyer might pay for a house with a bank mortgage, cash, and a property seller mortgage. When the bank is aware of the amount financed by the seller, both the mortgage issued by the third-party lender and the seller financing are considered purchase-money mortgages.

Does a purchase-money mortgage require an appraisal?

Not if the seller does not require one. With owner financing, the seller sets the terms, which may not include an appraisal.

Photo credit: iStock/MicroStockHub

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 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.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOHL-Q324-039

Looking to buy a manufactured home, a boat, or a piece of equipment for your business? You may need a chattel mortgage.

Chattel mortgages are used to finance movable assets separately from the land they occupy. They come with a higher cost than a traditional mortgage, so manufactured home dwellers who qualify for a standard mortgage will save money by choosing that route.

Here’s what you need to know about how chattel loans work and when you might want to look for alternative financing.

What Is a Chattel Mortgage?

First of all, a chattel mortgage is used for personal property, not real property. Real property includes land and property that cannot be easily removed from the land.

When a chattel mortgage is used for a large, movable asset like a manufactured home — called a mobile home before June 15, 1976 — or a piece of equipment (the “chattel”), the asset is held as collateral on the loan. If the borrower defaults on the loan, the lender can recoup costs by selling the asset.

A chattel loan may have a lower interest rate than an unsecured personal loan but a higher rate than a traditional mortgage.

Note: SoFi does not offer chattel mortgages at this time. However, SoFi does offer conventional loan options.

How Does a Chattel Mortgage Work?

Chattel mortgages are used in two main instances: when an asset can be moved or when the land the asset sits on, or will, is leased. (In fewer cases, a chattel loan may be used when a borrower doesn’t want to encumber their owned land with a loan, as when land is owned jointly in a trust.)

Applying for a chattel loan is similar to applying for other types of loans, such as home equity loans and personal loans. The lender will look at your creditworthiness and ability to repay the loan before making a decision.

Chattel loans are typically small, with relatively short terms, but usually require no appraisal, title policy, survey, or doc stamps (the documentary stamp triggers a tax in certain states).

Recommended: First-Time Homebuyer Guide

What Are Chattel Loans Used For?

Here are some of the most common applications for chattel loans.

Manufactured Homes

Manufactured homes are built in a factory on a permanent chassis and can be transported in one or more sections. Formerly known as mobile homes, they’re designed to be used with or without a permanent foundation, but must be elevated and secured to resist flooding, floatation, collapse, or lateral movement.

Many are titled as personal property. Manufactured housing that is titled as personal property or chattel is only eligible for chattel financing.

When a manufactured home is titled as chattel, you’re also going to pay vehicle taxes to the Department of Motor Vehicles instead of property taxes.

Many consumers may encounter a chattel loan at the sales office of a manufactured home builder. They’re convenient with quick closing times, but come with a higher interest rate and a shorter term than most traditional mortgages.

This makes the financing cost of the manufactured home high, even if the payment is low thanks to the lower cost of a manufactured home compared with a site-built home. Around 42% of loans for manufactured homes are chattel loans, according to the Consumer Finance Protection Bureau.

When you own a manufactured home and rent the land it occupies, such as in a mobile home park, you will need a chattel mortgage, except when an FHA Title I loan is used.

Tiny Houses

A chattel mortgage may be used for tiny house financing when the tiny house is not affixed to a permanent foundation and/or when the land is leased.

Tiny houses are usually too small to meet building codes for a residential home, so even if the home is on a foundation and on owned land, a traditional mortgage is almost always out of the question. Even if Fannie Mae or FHA allows the property, the lender won’t.

Tiny houses on foundations are usually classified as accessory dwelling units.

Vehicles

A chattel loan may finance assets that are not permanently affixed to the property, such as vehicles. Dump trucks and construction vehicles may qualify.

Equipment

A chattel loan can be used to purchase large equipment for a business, such as a forklift or a tractor. Even livestock can be purchased with a chattel loan.

How Much Does a Chattel Mortgage Cost?

Chattel mortgages are more expensive than many other different mortgage types. The Urban Institute concluded that chattel loans were substantially more expensive than non-chattel loans. Owners of manufactured homes would spend thousands more per year in interest compared with a traditional mortgage.

These types of mortgages are not being purchased by Fannie Mae or Freddie Mac on the secondary mortgage market. When a conventional mortgage is purchased by one of these entities, the loan originator obtains more liquidity and can provide more loans to more people. This drives the cost of the mortgage down.

A chattel mortgage, on the other hand, must stay on the books of the lender, making the loan riskier and more expensive.
If you qualify, you might want to consider refinancing your chattel mortgage into a traditional mortgage.

Recommended: Home Loan Help Center

Chattel Mortgage vs Traditional Mortgage

To qualify for a conventional or government-backed mortgage instead of a chattel mortgage, you must own the land your home sits on, the home must be permanently affixed to a foundation, and it must have at least 400 square feet of living space (600 for Fannie Mae’s conventional loan for manufactured homes).

Mobile homes built before June 15, 1976, will not qualify for a mortgage loan. A personal loan is about the only option.

You must also meet all other requirements set forth by the lender to qualify for a traditional mortgage. A mortgage calculator tool can help with this.

For some types of assets, a chattel mortgage may be a good option to consider. Take a look at the major differences.

Pros and Cons of a Chattel Mortgage

A chattel mortgage is more expensive than a traditional mortgage, so anyone who can qualify for a traditional mortgage may wish to pursue that option first. It’s not all bad news for chattel mortgages, though, especially for other types of property where a chattel loan is desirable.

Consumer Protection and Chattel Mortgages

Chattel mortgages on manufactured homes are a special concern to the Consumer Financial Protection Bureau because that type of housing:

•   Serves an important role in low-income housing

•   Is typically taken on by financially vulnerable people

•   Has fewer consumer protections

Manufactured home sellers often have an on-site lender where borrowers can walk away with a chattel loan the same day as the home purchase. In certain scenarios, though, better financing options might be available.

The Takeaway

Buying a manufactured home or a piece of heavy equipment? A chattel loan could be the answer. If, though, you are buying a manufactured home and own the land, a traditional mortgage makes more sense than a chattel mortgage.

FAQ

Where can I get a chattel loan?

Lenders specializing in chattel or manufactured housing loans will offer this type of loan.

How much does a chattel mortgage cost?

The interest rate of a chattel mortgage could be several percentage points higher than that of a standard mortgage loan.

What happens at the end of a chattel mortgage?

When a chattel mortgage is paid off, the borrower receives legal title to the property or asset borrowed against. It’s also possible for landowners with permanently affixed manufactured homes to refinance into a traditional mortgage to end their chattel loans.

Is a chattel mortgage tax deductible?

A chattel mortgage qualifies for the same tax deductions that a traditional mortgage does. This includes a deduction on mortgage interest paid throughout the tax year.

Photo credit: iStock/MicroStockHub

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 for more information.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

SOHL-Q324-037