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An annual income of about $90,000 could allow you to afford a $300,000 mortgage, assuming you don’t have other significant debt, such as student loans. But how much house you can afford will depend on multiple factors, including credit history and how much you have saved for a down payment, to name a couple. Here’s a closer look at how much income may be needed for a $300,000 mortgage.

Income Needed for a $300,000 Mortgage

Income is one of several variables that lenders consider for mortgage approval — it’s a key indicator of a borrower’s ability to pay back the mortgage loan. So how much income is needed for a $300K mortgage? You’ll need to demonstrate that you can afford the down payment, closing costs (typically 2% to 6% of the home sale price), and monthly mortgage payment.

Lenders consider multiple forms of income, including dividends, investment, and child support toward a borrower’s gross income.

Recommended: Tips to Qualify for a Mortgage

How Much Do You Need to Make to Get a $300K Mortgage?

What income is needed for a $300K mortgage? Running the numbers with a home affordability calculator shows that an income of $86,000 – $94,000 is needed for a $300,000 mortgage. This assumes an interest rate of 7.00% and a 30-year loan term.

A mortgage calculator shows that the monthly payment would be $1,995 if you put 20%, or $75,000, toward a down payment on a property that costs $375,000. Of course, having $75,000 saved up for a down payment is a tall order, and many homebuyers will put down less.

Borrowers can use the 28/36 rule to ensure they can afford their mortgage and debt payments. This dictates that a home payment should be at or below 28% of income, while total debt payments should not exceed 36% of your income. In the example above, you’d need to make $7,166 a month ($86,000 a year) to afford a $1,995 mortgage payment per the 28/36 rule. But to make the mortgage payment with property taxes and home insurance, you’ll need to earn more like $94,000, as monthly payments would top $2,600.

Different types of mortgage loans may require private mortgage insurance (PMI), an additional expense that’s lumped into a monthly payment. If you make a down payment that is less than 20%, you will likely need to pay for PMI in addition to other monthly housing costs. Putting down 20% will help you avoid PMI and help secure a more competitive rate for a lower monthly mortgage payment.

Having proof of income, such as W-2s and tax returns, will help potential homebuyers be prepared for the mortgage preapproval process and application.

What Is a Good Debt-to-Income Ratio?

Your debt-to-income (DTI) ratio represents how much you owe in debt each month compared to how much you earn. The U.S. government’s Consumer Financial Protection Bureau recommends that homeowners have a DTI ratio of 36% or less. However, lenders may accept a DTI ratio of up to 43%, depending on the loan type and other borrower criteria.

Borrowers earning $90,000 a year (or $7,500 a month) can have up to $2,700 in total monthly debt to maintain a DTI ratio of 36% or less.

What Determines How Much House You Can Afford?

Figuring out the income needed for a $300K mortgage is an important first step to understanding how much house you can afford. But there are other factors, including your credit score and savings for a down payment, that will determine your home-buying budget if you plan on financing a home purchase.

Calculating your other existing debts, such as car loans and student loans, is also essential. Using the 28/36 rule, if you earn $90,000 a year, your total debt, including a future mortgage payment, should not exceed $2,700. With a $1,995 mortgage payment, this would leave $705 for other recurring debts.

Where you plan on buying a home also affects home affordability. Home prices and the cost of living by state can differ substantially. A $300,000 mortgage could give you a range of options in some places, but it may be limiting, unless you have a large down payment, in pricier locations.

Recommended: Most Affordable Places to Live

What Mortgage Lenders Look For

Lenders look at a range of factors when evaluating a borrower’s ability to repay a mortgage loan. Besides income, they’ll consider a borrower’s credit history, existing debt, employment, assets, and money saved for a down payment.

$300,000 Mortgage Breakdown Examples

How much you’ll pay for a $300,000 mortgage can vary based on the interest rate, loan term, taxes, and insurance. Crunching the numbers with a mortgage calculator with taxes and insurance included can give a more accurate estimate of your expected monthly mortgage payment.

Let’s suppose you buy a $375,000 house with $75,000 down. You secure a 30-year fixed mortgage with a 7.00% interest rate. Your monthly payment, including the principal, interest, insurance, and taxes would amount to about $2,600 (the exact number will depend on your property tax and insurance rates).

In another example, reducing the loan term to 15 years with the same interest rate would up the monthly payment to $3,300, but save thousands in interest payments. Meanwhile, locking in a lower rate of 6.50% on the 30-year fixed mortgage would lower the monthly payment to around $2,500.

Pros and Cons of a $300,000 Mortgage

Given that buying a home is often the largest purchase made in one’s lifetime, it’s worth weighing the pros and cons of a $300,000 mortgage. The average home listing price was $442,500 in May 2024, according to Realtor.com®. So unless you have a sizable down payment or look in a cheaper market, your homebuying options may be somewhat limited with a $300,000 mortgage.

On the other hand, a $300K mortgage might mean taking on less debt than the average homebuyer in 2024. Lower monthly payments could mean more funds for renovations or achieving other financial goals.

How Much Will You Need for a Down Payment?

The down payment will depend on the loan type. Most borrowers can expect to put between 3% (for qualifying first-time homebuyers) and 20% of a home’s purchase price toward a down payment.

Can You Buy a $300K Home With No Money Down?

You could get a mortgage with no down payment with either a government-backed loan from the U.S. Department of Veterans Affairs (VA) or from the U.S. Department of Agriculture (USDA). Both loan types are insured by the federal government and allow eligible homebuyers to purchase a home with no money down.

Borrowers must meet income and location eligibility requirements to qualify for a USDA loan, whereas VA loans are intended for eligible active-duty servicemembers, veterans, National Guard and Reserves members, and surviving spouses.

Can You Buy a $300K Home With a Small Down Payment?

If you don’t meet the requirements for a USDA or VA loan, you could still get a $300K mortgage with a small down payment. With an FHA loan from the Federal Housing Administration, first-time homebuyers could put just 3.5% down on a house if their credit score is 580 or higher. Qualified first-time home buyers with a credit score of 500 to 579 will need to put at least 10% toward a down payment on a FHA loan.

Alternatively, some homebuyers could qualify for a conventional mortgage loan that requires a down payment as low as 3% – 5%.

Is a $300K Mortgage with No Down Payment a Good Idea?

Saving up for a down payment can be challenging, and homebuyers may want to reserve cash for renovations or other financial goals. However, putting less money down means taking out more debt and paying more interest over the life of the loan. Also, keep in mind that it will take longer to build equity in your home without a down payment.

Can’t Afford a $300K Mortgage With No Down Payment?

If you can’t afford the monthly payment on a $300K mortgage with no down payment, here are a few steps that could improve your qualifications as a borrower.

Pay Off Debt

Paying off debts can improve your DTI ratio and increase your home-buying budget. Focusing on recurring debts that you can pay off in full in the short-term can provide the quickest results, as your monthly debt burden will immediately go down. It may also be a good idea to prioritize high-interest debt to avoid paying more in interest.

Look into First-Time Homebuyer Programs

If you’re a first-time homebuyer, you may qualify for more flexible loan terms and programs to make homeownership more accessible. Besides offering a minimum down payment of 3.5%, FHA loans allow first-time buyers to finance their closing costs. Additionally, down payment assistance programs can provide funding to help cover the down payment cost.

Build Up Credit

Improving your credit score could help secure a lower interest rate and increase your homebuying budget. Making minimum monthly payments and keeping your credit utilization — the percentage of credit you’re using on credit cards and other lines of credit — below 30% are two useful strategies.

Start Budgeting

Building a budget can help with paying off debt, saving up for a down payment, and other financial goals. Once implemented, your budget can help determine how much you can afford to pay for a monthly mortgage payment.

Alternatives to Conventional Mortgage Loans

If you can’t qualify for a conventional mortgage or government-backed loan, there are some other options to look into.

•   Balloon mortgage: Involves low monthly payments for a short period of time before the entire loan balance comes due at the end of the term.

•   Interest-only mortgages: Allows borrowers to make interest-only payments for a set term before having to pay principal and interest or consider a mortgage refinance.

•   Rent-to-own: Lets renters put a portion of their monthly payment toward purchasing the home from a landlord based on an agreement between both parties.

Mortgage Tips

Particularly if you are a first-time homebuyer, there is a lot to learn about applying for a mortgage and purchasing a home. For example, you can put in a few basic facts about your finances and prequalify for a mortgage loan. But this is different from being preapproved for a loan, and it’s important to understand mortgage prequalification vs. preapproval before you move forward.

Consulting a home loan help center can help you learn other mortgage tips.

The Takeaway

The income needed for a $300K mortgage depends on several variables, including credit history, down payment, and existing debt. If you earn around $90,000 a year, you can likely afford the mortgage payment on a home loan this size, unless you have significant debt. Putting more toward a down payment, paying off debt, and keeping up good credit habits could help you increase your home-buying budget.

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

How much should you make to afford a $300K house?

To afford a $300,000 house, you’ll need to make more than $83,000 a year, assuming you don’t have any significant recurring debt.

What is the monthly payment on a $300K mortgage?

The monthly payment on a $300,000 mortgage can range from $1,950 to $2,600 based on the loan term, interest rate, taxes, and insurance.

Can I afford a $300K house on a $70K salary?

It would be challenging to afford a $300,000 house on a $70,000 salary, unless you have saved up for a very large down payment or have other sources of income in addition to your salary. A $250,000 house may be more affordable for borrowers making $70,000.

Photo credit: iStock/Fabio Camandona

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

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

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

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

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.

^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.

SOHL-Q224-1906744-V1

Borrowing against home equity can put cash in your hands when needed. But how soon can you pull equity out of your home after purchasing it?

You might be surprised to learn that there’s no minimum waiting period to access your home equity. You’ll need to meet a lender’s other conditions and requirements to qualify for a loan against your equity, but you can decide when it makes sense to borrow against your home.

What Is Home Equity?

How is home equity explained? Equity is the difference between your home’s value and the remaining amount due on the mortgage. In simpler terms, equity represents the portion of the home that you own.

Home equity accumulates as your mortgage balance goes down and your property’s value goes up. As of March 2024, the average equity value among 48 million U.S. homeowners with mortgages was $206,000, according to the ICE Mortgage Monitor.

It’s possible to have negative equity in a home. That scenario can occur when you owe more on the mortgage than the home is worth. This is also referred to as being upside down or underwater on the mortgage. That’s important to know if you’re calculating how home equity counts in your net worth.

Ways to Access Home Equity

There are several options for borrowing against your equity. The most common are a home equity loan, a home equity line of credit, and a cash-out refinance.

Home Equity Loan

A home equity loan allows you to withdraw your equity in a lump sum. Home equity loans typically have fixed interest rates and your repayment term may last up to 30 years. A home equity loan is a type of second mortgage that doesn’t affect the terms of the loan you took out to purchase the property. Your home serves as collateral for the loan. If you default on the payments, the lender could initiate a foreclosure proceeding against you.

Home equity loans offer flexibility since you use the money any way you like. Some of the most common uses for home equity loans include:

•   Home repairs and maintenance

•   Home improvements

•   Debt consolidation

•   Medical bills

•   Large purchases

Interest on a home equity loan may be tax-deductible if the proceeds are used to “buy, build, or substantially improve the residence,” according to IRS tax rules. This rule applies through the end of 2025.

Home Equity Line of Credit

A home equity line of credit (HELOC) is a revolving line of credit that you can draw against as needed. HELOCs tend to have variable interest rates, though some lenders offer a fixed-rate option.4 When you take out a HELOC, you have a draw period in which you can access your line of credit and a repayment period when you pay it back. You pay interest only on the portion of your credit line that you use.

HELOCs can be used for the same purposes as a home equity loan. A HELOC may offer a lower interest rate than a home equity loan, depending on the overall rate environment. However, your payment isn’t always predictable if you have a variable interest rate.

Cash-Out Refinance

Cash-out refinancing replaces your existing mortgage loan with a new one while allowing you to withdraw some of your equity in cash at closing. A cash-out refinance loan isn’t a second mortgage; it takes the place of your original purchase loan. The balance due is higher to account for the amount of equity you withdraw in cash.

A cash-out refinance loan may have a fixed rate or an adjustable rate. Fixed-rate loans typically have repayment terms extending from 10 to 30 years. If you choose an adjustable-rate mortgage (ARM), you might be able to select a 3/1, 5/1, 7/1, or 10/1 ARM.

The first number represents how long you have to enjoy a fixed rate on the loan; the second number is how often the rate adjusts on an annual basis. So, a 10/1 ARM would have a fixed rate for the first 10 years. Then the rate would either increase or decrease once a year annually for the remainder of the loan term.

Requirements to Tap Home Equity

Qualification requirements for a home equity loan, HELOC, or cash-out refinance loan vary by lender. In most instances, you’ll need to have:

•   A credit score of 660 or better

•   At least 20% equity, though some lenders may go as low as 15%

•   A debt-to-income (DTI) ratio below 43%

Essentially, lenders want to make sure that you have sufficient income to make the payments on a home equity loan and that you’re likely to pay on time.

Lenders use your combined loan-to-value (CLTV) ratio to measure your equity. Your loan-to-value (LTV) ratio measures your home’s mortgage value against the property’s appraised value. The current loan balance divided by the appraised value equals your LTV.8 Combined LTV uses the balance of all loans, including first and second mortgages, to measure equity. This number can tell you how much of your equity you can borrow. Most lenders look for a CLTV in the 80% to 85% range, though it’s possible to find lenders that allow 100% financing.

Recommended: Understanding Mortgage Basics

Factors That Impact Timing

How soon can you get a home equity loan? Technically, right away. But the more important question to ask is whether it makes sense to access your equity sooner or later.

If you’ve just purchased a home, you may not have much equity built up yet. You may need to wait a few months for some equity to build up before borrowing against it. Your choice of lender could also make a difference. If a lender requires a home equity waiting period, you might have to wait until it ends to borrow.

Here are some questions to ask when deciding if the time is right to withdraw equity:

•   What will you use the money for?

•   How much do you need to borrow?

•   Which borrowing option makes the most sense?

•   How much can you afford in additional monthly mortgage payments?

Risks of Borrowing Too Soon

Just because you can get a home equity loan or HELOC right away doesn’t mean you should. There are some risk factors to consider if you’re thinking about an equity withdrawal.

•   Having less equity in the home can mean a higher LTV, which could make it harder to qualify.

•   Should your home’s value drop after borrowing, you could end up underwater on the mortgage.

•   If you only recently bought the home, you may not have a firm idea of your maintenance and utility costs, which could make it difficult to estimate how much you can afford in additional mortgage payments.

•   Your credit score may need time to recover so you can qualify for the best rates if you just signed off on a purchase mortgage loan.

Using a home equity loan or HELOC calculator can help you estimate what your payments might be. You can then add that to your existing mortgage payment to get an idea of what you’ll pay overall and what’s affordable for your budget.

Alternative Options

If you need to borrow money for home repairs, home improvements, or any other purpose, your equity isn’t the only option. You might consider these alternatives instead.

•   Personal loan. A personal loan allows you to borrow a lump sum and repay it with interest over time. Personal loans are typically unsecured, meaning you don’t need collateral and your home isn’t at risk if you’re unable to pay for any reason.

•   Credit card. Credit cards can be a convenient way to pay for large purchases, home improvements, or emergency expenses. Choosing a card with a 0% introductory APR on purchases can give you time to pay them off interest-free.

•   401(k) loan. If you have a retirement plan at work, you might be able to borrow against it. However, that’s usually not ideal since any money you take out won’t benefit from compounding interest, which could shortchange your retirement.

•   Home equity conversion mortgage (HECM). Eligible seniors 62 and older can get a home equity conversion mortgage to withdraw equity. You can also use an HECM for purchase loan to buy a home. A home equity conversion mortgage requires no payments as long as the homeowner lives in the property, with the balance due when they sell the home or die. Compare an HECM vs. reverse mortgage to see if you’re eligible.

You might also ask friends and family for a loan or sell things you don’t need to raise funds. Taking on a side hustle or part-time job could also bring in extra income so you don’t need to borrow.

The Takeaway

Withdrawing equity from your home can give you access to cash when you need it. In addition to getting the timing right, it’s also important to shop around and find your ideal lender. Comparing rates, terms, credit score requirements, and CLTV requirements can help you find the best loan for your needs.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

FAQ

How long after purchasing a home can you pull out equity?

There’s generally no set period for how soon you can take equity out of your home after purchasing it. Your ability to borrow can depend on your credit scores, debt-to-income ratio, and how much equity you’ve accumulated in the home.

Are there fees to tap home equity?

Home equity loans, HELOCs, and cash-out refinance loans can all have closing costs just like a purchase loan. Some of the fees you’ll pay can include appraisal fees, inspection fees if an inspection is required, attorney’s fees, and recording fees. You’ll need to pay certain fees out of pocket but your lender may allow you to roll other closing costs into the loan.

How fast can I get a home equity loan?

It’s possible to get a home equity loan as soon as you purchase your home. You’ll need to meet a lender’s minimum requirements to qualify for home equity financing. Getting approved may be challenging if you have a low credit score or only a small amount of equity in the home.

Photo credit: iStock/DjelicS

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

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

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

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

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.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

A balloon mortgage is where you make low monthly payments for a short period of time, and then pay off the entire loan balance at the end of the term. Balloon mortgage terms are typically five to seven years, but can be as little as two years. The payments leading up to the final payment, which is known as the balloon payment, can be interest-only or a combination of principal and interest.

Note: SoFi does not offer balloon mortgages at this time.

The idea of low initial payments sounds enticing to many homebuyers, so let’s take a look at what exactly a balloon mortgage is and how it works, including pros and cons.

What Is a Balloon Mortgage?

A balloon mortgage is a mortgage with a shorter-than-normal term — maybe five or seven years as opposed to 15 or 30 — with relatively low monthly payments but a large lump sum due at the end of the term.

Typically, people who take out a balloon mortgage plan on selling the home or refinancing before the balloon payment is due. Some may expect to receive a large sum of money that can be used to pay off the loan.

Do Balloon Mortgages Still Exist?

Balloon mortgages do exist, although they are less common today than they were before the 2007-2008 financial crisis, which found many homeowners owing more on their loan than their property was worth. Balloon mortgages are not considered “qualified mortgages” — meaning they have an unusually high risk profile. Because they are higher risk, balloon mortgages may be offered only by smaller lenders.

Balloon mortgages are sometimes used for business loans, in which the founder wishes to have money to spend on launching the business and plans to repay it once the business is up and running and making a profit.

How Do Balloon Mortgages Work?

In technical terms, a balloon mortgage is one that hasn’t undergone full mortgage amortization. Although the payments are based on a 30-year term, the actual term is much shorter, which means a lot of money is left over at the end (hence the lump payment due).

Types of Balloon Mortgages

There are two ways a lender might calculate payments on a balloon mortgage:

Amortization Over a Longer Loan Term

In this scenario, the fixed loan payments may be based on a 30-year loan term even though the actual term is just 15 years. The borrower would make the relatively affordable lower payments for 15 years and then the loan balance would be due in a mortgage balloon payment.

Interest-Only Payments

Here, the borrower would pay only the interest on the loan for an initial period, and then the principal balance would be due in a balloon payment.

Balloon Mortgage Example

Below you can see how the two types of balloon mortgages might play out for a borrower who has a balloon mortgage for $300,000.

10-Year Balloon Loan at 6.50% With 30-Year Amortization

5-Year Balloon Mortgage With Interest-Only Payments at 6.50%

Why Would Anyone Want a Balloon Mortgage?

Being suddenly faced with a lump sum mortgage payment due might sound like a nightmare to most of us. So when would such a financial product actually be an attractive option?

It’s worth noting that balloon mortgages sometimes carry lower interest rates than 30-year fixed-interest mortgages, and in some cases, they can be easier to qualify for. That can make them tempting to those in the following situations:

•   The borrower plans to sell the house and move before the balloon sum is due. This way, the lump sum is paid off with proceeds from selling the house — and in the meantime, the borrower benefits from the lower interest rate. This assumes, of course, that the home holds its value or increases in value in a relatively short time period.

•   The borrower plans to refinance the loan once the balloon sum is due. This is a common scenario, and may give a borrower the opportunity to benefit from the lower interest rate of the balloon mortgage in the short term while buying time to build credit and shop for a better loan in the long term.

•   The borrower expects to have the money to pay the balloon sum by the time it’s due. Maybe they have another property they plan to sell or are banking on an inheritance or some other savings plan — and they might save money in the long run on interest compared with taking out a traditional 30-year mortgage.

That said, there are obviously risks to this approach that may outweigh the benefits.

Recommended: Guide to Buying, Selling, and Updating Your Home

Pros and Cons of Balloon Mortgages

What are the specific advantages and disadvantages of balloon mortgages?

Pros of a Balloon Mortgage

•   Possible lower interest rate. Balloon mortgages may carry a lower interest rate than mortgages with longer terms, depending on the lender’s criteria and the borrower’s creditworthiness.

•   Possible lower monthly payment. Lower interest rates can translate to lower monthly payments, making the mortgage more affordable and easier to fit into the monthly budget (at least in the short term).

•   May pay off the loan quicker. If a borrower is able to come up with the lump sum payment at the time it’s due, a balloon mortgage may allow a purchaser to pay off the house more quickly.

•   Possibly easier to qualify for. Because of their lower payment, balloon mortgages may be easier for some consumers to qualify for.

Cons of a Balloon Mortgage

•   Interest-only payments. In some cases, the monthly payments made during the term of a balloon mortgage may be interest-only — which means borrowers aren’t building equity in their homes during that time.

•   Buyers may be unable to sell their house or refinance in time. To avoid the lump sum payment, borrowers must sell or refinance. If rates have risen or they can’t sell, they may face mortgage foreclosure.

•   Buyer may pay more in fees. Even if successful, refinancing can incur fees that may mitigate some of the savings earned by taking out the balloon loan in the first place.

•   Refinancing may increase monthly payment. After refinancing, monthly mortgage payments are often higher, especially if the balloon mortgage was interest-only.

•   Risky for the borrower. Other unforeseen circumstances can wreak havoc on a balloon borrower’s plans, leaving them with a huge lump sum payment they can’t afford.

Other Types of Mortgages to Consider

Although balloon loans can be relatively easy to qualify for and do have some benefits, they can also be risky. We know what they say about best-laid plans — and even those with bulletproof plans sometimes encounter unforeseen circumstances.

What if the money that was set aside for the balloon payment has to be spent on a medical emergency or another surprise expense? What if the sale of the property or the annual bonuses fall through? What if, when it’s time to refinance, rates are actually higher or the borrower’s credit history is less favorable? What if property values have dropped precipitously and refinancing options are hard to come by?

Fortunately, there are plenty of other types of mortgages that can meet borrowers’ needs without creating an unduly risky scenario.

Fixed-Rate Mortgages

A fixed-rate mortgage, or FRM, is one in which the interest rate is fixed. The borrower pays the same interest rate over the entire term of the loan, usually 15 or 30 years.

The fixed interest rate also means the monthly payment amount is fixed, making this a popular type of mortgage for those who want to plan ahead to ensure that their mortgage payment will fit their budget.

FRMs protect buyers from rising interest rates; no matter what happens with the market, they can rest assured their rates will stay the same.

On the other hand, FRMs can preclude borrowers from benefiting when interest rates drop — which leads us to another popular type of mortgage.

Adjustable-Rate Mortgages

An adjustable-rate mortgage, or ARM, has an interest rate that fluctuates over the term of the loan based on the market. These loans generally begin with a relatively short period when the interest rate is fixed — known as the fixed-rate period — before switching to the variable interest rate.

ARMs are attractive for a variety of reasons. For one thing, the interest rate during the introductory fixed-rate period is often lower than it is in FRMs, meaning the borrower can enjoy smaller payments at the beginning of the mortgage.

ARMs may also allow borrowers to benefit when market rates drop. Though, if market rates increase, so can the borrower’s monthly payment. Some ARMs include clauses limiting the annual and life-of-loan adjustments and creating rate caps, which can help protect buyers, but it’s still not the same kind of peace of mind available from FRMs.

Recommended: Fixed vs. Adjustable Rate Mortgages: What’s the Difference?

More Ways to Find the Right Mortgage for Your Needs

Any mortgage — indeed, any loan — carries some degree of risk. But there are ways to mitigate the inherent hazards involved with owing a large debt. For one thing, figuring out how much house you can afford is an important first step to help ensure that you don’t overspend and end up with an unaffordable mortgage.

Once you’ve got a home-buying budget locked in, researching types of mortgage loans is a great next step. And finally, shopping around at different lenders for the best mortgage terms available can also help you save money in the long run.

Government-insured loans can help borrowers qualify with low-interest rates and down payments — as little as 3.5% for FHA loans (backed by the Federal Housing Administration) and even 0% for U.S. Department of Agriculture (USDA) loans in approved rural areas. But conventional loans, or those offered from private lenders, can also offer competitive terms and incentives.

The Takeaway

A borrower with a balloon mortgage makes low payments for, say, 5 or 7 years before a very large “balloon” payment is due to pay off the mortgage. Financing your home purchase this way can be riskier than other loan types, even though the upfront costs are enticingly low. Fortunately, there are other ways to borrow money for a home purchase that involve less risk.

FAQ

What is considered a balloon mortgage?

A balloon mortgage is one in which the borrower makes relatively low payments for an initial period of time (5, 7, or 15 years) before one very large mortgage “balloon” payment comes due.

Do balloon mortgages still exist?

Balloon mortgages do exist, although they are less commonly used for home purchases than they were in the past. Today they are used more often for commercial loans.

Why would you want a balloon mortgage?

Borrowers are attracted to balloon mortgages because of the period of low monthly payments at the outset of the loan term. They may plan to sell or refinance before the mortgage balloon payment comes due, or may think that they will come into other money — through an inheritance, for example — that will help them afford the balloon payment. However there is always risk involved in these scenarios.

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

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

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

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

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.

^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.

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Mortgage fraud involves lying or omitting information to fund or insure a mortgage loan. It results in billions of dollars in annual losses nationwide. In the second quarter of 2023, 0.75% of all mortgage applications were estimated to contain fraud, which is about 1 in 134 applications, according to CoreLogic. Rates of fraud were higher for two- to four-family properties than for single-family homes. The top states for mortgage application fraud in 2023 were New York and Florida.

What Is Mortgage Fraud?

The FBI, which investigates mortgage fraud, defines it as “a material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.” A borrower might apply for a loan saying they had received a gift of money to help purchase a home when in reality, the borrower simply used money borrowed from a family member to temporarily inflate their assets during the loan application process.

Sometimes those working in the mortgage industry are the fraudsters: In one recent case, employees of a New Jersey mortgage business misled lenders about the intended use of properties to fraudulently secure lower mortgage interest rates. They often submitted loan applications saying that borrowers would reside in a property when in fact the property was being used as a rental or investment property.

How Does Mortgage Fraud Happen?

Mortgage fraud happens when someone involved in the process of obtaining a loan for a property purchase makes false statements about their financial situation or the planned use of the property. It may involve falsifying documents, lying about the source of income, or even creating an entirely false identity.

Types of Mortgage Fraud

The FBI investigates two distinct areas of mortgage fraud: fraud for profit and mortgage fraud schemes used for housing.

Fraud for Profit

The FBI says that those who commit this type of mortgage fraud are often industry insiders. Current investigations and reporting indicate that a high percentage of mortgage fraud involves collusion by bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals in the industry. The FBI points out that fraud for profit is not about getting a home, but manipulating the mortgage process to steal cash and equity from lenders and homeowners.

Fraud for Housing

It’s not only industry insiders who can look to milk the system with mortgage scams. With fraud for housing, the perpetrators are borrowers who take illegal actions in order to acquire or maintain ownership of a house. They could do this by lying about income or presenting false information about assets on their loan application to get a good mortgage rate, for example. One area where fraud is on the increase in recent years is occupancy misrepresentation, in which an investor claims that an investment property is their primary residence in order to get a more favorable mortgage rate.


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

What Are the Penalties for Mortgage Fraud?

Mortgage fraud schemes abound, and mortgage fraud is serious. In fact, it’s typically a felony. It’s usually the FBI who investigates mortgage fraud, and conviction for federal mortgage fraud can result in a federal prison sentence of 30 years; state convictions can last a few years. If the crime is a misdemeanor and the amount involved is less than $1,000, there can be a one-year sentence.

A conviction on a single count of federal mortgage fraud can result in a fine of up to $1 million. State fines can range from a few thousand dollars for a misdemeanor to $100,000 or more for a felony. Those found guilty can expect to pay restitution to compensate the victims and to be on probation following jail time.

9 Main Types of Mortgage Fraud

Mortgage fraud comes in many flavors so let’s get a closer look at exactly what is mortgage fraud. Scammers are big on creativity, particularly when it comes to scams targeting seniors. The FBI has a list of common mortgage fraud schemes and scams to watch out for. Here are a few of theirs and others to keep in mind.

1. Property Flipping

There’s nothing innately evil about flipping properties. In fact, adding investment properties to your portfolio can be a way to build wealth if you’re good at it. But then there’s the sinister side of flipping. It goes something like this: A property is purchased below the market price and immediately sold for profit, typically with the help of a shady appraiser who puffs up the value of the property. This is illegal.

2. Equity Skimming

The FBI explains how this works: An investor may use a “straw buyer” (a knowing accomplice), false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. After closing, the straw buyer signs the property over to the investor in a quit-claim deed, which relinquishes all rights to the property and provides no guarantee to title. The investor does not make any mortgage payments and rents out the property until foreclosure takes place several months later.

3. Asset Rental

It’s one thing to borrow something blue on your wedding day, and quite another to borrow or rent the assets of your best friend or loved one to make yourself look better in the eyes of a lender. You “borrow” the asset, maybe a hefty chunk of cash, and after the mortgage closes, you give it back to your partner in crime. Sounds harmless, but it’s a common and serious mortgage scam.

4. Inflated Appraisals

Appraisers have the keys to the kingdom. They state the fair market value of a home. Crooked appraisers can do a couple of things that are illegal: They can undervalue the property so that a buyer gets a “deal,” or more often, they overstate the value of the property. The goal is to help a buyer or seller, or a homeowner planning to refinance or tap home equity.

5. False Identity/Identity Theft

Identity theft is an epidemic. According to the Federal Trade Commission, in 2022, it received over 1.1 million reports of identity theft.

Scammers use financial information like Social Security numbers, stolen pay stubs, even fake employment verification forms to get a fraudulent mortgage on a property they do not own. If you’ve been a victim, report identity theft as soon as possible.

6. Foreclosure Scams

Talk about kicking somebody when they’re down. Predators seek out those who are in foreclosure or at risk of defaulting on their loan and tell them that they can save their home by transferring the deed or putting the property in the name of an investor. It can sound rational when you’re desperate.

The perpetrator cashes in when they sell the property to an investor or straw borrower, creating equity using a fraudulent appraisal and stealing the seller proceeds or fees paid by the homeowners. The homeowners are typically told that they can pay rent for at least a year and repurchase the property when their credit has improved.

But that’s not how the story goes. The crooks don’t make the mortgage payments, and the property will likely wind up going into foreclosure.

7. Air Loan

This may as well be in a movie, because nothing is real with this — it’s probably the most bizarre of the mortgage fraud schemes. The FBI describes an air loan as a nonexistent property loan where there is usually no collateral. Brokers invent borrowers and properties, establish accounts for payments, and maintain custodial accounts for escrow. They may establish an office with a bank of phones used as the fake employer, appraiser, credit agency, and so on, to deceive creditors who attempt to verify information on loan applications.

8. Inaccurate Income

A lie can be what you leave out as much as what you say. Given the nature of how self-employed people file taxes, some do not report their full income on their taxes. When it comes to a “stated income” loan, a borrower claims a certain amount of income, and an underwriter makes a decision based on that figure to give them a loan or not.

If the borrower tells a little white lie about their income, it’s not little at all. It’s mortgage fraud. One way lenders try to ensure the information a borrower provides is accurate is to request a letter of explanation about anything that might be concerning in a borrower’s application. This is also why a lender asks for bank statements for a mortgage application, and may ask for extra documentation if you are self-employed.

9. Repaying Gift Money

You can receive part of a down payment for a home, but the gift is not to be repaid. In fact, when you plan to use gift funds, you’ll need to provide a gift letter that proves the money is not a loan to be repaid. You may also be asked to provide documentation to prove the transfer of the gift into your bank account. This may include asking the donor for a copy of their check or bank account statement.

If that gift is to be repaid, it is mortgage fraud. It can also put your loan qualification at risk, as all loans need to be factored into your debt-to-income ratio.


💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

Why Is Mortgage Fraud Committed?

Borrowers who know they are not really mortgage-ready — perhaps because of a poor credit history, a low credit score, or a nothing-to-brag-about salary that would likely get them the thumbs down from a lender — may be driven to try to enhance their chances of getting a loan, even by illegal means.

As for industry professionals, be it appraisers, real estate agents, mortgage brokers, or anyone who has a role in the home buying and selling process, they could be motivated by the almighty dollar. If they can look the other way to get the transaction done, or manipulate facts so they get their piece of the action, they may do so. (Home improvement scams are widespread too, so exercise caution when commissioning work on your home as well.)

Avoiding and Preventing Mortgage Fraud

When it comes to buying or selling a house, there are a lot of moving parts and many cooks in the kitchen. It’s a good idea to, above all, be truthful about everything, and if anyone along the way seems to be pushing you in any other direction, you could pay dearly for taking that bad advice.

You can play the game straight, but what about all the others involved in the process? It’s smart to get referrals for companies and real estate and mortgage pros that you’ll be working with, and to check state and local licenses. Visit a home loan help center to familiarize yourself with the ins and outs of getting a mortgage before you start your home search.

Once you’ve found a home you love and begin the buying process, do your homework to ensure your property evaluation, or appraisal, is on target. It might be helpful to look at other homes that are similar to see what they have sold for, and recent tax assessments of nearby homes.

Guard your John Hancock as well. Be careful what you sign, and never sign a blank document or one containing blank lines.

Once you’re a homeowner, never sign over the house deed “temporarily.” This could be a set-up. Someone may be asking you to sign over your house deed as part of a scheme to avoid foreclosure. Know that chances are you’ll lose your house permanently.

Can You Accidentally Commit Mortgage Fraud?

Even if you didn’t set out to perpetrate a mortgage scam, you could commit fraud unwittingly by signing fraudulent documents presented by a clever thief, by guessing at your assets and writing numbers into your application without checking them, or by borrowing money for a down payment without disclosing the loan.

Victims of Mortgage Fraud

What do you do if you’re the victim of mortgage fraud? Your local police department may take a report. Your state attorney general’s office may be another good resource. The FBI, however, is the agency that handles most mortgage fraud investigations. You can go to tips.fbi.gov to report a crime. Other federal agencies also investigate mortgage fraud, but the FBI is likely the best first option.

The Takeaway

Mortgage fraud isn’t rare, and both industry insiders and borrowers can be involved. It’s smart to approach the process of getting a home loan with care. Do your homework to find a loan provider you trust and read everything before you sign.

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 considered mortgage fraud?

Intentionally providing false information or omitting information during the mortgage loan application process is considered mortgage fraud.

What are common mortgage fraud tactics?

Mortgage fraud takes many different shapes but common tactics include borrowers falsely inflating assets or income; those involved in the mortgage lending process inventing fake borrowers; or appraisers artificially inflating property values.

What is the typical sentence for mortgage fraud?

The average sentence for mortgage fraud is 14 months, but prison time can extend to 30 years. Fines (of up to $1 million) and the payment of restitution — repaying the money that resulted from the fraud — are also usually part of the sentence.

Photo credit: iStock/fizkes

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

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

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

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

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.

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A common rule of thumb for renters states that no more than 30% of your income should go to rent and utility payments each month. This guideline dates back to housing initiatives introduced by the federal government in the 1960s.

Deciding what percentage of income should go to rent and utilities is central to making a realistic budget as a renter. The less you can spend on these items each month, the more money you’ll have to fund your financial goals. Read on for more about calculating a housing budget that’s right for you, as well as creative ways to cut your housing costs.

What Is the 30% Rule?

The 30% rule says that households should spend no more than 30% of their income on housing costs, including rent and utilities. This housing affordability advice dates back to the 1969 Brooke Amendment, which was passed in response to rental price increases and complaints about public housing services.

The Brooke Amendment capped rent for public housing at 25% of residents’ income. This measure was designed to offer financial relief to low-income households participating in public housing programs. In 1981, Congress increased the 25% threshold to 30%, where it has remained to the present day.

Recommended: Should I Sell My House Now or Wait

What Is 30% Based on?

The 30% rule for housing affordability considers two distinct categories of costs: housing and utilities. For renters, this generally means rental payments and basic utilities such as electric, water, and heating. Collectively, these expenses should total no more than 30% of a renter’s gross monthly income.

Gross income is what someone earns before taxes and other deductions are taken out. Net income, on the other hand, is what they actually take home in their paychecks. Basing the 30% rule on someone’s gross income versus their net income will result in a higher dollar amount that should be allocated to rent and utilities.

It’s also important to remember that the 30% rule isn’t set in stone. The average monthly expenses for one person will vary depending on your location’s cost of living, optional costs like renter’s insurance, and whether you have a very low or high income.

If you need help managing your finances, online tools like a money tracker can help you monitor spending, set budgets, and keep tabs on your credit score.

Calculating the Percentage to Go to Rent and Utilities

Figuring out what percentage of income should go to rent and utilities using the 30% rule is a fairly simple calculation. You’d multiply your gross monthly income by 0.30 to figure out the maximum amount you should be budgeting for rent and utility costs. How complicated this calculation is can depend on how often you’re paid and whether your paychecks are always the same amount.

If You Are Paid the Same Amount Every Two Weeks

If you’re paid biweekly and your paychecks are the same, you can calculate your target rent and utilities in one of two ways. First, you take the gross amount reported on one of your paychecks and multiply it by 0.30. You then double that result to find the monthly amount.

So, say your biweekly gross income is $2,500. Thirty percent of that number is $750 ($2,500 x 0.30). If you double it, then your rent and utilities budget should be no more than $1,500 per month.

This strategy doesn’t take into account the two months in a year that there are three biweekly paychecks, however. If you want to find the average amount to spend on rent and utilities each month, you can multiply your biweekly gross paycheck amount by 26 (for 26 paychecks in one year), divide by 12 (for 12 months), then find 30% of that amount.

So using the $2,500 figure once again, if you multiply that by 26, you’d get $65,000. Divide that by 12 to get $5,417 (rounded up), your monthly pay. Thirty percent of that is $1,625, the amount you’d allocate to rent and utilities per month.

If You Are Paid Varying Amounts Every Paycheck

Pinpointing what percentage of income should go to rent and utilities can be a little more challenging if your paychecks aren’t the same from one pay period to the next. That might happen if you’re paid hourly and work different hours each week, receive vacation or sick pay, or part of your income is based on commissions.

In that scenario, you’d want to look at your annual income in its entirety. You can do that by looking at all of your pay stubs for the previous 12 months or checking your most recent W-2 form. Again, you’re looking at gross income, not net pay.

You’d take the gross income for the year, then multiply it by 0.30 to figure out how much of your pay should go to rent and utilities overall. If your gross annual income was $70,000, then your target number would be $21,000 for the year. Divide that by 12 and you’ll find that you should be spending no more than $1,750 per month on rent and utilities using the 30% rule.

How to Reduce Your Rent to 30% or Less of Your Income

If you’ve done the calculations and you’re spending more than 30% of your income on rent and utilities, there are some things you may be able to do to reduce those costs.

Split the Rent With Roommates

Taking on one or more roommates could ease some of the financial load. Remember, it’s important to have a written agreement in place specifying what percentage of rent and utilities each roommate is responsible for.

Also, determine who will pay the rent and utility bills when everyone is chipping in. For example, one person may volunteer to collect payments from everyone else and then cut a check to the landlord or utility company. Consider using a budget planner app to keep track of household bills and payments.

Recommended: 25 Tips for Sharing Expenses With Roommates

Consider a New Location

Moving is another possibility for lowering rent and utility costs if you’re relocating to an area with a lower cost of living. Rent in rural areas may be cheaper than in a trendy urban center, for example. There can even be significant variation in rents in different neighborhoods within the same city.

Keep in mind that relocating can have its trade-offs. For instance, living in a less expensive area may mean giving up certain amenities you enjoyed in your old neighborhood, like walkability or convenient access to stores and restaurants. And of course, you’ll also have to budget for the costs of moving, which can average $1,250 for a local move or $4,890 for a long-distance move.

Work Remotely

Working remotely can have its advantages, including saving money on certain expenses. For example, you may spend less on gas, meals out with coworkers, or office attire.

That said, if you are on a computer all day, you’ll want to take steps to lower your energy bill, such as unplugging at the end of the day and buying energy-efficient lights.

Opting for remote work could also save you money on rent if you’re able to become location-independent. When you’re not tied to a particular city, that frees you up to seek out cheaper areas to live. You could even forgo renting altogether and become a digital nomad. That has its own costs, but you’re not locked in to paying rent to a landlord or utility payments long-term.

Negotiate With Your Landlord

The most effective way to reduce your rent may be to go straight to the landlord and negotiate your rent. Your landlord may be willing to offer a discount or reduced rental rate under certain conditions.

For example, your landlord might agree to reduce your rent by 10% or 15% if you pay six months in advance or agree to a longer lease term. The prospect of guaranteed rental income might be attractive enough for them to offer you a better deal.

You may also be able to get a rate discount by offering to take care of certain maintenance and upkeep tasks yourself. If your landlord normally pays for lawn care, for example, they may be willing to let you pay less in rent if you’re working off the difference by cutting the grass and maintaining the property’s landscaping.

Ask for a Promotion or Find a New Job

Instead of attempting to reduce your costs, you could try a different tactic: Making more money means you can budget more for rent and utility costs.

Asking your boss for a raise or promotion might boost your paycheck. If you hit a dead end, you may consider a more drastic move and look for a higher-paying job. Taking on a part-time job or starting a side hustle can also help you bring in more money to cover rent and utility payments.

What to Consider if 30% Doesn’t Work for You

As noted above, the 30% rule for housing is a somewhat arbitrary number and may not work for everyone. Spending more than 30% of your income on rent and utilities doesn’t automatically mean that you’re living beyond your means, for a variety of reasons.

There are, however, a few actions you can take to streamline your finances and determine what percentage of income should go to rent and utilities.

Try the 50/30/20 Rule

The 50/30/20 budget rule recommends spending 50% of your income on needs, 30% on wants, and the remaining 20% on savings and debt repayment. This budgeting method doesn’t specify an exact percentage or dollar amount to spend on rent and utilities. Instead, those expenses get grouped into the 50% of income allocated to “needs”.

You still need to keep track of your spending to make sure you’re staying within the 50% limit. Using an online budget planner can help you figure out if the 50/30/20 rule is realistic based on your income and expenses.

Pay Down Loans and Debt

Total U.S. household debt reached $17.69 trillion in the first quarter of 2024, according to Federal Reserve data. While a big chunk of that is mortgage debt, Americans also pay a sizable amount of money to credit cards, student loans, personal loans, auto loans, and other debts.

Working to pay off debts can free up more money to allocate to rent and utilities. There are different methods you can use, including the debt snowball method and the debt avalanche.

Look for Cost Savings in Recurring Expenses

One more way to make shouldering higher rent costs easier is to lower your other expenses. Making small changes at home can lead to lower electricity and water bills. Cutting out subscriptions you don’t use, looking for a better deal on car insurance, and eating more meals at home instead of dining out are all simple ways to lower your expenses.

The Takeaway

If you’re spending 30% of your gross (before tax) income or less on rent and utilities, pat yourself on the back. You may spend up to 50% on housing if you have no debt and a healthy savings balance. The important thing is to look at your entire financial picture, including your income, debts, and goals, to decide the figure that’s right for you.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What is a good percentage of income to spend on rent?

The 30% rule says that renters should spend no more than a third of their gross income on rent and utility payments. The less you can spend on rent and utilities, the more money you’ll have to fund other financial goals, like saving for emergencies, paying off debt, and planning for retirement.

Is 30% of income on rent too much?

Spending 30% of income on rent may be too much if a significant part of your income is also going toward debt repayment. That may leave you with little money to cover other necessary expenses or discretionary spending.

How much of your monthly income should go to rent?

A common rule of thumb says that roughly one-third of your monthly gross income can go to rent. But if you have substantial savings and no debt, you may be OK with spending a larger percentage of income on rent. On the other hand, if you’re trying to pay off debt or build savings, you may prefer to spend less on rent payments.

Photo credit: iStock/deliormanli

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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