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An $80,000 annual salary would allow you to purchase a home priced up to around $300,000 — that is, if you follow the conventional guidance, which is that you spend no more than a third of your pretax income on housing costs. But there’s more (lots more) to it than that.

By just about any measure, earning $80,000 a year is a good salary. It’s about $5,000 higher than the U.S. median household income, per Census data. But depending on where you live and other aspects of your financial profile, earning a good salary doesn’t always translate into being able to afford a large house — or, in some expensive cities, any house at all.

So how can you tell where you stand? Let’s dig into the details.

What Kind of House Can I Afford With $80K a Year?

As noted above, one basic rule of thumb is to spend no more than about a third of your income on housing — and ideally even less. That means that if you earn $80,000 per year, you should spend about $26,000 per year on housing.

That translates to roughly $2,200 per month, which should cover not only your mortgage payment but also utilities, home insurance, and other housing-related expenses.

However, as you’ve probably noticed, this still isn’t a straightforward answer; the size of your monthly mortgage payment doesn’t directly translate to the overall cost of the house. Other factors like your interest rate, debt-to-income ratio, and the size of your down payment all factor in — so let’s take a closer look at those.


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

What is Debt-to-income Ratio (DTI)?

Your debt-to-income ratio, or DTI, is a measure of how much money you pay toward your debts each month relative to how much free cash you have available. It’s determined by dividing the sum of your monthly liabilities (i.e., credit card bills and student loan payments) by your gross monthly income.

If you are already paying quite a bit toward debt every month, you’ll have less money to spend on housing. (For example, someone earning $80,000 a year who is already paying $1,400 per month toward debt can likely only afford a house priced around $200,000.)

The higher your DTI, the riskier you appear to mortgage lenders — which may drive up your interest rate and, therefore, your monthly payment. And above a certain DTI level (usually around 40%, but sometimes as high as 50%), a mortgage lender might disqualify you from borrowing entirely. That’s why it’s often a good idea for would-be homebuyers to drive down their overall debt before moving seriously into the housing market.

Factoring in Your Down Payment

Along with how much debt you have, lenders also consider how much money you’re ready to put down for your home up front — otherwise known as your down payment. Generally speaking, the larger your down payment, the more house you can afford, since having so much money saved up is a favorable factor for home lenders. (Even if you keep your budget modest, having a larger down payment can help you save money over time since the amount you’ll be borrowing will be proportionally smaller.)

How Down Payment Assistance Can Help

Saving up a down payment can be one of the most challenging parts of the home-buying process, especially for first-time homebuyers. Fortunately, down payment assistance programs can help buyers overcome this hurdle — though keep in mind that the assistance itself is often a loan, which also needs to be repaid over time. Often, the interest on such loans is very low, making it a more viable option for homebuyers already struggling to get their foot in the door.

You may also need to prove financial need in order to qualify for down payment assistance for your mortgage. For example, you may have to be at or below a certain income threshold or have less than a given amount of liquid assets at your disposal to be eligible for down payment assistance.

Down payment assistance is offered through local governments, federal government bodies, and some nonprofits. If the prospect of saving a substantial chunk of money is blocking you from the home you hope to afford, it’s worth shopping around to see what kind of assistance is available.

Other Factors That Affect Home Affordability

Along with your current level of debt and how much of a down payment you’ve saved up, other factors affect how much home you can afford — and how affordable your city is, for that matter.

On your end, factors like your credit score and credit history, along with your job history and security, may increase or decrease your eligibility for a home mortgage loan (and, if you qualify, affect your interest rate). And as far as the affordability of homes themselves, where you live has a major impact, along with the size, type, age, and repair level of the homes you’re shopping for.

How Your Monthly Payment Affects Your Price Range

As mentioned above, figuring out how much house you can afford is all about figuring out how much you can afford to spend on housing each month. The higher the monthly payment you can comfortably afford, the larger the overall mortgage you can afford, which means you may be able to buy a higher-priced home. That said, it’s important to keep in mind that your mortgage is just the beginning.

Along with all of your other existing expenses — like car payments, student loan bills, utilities, groceries, and gas — owning a home can also increase the amount you spend on home maintenance relevant to renting. That’s because, once you’re a homeowner, when something breaks in your house, it’s your responsibility to fix it.

Most homes come with a variety of maintenance issues that need to be addressed at some point after purchase; sometimes, appliances break. Just be sure you’re not putting yourself in a position where your monthly mortgage payment is so high, you won’t be able to afford the other expenses that come along with homeownership.

How to Calculate How Much House You Can Afford

Use a housing affordability calculator to determine how much house you can afford based on your income, your current debts owed, your credit score, the size of your down payment, and your expected interest rate. (You can get a better sense of what, exactly, your interest rate might be by chatting with an agent from your home lender; they’ll also be able to give you an idea, given your financial profile, of how much house you can afford.)

Types of Home Loans Available to $80K Households

Fortunately, many different types of mortgage loans are available to households making $80,000 per year. For example, if you’re a first-time buyer, you may qualify for an FHA loan from the Federal Housing Administration, which allows you to buy with lower down payments and closing costs as well as less-stringent credit requirements.

Veterans and their families might look into VA loans. The U.S. Department of Veterans Affairs makes it possible to purchase a home with no down payment at all if you’re qualified.

And, of course, conventional home loans from private lenders are also available to those earning $80,000 — or most any amount.


💡 Quick Tip: Active duty service members who have served for at least 90 consecutive days are eligible for a VA loan. But so are many veterans, surviving spouses, and National Guard and Reserves members. It’s worth exploring with an online VA loan application because the low interest rates and other advantages of this loan can’t be beat.†

The Takeaway

As a $80,000 earner, chances are you can afford to purchase property — but the specifics depend on a wide variety of factors including your other markers of financial health as well as where you’re trying to buy. Using an home affordability calculator is a smart way to start exploring what your budget will allow before you embark on a search for a home and a home mortgage loan.

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

Is $80K a good salary for a single person?

$80,000 is about $5,000 higher than the U.S. median household income, so many people would consider it very good for a single person. “Good” is always a relative term when it comes to salary; whether or not the amount you earn covers your expenses is a highly personal dynamic.

What is a comfortable income for a single person?

Comfortable depends on where you live and your personal habits. A single person in San Francisco would need about $55,000, while the same person living in Cincinnati, Ohio, could get by on around $32,000, according to MIT’s Living Wage Calculator.

What is a liveable wage in 2024?

Living wage calculations are dependent on where you live and the cost of living in that area — along with factors like the size of your family and how many people in your household are working. Living wage calculators exist online that can help you better determine the living wage in your area.

What salary is considered rich for a single person?

People have so many different definitions of “rich.” If you’re settled in an area with a low cost of living, $100,000 might make you rich; in expensive cities, even a six-figure salary may only feel middle-class.

Photo credit: iStock/PIKSEL

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.

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Whether it’s a cozy micro-cabin or a rambling Colonial, your home is probably the single largest purchase you’ll ever make and your biggest physical asset. An investment like that is worth protecting.

That’s where homeowners insurance comes in; it gives you peace of mind that if you were to have major damage or get robbed, there would be funds to repair and restore your home. But what happens when you think it’s time to change your policy?

Here’s what you need to know about switching your homeowners insurance policy, as well as a step-by-step guide to getting it done as quickly as possible and with a minimum of hassles.

Can I Switch Homeowners Insurance at Any Time?

Good news: yes! No matter the reason, you’re allowed to change your homeowner’s insurance at any time. This is good, since shopping around for the right policy can save you a lot of money in some instances.

If you’re shopping for a new home as we speak, it can be a good idea to start looking at insurance before you sign the purchase agreement. And if you’re an existing homeowner looking to save money or simply find a new policy, you absolutely can do so whenever you like. But it’s important to follow the steps in order to ensure you don’t accidentally have a lapse in coverage.


💡 Quick Tip: Homeowners insurance covers three basic categories: the building itself, the belongings inside, and your liability if someone gets hurt on your property.

When Should I Change My Homeowners Insurance?

There are certain events that should also trigger a review of your insurance, including paying off your mortgage (your rates may well go down) and adding a pool (your rates may go up). Also, you may find you are offered deals if you bundle your homeowners insurance with, say, your car insurance; that might be a savings you want to consider.

You never know what options might be available out there to help you save some money. And since homeowners insurance can easily cost more than $1,800 per year, it can be well worth shopping around.

Recommended: Is Homeowners Insurance Required to Buy a Home?

How Often Should I Change My Homeowners Insurance?

You’re really the only person who can answer this one, but in general, it’s a good idea to at least review your coverage annually.

However, it does take time and effort. Sometimes, a cheaper policy means less coverage, so it’s not always a good deal. Be sure you’re able to thoroughly review all the fine print and make sure you know what you’re getting.

Ready to change your homeowners insurance? Follow these steps in order to ensure you don’t accidentally sustain a loss in coverage!

Step One: Check the Terms and Conditions of Your Existing Policy

The first step toward changing your homeowners insurance policy is ensuring that you actually want to change it in the first place!

Take a look at your existing policy and see what your coverage is like, and be sure to look closely to see if there are any specific terms about early termination. While you always have the right to change your homeowners insurance policy, there could be a fee involved. In many instances, you may have to wait a bit to receive a prorated refund for unused coverage.

Step Two: Think about Your Coverage Needs

Once you have a handle on what your current insurance covers, you can start shopping for new insurance in an informed way. You probably don’t want to “save money” by accidentally purchasing a less comprehensive plan. But do think about how your coverage needs may have shifted since you last purchased homeowners insurance.

For example, the value of your home may have changed (lucky you if your once “up and coming” neighborhood is not officially a hot market). Or perhaps you’ve added on additional structures or outbuildings and need to bump up your policy to cover those.

Step Three: Research Different Insurance Companies

Now comes the labor-intensive part: looking around at other available insurance policies to see what’s on offer. Keep your current premiums and deductibles in mind as you shop around. Saving money is likely one of the main objectives of this exercise, though sometimes, higher costs are worth it for better coverage.

Make sure you are carefully comparing coverage limits, deductibles, and premiums to get the best policy for your needs. Also consider whether the policy is providing actual cash value or replacement value. You may want to opt for a slightly pricier “replacement value” so you have funds to go out and buy new versions of any lost or damaged items, versus getting a lower, depreciated amount.

In addition to the theoretical coverage you encounter, it’s a good idea to stick with insurers with a good reputation. All the coverage in the world doesn’t matter if it’s only on paper; you need to be able to get through to customer service and file a claim when and if the time comes!

Fortunately, many online reviews are available that make this vetting process a lot easier. A few reputable sources for ratings: The Better Business Bureau and J.D. Power’s Customer Satisfaction Survey, and Property Claims Satisfaction Study. You can also do some of the footwork yourself by calling around to get quotes, though this is time-intensive and you might want to simply use an online comparison tool instead.

Step Four: Start Your New Policy, Then Cancel Your Old One

Found a new insurance plan that suits your needs better than your current one? Great news! But here’s the really important part: You want to get that new policy started before you cancel your old one.

That’s because even a short lapse in coverage could jeopardize your valuable investment, as well as drive up premiums in the future. Once you’ve made the new insurance purchase call and have your new declarations page in hand, you are ready to make the old insurance cancellation call. Be sure to verify the following with your old insurer:

•   The cancellation date is on or after the new insurance policy’s start date.

•   The old insurance policy won’t be automatically renewed and is fully canceled.

•   If you’re entitled to a prorated refund, find out how it will be issued and how long it will take to arrive.

Congratulations: You’ve got new homeowners insurance!

Recommended: Should I Sell My House Now or Wait

Step Five: Let Your Lender Know

The last step, but still a very important one, is to notify your mortgage lender about your homeowners insurance change. Most mortgage lenders require homeowners insurance, and they need to be kept up-to-date on who’s got your back should calamity strike. Additionally, if you still owe more than 80% the home value to your lender, they may still be paying the insurer for you through an escrow account — so you definitely want to make sure those payments are going to the right company.


💡 Quick Tip: A basic homeowners insurance plan doesn’t cover floods, earthquakes, or sinkholes. If you live in an area prone to natural disasters, you may want to look into supplemental coverage.

The Takeaway

Homeowners insurance is an important but often expensive form of financial protection. It can help you cover the cost of repairing or rebuilding your home if you undergo a covered loss or damage. Since our homes are such valuable investments, they’re worth safeguarding. Plus, most mortgage lenders require homeowners insurance.

Sometimes, changing your policy can help you save money for comparable or better coverage. Reviewing and possibly rethinking your homeowners insurance is an important process, especially as your needs and lifestyle evolve. If you’ve added on to your home, put in a pool, bought a prized piece of art, or are enduring more punishing weather, all are signals that you should take a fresh look at your policy and make sure you’re well protected.

If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.

Photo credit: iStock/MonthiraYodtiwong

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Subprime mortgages allow borrowers with lower credit scores to obtain homeownership, but the homebuyers pay a steep price for the privilege, thanks to the higher risk to lenders. Fortunately, there is hope for subprime borrowers who raise their credit profiles through consistent, on-time payments: They can look into refinancing. Here’s a closer look at the subprime mortgage world.

What Is a Subprime Mortgage?

A subprime mortgage is a housing loan made to a borrower with a subprime credit score, typically one in the 580 to 669 range, although what constitutes a prime and subprime credit score can vary among lenders and organizations. A credit score above 670 is considered prime, according to Experian, which tracks data on the credit industry. (And generally speaking, to qualify for the best interest rates, a borrower needs a “super prime” score of 740 or better.)

Borrowers with lower credit scores represent a greater risk to the lender; they are statistically more likely to have trouble paying on time. So subprime mortgages often come with higher interest rates and larger down payments to help protect the lender from the increased risk of default.

Subprime borrowers accept these terms because they cannot qualify for a conventional mortgage — one from a private lender like a bank, credit union, or mortgage company — with lower costs. Subprime mortgages are different from government-backed loans for borrowers with low credit scores (such as FHA loans backed by the Federal Housing Administration).


💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.

How Subprime Mortgages Work

The main difference between a mortgage loan offered to a prime borrower vs. a subprime borrower is cost. Borrowers go through the same rigorous underwriting process with a lender and must submit documentation to verify income, employment, and assets.

But in the end, a prime borrower is offered the best rates, while a subprime borrower with so-called bad credit has to put more money down, pay more in fees, and pay a much higher interest rate over the life of the loan. Subprime mortgages also are often adjustable-rate mortgages, which means the payment can go up based on market indices after a predetermined period of time.

Subprime Mortgages and the 2008 Housing Market Crash

Subprime mortgages became popular in the 2000s as more high-risk mortgages were made available to subprime borrowers. In 2005, subprime mortgages accounted for 20% of all new mortgage loans.

It became possible for a lender to originate more of these high-risk mortgages because of a new financial product called private-label mortgage-backed securities, sold to investors to fund the mortgages. The investments masked the risk of the subprime mortgages within.

Home prices soared as more borrowers sought out the various subprime mortgages being offered. Rising home prices also protected the investors of mortgage-backed securities from losses.

When the housing market had passed its peak and borrowers had no viable option for selling or refinancing their homes, properties began to fall into default. In an attempt to reduce their risk exposure, lenders originated fewer loans and increased requirements for all borrowers. This depressed the market further.

Financial institutions that had taken strong positions in mortgage-backed securities were also in trouble. Many of the largest banking institutions in the world filed for bankruptcy, and the world learned once again what stock market crashes are.

In response to the financial crisis, the Federal Reserve implemented low mortgage rates in an attempt to jumpstart the economy.

Subprime Mortgage Regulations

In the wake of the financial crisis, Congress passed the Dodd-Frank Act to reduce excessive risk-taking in the mortgage industry. It established rules for what qualified mortgages are, which gave lenders a set of rules to follow to ensure that borrowers had the ability to repay the loans they were applying for.

It also provided regulation of qualified mortgages, including:

•   Limiting mortgages to 30-year terms

•   Limiting the amount of debt a borrower can take on to 43%

•   Barring interest-only payments

•   Barring negative amortization

•   Barring balloon payments

•   Putting a cap on fees and points a borrower can be charged for a loan

Subprime mortgages are not qualified mortgages. Borrowers who seek non-qualified mortgage loans may include self-employed people who want a more flexible financial verification process, people who have high debt, and people who want an interest-only loan.

Types of Subprime Mortgages

The most common types of subprime mortgages are adjustable-rate mortgages (ARMs), extended-term mortgages, and interest-only mortgages.

•   ARMs. Adjustable-rate mortgages have an interest rate that will change over the life of the loan. They often come with a low introductory rate, which after a predetermined time period changes to a rate tied to market indices.

•   Extended-term mortgages. A subprime mortgage may have a term of 40 years instead of the typical 30-year term. Add to this the higher interest rate, and borrowers pay much more for the mortgage over the life of the loan.

•   Interest-only mortgages. Interest-only loans offer borrowers the ability to only repay the interest part of the loan for the first part of the repayment period. Borrowers have the option of not repaying any principal for five to 10 years. The annual percentage rate is typically higher than for conventional loans. Origination fees may be higher as well.

The “dignity mortgage,” a new kind of subprime loan, could help borrowers who expect to redeem their creditworthiness. The borrower makes a down payment of about 10% and agrees to pay a higher rate of interest for a number of years, typically five. After that period of on-time payments, the amount paid toward interest goes toward reducing the mortgage balance, and the rate is lowered to the prime rate.

Subprime vs Prime Mortgages

Subprime mortgages have many of the same features as prime mortgages, but there are some key differences.

Applying for Subprime Mortgages

Most lenders require a minimum credit score of 620 for a conventional mortgage, but there are lenders out there that specialize in subprime mortgages.

Generally, applying for a subprime mortgage is much the same as applying for a traditional mortgage. Lenders will check your credit and analyze your finances. They will ask for proof of income, verification of employment, and documentation of assets (such as bank statements). They may also ask for documentation regarding your debts or negative items in your credit reports.

Mortgage rates for subprime loans will vary depending on the prime rate, lending institution, the home’s location, the loan amount, the down payment, credit score, the interest rate type, the loan term, and loan type. The rate is typically much higher than a prime mortgage’s.

A mortgage calculator can help you find out what your monthly payments will be with a subprime mortgage. Simply adjust your mortgage rate to the one quoted by a lender for your credit situation.

Alternatives to Subprime Mortgages

Subprime loans are not the only option for borrowers with fair credit scores. Borrowers with credit issues can also look at mortgages backed by the FHA and the Department of Veterans Affairs (VA).

FHA loans have more flexible standards for borrowers than conventional loans. Though borrowers can obtain a mortgage with a credit score as low as 500 (assuming they have a 10% down payment), FHA loans are not considered subprime mortgages. Instead, FHA loans are government-backed loans that provide mortgage insurance to FHA-approved lenders to use if the borrower defaults on the loan.

For many borrowers with good credit and a moderate down payment, FHA loans are more expensive and don’t make sense. However, for borrowers with lower credit scores and smaller down payments, an FHA loan could be the best option.

VA loans have no minimum credit requirement, but instead, lenders review the entire loan profile. The VA advises lenders to consider credit satisfactory if 12 months of payments have been made after the last derogatory credit item (in cases not involving bankruptcy).


💡 Quick Tip: Keep in mind that FHA loans are available for your primary residence only. Investment properties and vacation homes are not eligible.1

The Takeaway

Subprime mortgages allow borrowers with impaired credit to unlock the door to a home, but to mitigate risk, the lender may charge more for the loan. Borrowers considering this type of mortgage would be smart to look closely at terms and costs, and to also consider other options such as FHA loans.

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.

Photo credit: iStock/shapecharge

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.

^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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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

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Heard of a no-closing-cost mortgage or refinance? Sounds divine, but mortgage closing costs are as certain as death and taxes. They must be accounted for, one way or the other.

You may be spared the pain of paying closing costs upfront, depending on the type of loan and the lender’s criteria, but they won’t just magically disappear. Instead, you’ll either be given a higher interest rate on the mortgage to cover those costs or see the costs added to your principal balance.

If you’re thinking about what’s needed to buy a house, keep closing costs in mind and understand the pros and cons of rolling these costs into your loan.

What Are Closing Costs?

A flock of fees known as closing costs on a new home are part and parcel of a sale. They typically range from 2% to 5% of the home’s purchase price. Closing costs include origination fees, recording fees, title insurance, the appraisal fee, property taxes, homeowners insurance, and possibly mortgage points. Some of the costs are unavoidable; lender fees are negotiable.

Closing costs come into play when acquiring a mortgage and when refinancing an existing home loan.

You may cover closing costs with a cash payment at closing, with your down payment, or by tacking them on to your monthly loan payments. You may also be able to negotiate with the sellers to have them cover some or all of the closing costs.


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

Can Closing Costs Be Rolled Into a Loan?

If you’re buying a home and taking out a new mortgage, your lender may allow you to roll your closing costs into the loan, depending on:

•   the type of home loan

•   the loan-to-value ratio

•   your debt-to-income (DTI) ratio

Rolling closing costs into your new mortgage can raise the DTI and loan-to-value ratios above a lender’s acceptable level. If this is the case, you may not be able to roll your closing costs into your loan. It’s also possible that if you roll in your closing costs, your loan-to-value ratio will become high enough that you will be forced to pay for private mortgage insurance. In that case, it may be worth it to pay your closing costs upfront if you can.

If you hear of someone who’s taken out a mortgage and says they rolled their closing costs into their loan, they may have actually acquired a lender credit — the lender agreed to pay the closing costs in exchange for a higher interest rate in a “no-closing-cost mortgage.” A no-closing-cost refinance works similarly.

Not all closing costs can be financed. For example, you can’t roll in the cost of homeowners insurance or prepaid property tax. Some of the costs that may be included are the origination fees, title fees and title insurance, appraisal fees, discount points, and the credit report fee.

What about government-backed mortgages? Most FHA loan closing costs can be financed. And VA loans usually require a one-time VA “funding fee,” which can be rolled into the mortgage.

USDA loans will allow borrowers to roll closing costs into their loan if the home they are buying appraises for more than the sales price. Buyers can then use the extra loan amount to pay the closing costs.

Finally, for FHA and USDA loans, the seller may contribute up to 6% of the home value as a seller concession for closing costs.

How to Roll Closing Costs Into an Existing Home Loan

When you’re refinancing an existing mortgage and you roll in closing costs, you add the cost to the balance of your new mortgage. This is also known as financing your closing costs. Instead of paying for them up front, you’ll be paying a small portion of the costs each month, plus interest.

Pros of Rolling Closing Costs Into Home Loans

If you don’t have the cash on hand to pay your closing costs, rolling them into your mortgage could be advantageous, especially if you’re a first-time homebuyer or short-term homeowner.

Even if you do have the cash, rolling closing costs into your loan allows you to keep that cash on hand to use for other purposes that may be more important to you at the time.

Cons of Rolling Closing Costs Into Home Loans

Rolling closing costs into a home loan can be expensive. By tacking on money to your loan principal, you’ll be increasing how much you spend each month on interest payments.

You’ll also increase your DTI ratio, which may make it more difficult for you to secure other loans if you need them.

By adding closing costs to your loan, you are also increasing your loan to value ratio, which means less equity and, often, private mortgage insurance.

Here are pros and cons of rolling closing costs into your loan at a glance:

Is It Smart to Roll Closing Costs Into Home Loans?

Whether or not rolling closing costs into a home loan is the right choice for you will depend largely on your personal circumstances. If you don’t have the money to cover closing costs now, rolling them in may be a worthwhile option.

However, if you have the cash on hand, it may be better to pay the closing costs upfront. In most cases, paying closing costs upfront will result in paying less for the loan overall.

No matter which option you choose, you may want to do what you can to reduce closing costs, such as negotiating fees with lenders and trying to negotiate a concession with the sellers in which they pay some or all of your costs. That said, a seller concession will be difficult to obtain if your local housing market is competitive.


💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

The Takeaway

Closing costs are an inevitable part of taking out a home loan or refinancing one. Rolling closing costs into the loan may be an option, but it pays to carefully consider the long-term costs of avoiding paying closing costs up front before you commit to your 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

What is a no-closing-cost mortgage?

The name of this kind of mortgage is a bit misleading. Closing costs are in play, but the lender agrees to cover them in exchange for a higher interest rate or adds them to the loan balance.

How much are home closing costs?

Closing costs are usually 2% to 5% of the purchase price of a home.

Can you waive closing costs on a home?

Some closing costs must be paid, no matter what. But you can try to negotiate origination and application fees with your lender. You may even be able to get your lender to waive certain fees entirely.

Photo credit: iStock/kate_sept2004

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.

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A mortgage contingency allows homebuyers to exit the purchase contract without legal repercussions should they be unable to secure financing by the agreed-upon deadline.

Consider this scenario: You found a gem of a home that many others are eyeballing. You make an offer and cough up earnest money to show that you mean business. You’ve been preapproved for a mortgage, so financing seems a shoo-in — until you hit a snag. That’s when a mortgage contingency becomes important.

If you’re unable to obtain financing by the deadline, you can walk away from the purchase agreement and have your earnest money returned.

Some non-cash buyers consider waiving the mortgage contingency to make their offer more competitive in a hot market, but of course, that involves risk. Here’s the scoop on the financing contingency.

What Is a Mortgage Contingency?

Should something unexpected happen, like a job loss or the inability to sell an existing home, a mortgage contingency clause in the purchase agreement allows buyers to back out of the contract and have their earnest money returned. An earnest money deposit isn’t small potatoes for anyone, but that’s especially true for those who are competing against multiple offers: Buyers might lay down as much as 10% of the home’s sale price as a good-faith deposit.

A mortgage contingency also protects both buyers and sellers from uncertainty in the real estate transaction. It’s one of several contingencies that buyers might include in the contract when the property listing status changes to contingent but not yet pending.


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

The Mortgage Contingency Clause

The mortgage contingency clause gives the buyers a time frame to go shopping for a mortgage or move beyond preapproval. Though the clause may vary from contract to contract, most will allow buyers to back out of the contract if they do not directly cause the financing to fail. The earnest money held in escrow is returned to the buyer.

Even when buyers have mortgage preapproval, financing can fall through at the last minute. This is the legal “out” if that happens.

Recommended: What Is the Difference Between Pending and Contingent Offers?

How Mortgage Contingency Works

Buyers find a home and make an offer and the seller’s real estate agent or attorney draws up a contract for the purchase of the property. Many buyers include in their offer a mortgage contingency, which has a deadline. If the sellers agree to this contingency (and other conditions of the offer), they sign the contract. The mortgage contingency becomes legally binding at this point.

Next, buyers complete a full application with the lender of their choice. The lender will review the buyer’s finances in-depth, and mortgage underwriting will make a final decision on whether or not to approve the loan.

If the mortgage is denied, the buyers are able to exit the contract and have their earnest money returned when a mortgage contingency is included.

In the absence of a mortgage contingency, the sellers would be able to keep the buyers’ earnest money and put the property back on the market to find another buyer.

How Long Does a Contingency Contract Last?

When buyers submit an offer, they will suggest a deadline for mortgage financing alongside the mortgage contingency. Typically, the time frame to secure a loan is 30 to 60 days.

Mortgage Contingency Clause Elements

Some mortgage contingency clauses are simple and give the buyers absolute discretion in obtaining financing acceptable to them. In others, financing is more specifically described. This variance depends on your contract and state law. Elements can include a mortgage contingency deadline, type of mortgage, amount needed, closing fees, and interest rate.

Mortgage Contingency Deadline

The mortgage contingency deadline is how long the buyer has to find approval for a mortgage. The deadline is often suggested by the buyer in the contract when an offer is made on the property.

When the seller signs the offer, the contingencies become legally binding and must be followed in good faith. Should a buyer need an extension of the deadline, an addendum must be submitted to and agreed upon by the seller.

Type of Mortgage

There are many different types of mortgages a buyer can use to purchase property, so while one loan may not work for a buyer’s situation, another may. Buyers may have the option of selecting a conventional or government-insured loan, a jumbo loan, a mortgage with a term of 30, 15, or other years, or an interest-only mortgage. A lender can help walk buyers through their options.

Amount Needed

A mortgage contingency clause can also designate the amount needed to secure the loan. A mortgage calculator tool can help buyers estimate how much a mortgage payment is going to be and the total amount a borrower can qualify for.

Closing Fees

The mortgage contingency can stipulate what closing fees and mortgage points are acceptable.

Maximum Interest Rate

An interest rate can be specified that the lender must provide before the mortgage contingency is satisfied. This makes it so the buyer can back out of the contract if the costs are too high.

Can You Waive a Mortgage Contingency?

Yes. Mortgage preapproval can help make your offer more competitive, but you may still waive the mortgage contingency. In that case, your earnest money is at risk, and you’re not able to renegotiate the contract if the appraisal comes in low. Keep in mind that FHA and VA loans do not allow buyers to waive the appraisal (which is an important part of the financing contingency).

Reasons to Waive a Mortgage Contingency

There are some scenarios where it doesn’t make sense to include a mortgage contingency in the contract:

•   When the buyer is able to pay cash for the property. Cash buyers do not have to include a mortgage contingency.

•   When owner financing is involved. If the current owner of the home is financing the sale, buyers do not need to include a mortgage contingency.

•   When competition is extremely high. It might be a good idea to look at this option as a last resort, but in a market where sellers only accept offers without contingencies, this could be a buyer’s only way to win the contract.

💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.

Other Common Types of Contingency Clauses

The financing contingency isn’t the only common one in a contract. Some others are:

•   Inspection contingency. This is a contingency that allows the buyer to exit the contract should the property fail a home inspection.

•   Appraisal contingency. This contingency is connected to the financing contingency. Should the property fail to appraise for the amount needed to finance the loan, the buyer would have the option of renegotiating or dropping the contract.

•   Title contingency. A property needs to be free of title defects for the sale of the property to go through.

•   Sale of home contingency. This contingency allows buyers to sell their current home before completing the purchase of a new home.

Recommended: How to Read a Preliminary Title Report

The Takeaway

A mortgage contingency protects homebuyers’ ability to get their earnest money back if financing falls through. Waiving the mortgage contingency in a hot market could put some house hunters at the front of the line, but it’s a risk only those feeling confident in their financial situation should take.

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 waive a mortgage contingency?

Yes. Even if you need to obtain financing, waiving the mortgage contingency is an option.

What does no mortgage contingency mean?

No mortgage contingency means that buyers are willing to take on the risk of losing their earnest money if they are unable to secure financing by the closing deadline.

Should you waive mortgage contingency?

Homebuyers willing to take the risk of losing their earnest money to the seller to better compete are best poised to waive the mortgage contingency. Buyers who are not willing to risk their earnest money should not waive the mortgage contingency.

How long does a mortgage contingency usually take?

A mortgage contingency is usually set between 30 and 60 days.

Photo credit: iStock/kate_sept2004

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.

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

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