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Virtually all new debit cards in the U.S. today come enabled with a small metallic square, known as an EMV chip. This embedded microchip creates a unique, one-time code for each transaction, making it more secure than older magnetic stripes, which directly share your bank account information.

According to EMVCo — the organization that oversees EMV technology — nearly 15 billion EMV-enabled payment cards are now in circulation worldwide, accounting for about 96% of all in-store card transactions across more than 80 countries.

Read on to learn how chip-enabled debit cards work, why they’re more secure, and what to do if your card’s chip stops working.

What Is a Chip Card and How Does It Work?

Debit cards were invented back in the late 1960s as an alternative to carrying cash or a checkbook. They originally used magnetic stripes to store account information. The stripe holds static data, such as your name, account number, expiration date, and the security code from the back of the card.

Because the information on the magnetic stripe is not encrypted, it’s possible for scammers to use inexpensive devices (called skimmers) at payment terminals to steal your card data during a swipe. Criminals can then copy this stolen information onto counterfeit cards to make unauthorized purchases or withdraw cash.

Modern EMV chip cards offer an extra layer of protection because their chips encrypt data, making it more difficult for fraudsters to copy the information. The term EMV comes from Europay, MasterCard, and Visa, the companies that originally developed the technology to help prevent fraud and counterfeiting.

Understanding EMV Technology

Like the magnetic stripe, an EMV chip contains information about the checking account that is associated with the card. Unlike older magnetic stripe cards, however, EMV chip cards don’t transmit your actual account details during transactions. Instead, the chip generates a unique, one-time transaction code when you tap or insert your card. Even if that code fell into the wrong hands, it couldn’t be used to make another purchase.

While receiving an EMV chip card is the norm when you apply for a debit card, chip cards also still feature magnetic stripes, giving you the option of swiping or dipping/tapping. This is because merchants in the U.S. have not yet universally adopted the costlier chip-enabled card readers. Banks will no longer be required to issue chip cards with a magnetic stripe starting in 2027.

How Chip Cards Create a Unique Transaction Code

EMV cards rely on a security process called tokenization. During a transaction, your real account number is replaced with a one-time token that’s valid only for that specific purpose. The token — not your actual debit card number — travels through the payment network to the issuer for authorization. Once the transaction is complete, the token becomes useless.

Are Chip Debit Cards More Secure Than Magnetic Stripe Cards?

Yes — chip debit cards are generally significantly more secure than magnetic stripe cards.

With magnetic stripe cards, swiping the card allows the terminal to read stored account information. Criminals can exploit this by using skimmers to capture data as it’s being transmitted and use it for unauthorized purchases.

Chip cards were largely designed to help prevent fraudulent transactions. When you swipe or tap an EMV debit card, the chip generates a unique code that cannot be used again, making it more difficult for a fraudster to access your account information and commit debit card fraud.

An added security bonus is that when you use a chip debit card for an in-person transaction, your bank information doesn’t get stored in the retailer’s database. This prevents hackers from getting your account number in the event of a store’s data breach.

This isn’t to say that EMV debit cards are totally risk-free, however. Some hackers have started to use more sophisticated devices called “shimmers” that, like skimmers, can be placed in card reader slots, such as at gas pumps, vending machines, or machines in poorly lit areas. These devices contain microchips that may still be able to retrieve your account information and save it to a magnetic strip on a counterfeit card. While the advanced features of EMV debit cards can help to protect against fraud, it’s important to know that it can still occur.

How to Use Your Debit Card With a Chip

Although the technology behind EMV cards is complex, using one is simple. You generally have two options:

Dipping at a Card Reader

Dipping your card means inserting it into a card reader chip side up and leaving it there until the transaction is complete, which takes a few seconds. The screen will tell you to enter your debit card pin or sign for the purchase, depending on the transaction type and merchant. Once the screen indicates the transaction is complete, you can remove your card and take your receipt.

Tapping for Contactless Payments

If your card and the reader have the symbol for contactless payments (four curved lines), you can tap the card near the reader instead of inserting it for faster transactions.

Contactless payments use near-field communication (NFC) technology. When you tap your card near a compatible terminal, the chip transmits payment data wirelessly over a very short distance.

Despite common concerns, you can’t accidentally trigger a payment just by walking past a terminal. The card must be intentionally placed very close to the reader for the transaction to occur.

Recommended: What Is Cardless Withdrawal?

What Should You Do if Your Debit Card Chip Malfunctions?

If the chip in your debit card chip is not working, try one of these quick fixes:

•   Reinsert correctly: Ensure the chip is facing up and inserted properly into the reader.

•   Clean the chip: Gently wipe the chip with a soft cloth to remove dirt, then try again.

•   Use a different method: If dipping doesn’t work, try tapping (if that option is available). If neither method works, you can likely use the magnetic stripe option.

•   Use a different terminal: The issue might be the merchant’s reader, so you might simply try another machine.

Common Reasons a Debit Card Chip Is Not Working

One of the most common reasons why chips in debit cards stop working is everyday wear and tear. Simply pulling your card out of your wallet, using it, and putting it back can scuff the chip over time. EMV chips can also get damaged or scratched if your card is stored loosely in your bag or phone case.

If the chip gets scratched, cracked, or broken, it may not be able to establish a reliable connection with the card reader. While debit cards are typically water-resistant, prolonged exposure to liquids may also damage an EMV chip.

A common myth is that magnets can lead to a debit card chip malfunction. In reality, magnets mainly affect magnetic stripes — not chip technology.

Steps to Take When You Have a Damaged Chip

If your chip consistently fails to work, try cleaning it with a soft, damp cloth or alcohol wipe. If that doesn’t resolve the problem, contact your issuer and ask for a replacement card. You can do this by calling the number on the back of your card, or you may be able to request a new card on your banking app or the bank’s website. Be sure to specify that the replacement is for a damaged (not lost or stolen) debit card, so they issue a new card with the same number.

Chip Cards vs Mobile Wallets: Which Is More Secure?

Both mobile wallets and chip cards use tokenization for strong security. This means they replace your actual card number with a one-time token, keeping the real data from being exposed during transactions.

However, mobile wallets are generally seen as more secure than chip cards because they rely on multiple authentication steps. To make a payment with a mobile wallet, you typically need to first unlock your device using a passcode, fingerprint, or face ID. Plus, if someone were to steal your phone, you can usually lock or remotely wipe the wallet remotely.

The Takeaway

Chip-enabled (EMV) debit cards offer a high level of security and convenience for everyday spending. By generating unique transaction codes and keeping your account details private, they can significantly reduce the risk of fraud. With options to insert or tap your card, EMV technology provides a safe and seamless way to access your money.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Can a chip card be hacked?

While EMV chip cards are considered significantly more secure than magnetic stripe cards, they are not invincible. Some fraudsters use advanced tools called “shimmers.” These are very thin devices that can be fitted into a card terminal and illegally capture data stored in the microchips implanted in debit and credit cards.

Additionally, because chip cards still feature magnetic stripes for compatibility with older terminals, they remain vulnerable to traditional skimming. Some advanced schemes even involve intercepting new cards in the mail and tampering with the chips before they ever reach the cardholder.

Do chip cards have an expiration date?

Yes, chip cards (also known as EMV cards) have an expiration date. This date is typically located on the front or back of the card and is formatted as MM/YY (Month/Year). Expiration dates on debit and credit cards help banks manage the security and condition of the cards in circulation. They also ensure that cardholders periodically receive new cards with up-to-date security features. When your card expires, your bank will typically automatically send you a new one, which would also have a working EMV chip.

Why do I still have a magnetic stripe on my chip card?

Chip cards retain a magnetic stripe primarily for backward compatibility with older point-of-sale terminals that have not yet been upgraded to accept EMV chips. While chip readers are now common in the U.S., some merchants, particularly smaller businesses, may still use older swipe-only machines, making the magnetic stripe necessary to ensure the card can be used universally. U.S. banks will no longer be required to issue chip cards with a magnetic stripe starting in 2027.

How do I get a debit card with a chip?

Today, the vast majority of debit cards are made with EMV chips. To get a chip card, you may be able to request a replacement for your current debit card through your bank. Chip cards are the standard today, so requesting a replacement or opening an account will almost certainly get you one.

Can a damaged chip be repaired?

If the damage is minor, such as surface dirt or smudges, gently cleaning the chip with a soft cloth or an alcohol wipe may resolve the issue. However, if the chip is physically damaged — scratched, cracked, or broken — it cannot typically be repaired. In this scenario, the best course of action is to contact your bank or card issuer immediately and request a replacement debit card.

Photo credit: iStock/jorgemata

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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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.

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SOBNK-Q425-047

Filling out a tax return can be a challenging task. What’s more, unless you’re a tax expert, you may be unaware of how you can use tax laws to reduce how much you pay to the Internal Revenue Service. That’s why, come tax season, many people enlist the help of a tax preparer.

What does a tax preparer do? Services run the gamut from ensuring documents are mistake-free to spotting and claiming potential tax benefits to filing income tax returns on behalf of their client.

Here’s a look at the different types of income tax preparers, the pros and cons of hiring one, and under what circumstances they can help their clients pay less to the IRS.

What Is an Income Tax Preparer?

A tax preparer completes and files income tax documents and forms for clients. People use tax preparers because they are experts in tax rules and know how to use those rules to claim deductions or credits on tax returns.

That’s why, according to the Internal Revenue Service (IRS), more than 86 million individual tax returns e-filed in 2025 were prepared by paid preparers.

Recommended: What Are the Different Types of Taxes?

Credentialed Tax Preparers

Credentialed tax preparers tend to work full time on tax- and accounting-related tasks. There are three types of credentialed tax preparers: Certified Public Accountants (CPAs), Enrolled Agents (EAs), and tax attorneys. CPAs receive certification from state boards, EAs receive certification from the IRS, and state bar associations license tax attorneys.

CPAs

CPAs are certified by a state government as having the required expertise to maintain financial records, certify financial statements, and conduct tax and financial audits.

CPAs must pass the Uniform Certified Public Accountant Examination, a comprehensive test given by the American Institute of Certified Public Accountants. Most states require CPAs to pass an ethics exam and stay up to date on changing accounting and tax laws.

CPAs can also represent clients on tax and IRS issues, such as tax audits, payment and collection issues, and appeals.

Enrolled Agents (EA)

An EA obtains licensing from the IRS to represent clients before the IRS. To become an EA, an individual must pass the IRS’ Special Enrollment Examination or have qualifying work experience if they were an employee of the IRS. Once certified by the IRS, EAs are required to stay up to date on changes in the tax law by completing at least 16 hours of continuing education each year, or 72 hours of continuing education every three years.

Tax Attorneys

Tax attorneys specialize in tax law, advise clients on the legal aspects of their taxes, and prepare their clients’ tax returns. They can represent their clients before the IRS on all tax matters. Tax attorneys have a law degree, have passed a state exam, acquired a state license, and keep up with updates to the tax code through ongoing education.

Non-Credentialed Tax Preparers

Non-credentialed tax professionals are not licensed or certified by a third-party organization and tend to be self-taught. These individuals may have worked for a tax store during tax season but may not be involved in tax-related work full time.

Non-credentialed tax preparers include Volunteer Income Tax Assistance (VITA) program volunteers, tax accountants not certified by the American Institute of CPAs (AICPA), and Annual Filing Season Program participants.

What Does a Tax Preparer Do?

In addition to preparing, completing, and filing tax documents for their clients, income tax preparers also advise their clients on how they can reduce their tax liability in the coming year.

Preparing tax documents and returns requires calculating tax brackets, credits, deductibles, and liabilities. However, income tax preparers are also responsible for making sure tax reports comply with government tax rules and regulations. For example, there are strict due diligence requirements when certain tax benefits are claimed, such as earned income tax credit, or when an individual claims head-of-household status.

Following due diligence requires interviewing clients to verify the information they are providing, such as earnings, tax withholdings, and dependents, to gather supplemental documentation that back up the claims.

Recommended: What Tax Bracket Am I In?

How Much Does It Cost to File Taxes with a Tax Preparer?

How much you pay a tax preparer depends on who you use and what services they provide. For example, credentialed tax attorneys and CPAs will likely charge more than a seasonal worker or non-credentialed preparer. A credentialed preparer will also have more expertise and can take on more complex tasks, such as representing the client in tax resolution cases.

A tax preparer might charge a flat fee for a tax return or an hourly rate. Also, the more complex your taxes, the more a preparer may charge.

Where you live can affect the amount charged by a tax preparer. Fees tend to be higher on the West coast and in New England, and lower in the Southeast.

Wondering how to cover the cost of a tax preparer? A spending app can help you create budgets, organize your spending, manage bills, and more.

Pros and Cons of Hiring an Income Tax Preparer?

There are several advantages to hiring an income tax preparer, though there are some potential disadvantages, too.

Pros

•   Using a tax preparer could save you time.

•   Using a tax preparer minimizes errors on your return, which can help protect you from an audit.

•   You may save money if the tax preparer finds ways to reduce the amount of tax you pay.

•   The cost of using a tax preparer is often deductible.

Cons

•   The cost of working with a tax preparer may be high if your taxes are complex.

•   It might be difficult to find an available licensed tax preparer during tax time.

•   A non-credentialed tax preparer may not be able to take the time to fully understand your situation.

•   Some tax preparers could be frauds, so always check their credentials.

What Are the Job Requirements to Become an Income Tax Preparer?

A credentialed income tax preparer typically has a degree in finance or accounting. They also must have a thorough knowledge of the tax system and be up to date on the latest rules and changes. Tax preparers must also be familiar with tax software, Excel, and other tools and information resources.

What Skills Do Tax Preparers Need?

Tax preparers need to be skilled with numbers and in dealing with clients. They are required to interview clients and ask them sometimes intrusive questions to verify that the information they are providing about income and lifestyle is true.

Tax preparers must also have in-depth knowledge of the tax code and the tax benefits that apply to various situations and be able to apply those rules using their analytical and mathematical skills.

When Is Hiring an Income Tax Preparer Worth It?

As you’re preparing for tax season, you may want to consider hiring an income tax preparer if your situation is complex or there are tax benefits that you could qualify for. This might be the case if you are a business owner or self-employed; have diverse investments or rental properties; bought property during the tax year; or had a major life event, such as marriage, a birth or adoption, divorce, retirement, or inheritance.

If you have had issues with the IRS in the past or are under audit, you should also use a tax preparer. This is because a professional knows how to navigate the IRS’s rules to your advantage and help you understand the options open to you.

Whether you owe taxes or are getting a refund, using a money tracker app can help you manage your money.

The Takeaway

Not everyone can afford to hire a tax attorney or a CPA to help them with their tax returns. However, if you are a business owner, an independent contractor, or have experienced life events that make your tax situation complicated, hiring a credentialed tax preparer could help save you money in the long run.

Not all income tax preparers are the same, so if you choose to hire a tax preparer, make sure you choose a reputable one by checking with the Better Business Bureau for complaints and verifying their credentials. The IRS’ Directory of Federal Tax Return Preparers can be a good place to start.

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 are the responsibilities of a tax preparer?

Tax preparers are responsible for completing and filing tax forms for their clients. They are also responsible for ensuring the forms are accurate and the information provided by their clients is truthful. This often requires interviewing clients and collecting supporting documentation. Tax preparers also provide tax strategy advice to clients to help them to pay less tax in the future.

Can you make good money as a tax preparer?

Tax preparers’ salaries vary depending on whether they are credentialed and where they live. According to the Bureau of Labor Statistics, tax preparers in general earn around $58,860 a year, and accounts make around $93,520 a year. Tax attorneys stand to make more: According to Glassdoor, their average annual salary is around $196,000.

What is the difference between a CPA and a tax preparer?

A CPA is typically better qualified than a tax preparer. A CPA not only has accounting credentials, but they are also certified as a tax specialist by their state board. A tax preparer who is not a CPA, EA, or tax attorney is uncredentialed and may only have worked part time on taxes during the tax season.

Photo credit: iStock/MicroStockHub

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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.

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

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SORL-Q425-079

House trading involves selling your home to someone while buying their property. You essentially swap residences. This can spare both parties the irritation of showings and the expense of agent commissions while giving each party their new next home.

Trading homes isn’t done every day, but it can occasionally be an option that works for the parties involved. Learn more here.

What Is House Trading?

House trading means that you sell your home to someone and simultaneously buy their place.

You’re likely familiar with home exchange programs when it comes to vacations. You dash off to a lovely apartment in Paris, and the owners come to your city to enjoy all that it has to offer. Both parties enjoy a vacation with a much lower price tag. Maybe you’ve even thought, “Can I trade my house for another house?” and daydreamed about a permanent swap with another homeowner.

With real estate trading, this kind of switch is made permanent. Perhaps you’re outgrowing your compact two-bedroom house as your family expands, and the empty nesters down the street in a four-bedroom are looking to downsize their home. You could proceed with a house trade, selling and buying each other’s places simultaneously.

💡 Quick Tip: SoFi’s mortgage loan experience means a simple application — we even offer an on-time close guarantee. We’ve made $9.4+ billion in home loans, so we know what makes homebuyers happy.‡

How Does House Trading Work?

Think of trading real estate as a win-win. You want to sell your house. You find a home you like, and the homeowner is interested in buying your home too. It happens.

What comes next? Can you trade houses with someone? Yes. There will be two transactions at once. You sell your home to the Joneses, and they buy yours, typically on the same day. Because you’re selling and buying at the same time, it’s much like a trade. This is not a simple transaction, though. You want the stars aligned on that day.

However, there are some similarities to buying a home the traditional way. Expect the home-buying process checklist to be the same:

•   Qualifying for a home loan

•   Getting a home inspection

•   Doing a title search

•   Closing with simultaneous transactions.

You pay off one mortgage, if you have one, and take on a new one if needed. At the same time, the other party will sign their purchase and sale agreement.

As much as doing all this at once may feel overwhelming, the upside is that you won’t have two mortgages on your hands at the same time. If both homes are owned free and clear, then the only money matters are transfer taxes and closing costs.

You’ll probably want a real estate lawyer who knows how these deals work at your side.

Recommended: How to Buy a House When You Already Have a Mortgage

What If the Homes Are Unequal in Value?

It’s quite probable that the two homes won’t be of equal value. That’s not a deal-breaker, though. What matters is whether each house meets the needs and desires of the other party.

It’s important for both parties to order home appraisals. If one home is more valuable than the other, the buyer of the more expensive home pays the seller the difference at closing.

How Common Is House Trading?

Home trading is not something that happens every day, but as people continue to search for creative ways to fulfill their dreams and technology helps connect like-minded folks, house trading has its place in the array of home-buying options out there.

Recommended: What Is a Bridge Loan and How Does It Work?

Pros and Cons of Trading Your House

Here’s a look at the upsides and downsides of trading houses. On the one hand, there’s something to be said for this unconventional way of buying and selling a home.

•   You may be able to buy a house without a Realtor®. If there is no real estate agent involved in the trade, both buyer and seller keep the money they would have shelled out to their agent.

•   You eliminate some of the hassle of moving day. Because both parties are working in concert, it makes orchestration of the move easier.

•   You skip the whole dog-and-pony show of potential buyers traipsing through your home and the stress of having it look perfect for showings.

•   You also may find that getting financing when trading a home is easier. Some homeowners encounter hurdles qualifying for a mortgage before their home is sold. However, if you have a contract to sell your current house (which you would in a home trade), your lender won’t count your monthly mortgage payments as debt if you apply for a mortgage.

Having this improved debt-to-income ratio can allow you to qualify for better terms on your new mortgage, which just might save you a ton of money as well.

Real estate trading isn’t without its issues, however. These are some of the concerns related to trading houses instead of selling in a conventional manner.

•   If you’re in a hurry to move, you may not be able to find someone who wants a house swap as quickly as you want to move.

•   In a big-picture way, house trading may mean you have fewer options, you may not get the neighborhood you have in mind, or you may not find a home with all your dream features.

•   If you owe more on your mortgage than your home is worth, you may have trouble getting financing. The only way a trade would work is if you pay the lender the difference between what you sell your house for and what is still owed on the mortgage.

•   Issues could arise as you think about how to swap houses with mortgages. If for some reason the purchase and sale don’t happen at the same time, you could be stuck for a time with two mortgages.

Who Typically Trades Homes?

Home trading is usually a transaction between individual homeowners, although sometimes investors who own properties might trade homes within their portfolio with one another. Friends or relatives, older homeowners who wish to downsize, and people moving for work are among those who may be more likely than the average homeowner to engage in a house trade.

Common Scenarios for House Swaps

Here are a couple examples of how a house trade might play out:

The upsize, downsize trade A couple living in a small two-bedroom home is expecting their second child. They decide they would like to look for a larger place. They want to stay in their neighborhood, as it has great schools and their eldest child is starting kindergarten in the fall. And given that the baby is due in a few months, they want to move soon.

Meanwhile, an elderly couple living in a large house around the corner is thinking about downsizing into a smaller place. They, too, wish to remain local, as their children and grandchildren are in the area. Word travels quickly that each is looking to buy a house, and soon enough they are connected by a neighbor and start talking about a trade. Both properties are appraised, and the young couple agrees to pay the downsizers the difference between the two home prices. The larger house is a bit bigger than they were looking for, but there is very little for sale in the local market so they decide to move forward.

Once they are able to secure a mortgage for the new, larger home, the two families schedule a double closing. Each is represented by a lawyer in the transaction, and they also have to pay for title searches and title insurance. But no real estate agent is involved in the trade.

The job-transfer trade A marketing manager in a midwestern office of a large packaged-goods company sees an opportunity to move into a better job with her company by transferring to the Philadelphia headquarters. She owns a small house that she inherited from her grandparents, and she puts it on the market, but also posts on her social-media accounts that she is open to trading her midwestern house for a place in Philly.

To her surprise, she receives a message from a woman in Philadelphia who is looking to sell her condo and move back to her midwestern hometown. The two schedule virtual house “tours” and swap appraisal information. The Philly resident is head over heels for the midwesterner’s house. Meanwhile, the condo is satisfactory to the midwesterner as well — maybe it doesn’t have everything she wants, but as a first stop in the city, it’s fine, and she thinks it will hold its value.

In this case, the properties are valued about equally, and the two agree to a trade. Since neither of them has or needs a mortgage, the deal moves ahead with speed.

When House Trading Makes the Most Sense

As demonstrated in the two scenarios above, house trading makes the most sense when owners want to move soon and are willing to be somewhat flexible about what property they are buying. House trade has the added benefit of saving on real estate agents’ fees, so it may be especially appealing to cost-conscious consumers.

Trading Houses vs Conventional Selling

With home trading there’s a good chance you will be able to avoid using a real estate agent if you find your trading partner on your own, be it a relative, colleague, friend of a friend, or from a website. You can also avoid the hassle of staging your home and showing it to prospective buyers.

There are some things that are pretty much the same. Both parties may need new mortgages, and both may want home inspections. Both will probably want attorneys present.

Legal and Financial Considerations When Trading Homes

Owners who are trading properties will want to hire an attorney who is familiar with real estate trades to help ensure that the trade is binding and all the appropriate paperwork is filed. And they will go through most of the same steps as anyone purchasing a house in the conventional way.

Mortgage Transfers and Financing

If one or both of the homeowners in a house trade needs a home loan, the first step will be to secure financing if one or both parties doesn’t already have mortgage preapproval. A lender will require an appraisal of the home, and each owner will need to determine the size of their down payment, screen potential lenders, and decide on a lending partner.

In rare cases, one or both parties may have a mortgage that is assumable, meaning the mortgage can be transferred with the house to the new owner of the property. This can be an attractive feature when mortgage rates are high, but it’s a pretty unusual situation. Both parties will also need to arrange for homeowner’s insurance on their new property.

Title, Inspection, and Closing Requirements

A title search will be necessary to ensure that the person selling the home does in fact own it. And one or both homebuyers may want to arrange for an inspection of the property they are acquiring to safeguard against any costly surprises after they take possession. If the inspection reveals any serious issues, it may be necessary to remedy them or to negotiate a change in home price before the closing. Good communication is essential throughout these processes so that both parties involved in a house trade can arrive at the closing date with all their ducks neatly in a row.

The Takeaway

Trading homes is a viable option for house hunters who find a trading partner who wants to own their home. While the home exchange approach is decidedly nontraditional, the steps of securing a home loan (if needed) and closing will be familiar.

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FAQ

Does house trading have tax benefits?

A house trade is still a sales transaction, so the tax situation is the same as it would be in an ordinary sale. When you sell your residence, you have to pay capital gains tax if your profit is more than $500,000 (for a married couple) or $250,000 (for a single person). It’s a good idea to seek advice from a tax advisor when preparing your return after a home sale.

Can two people just trade houses without buying and selling?

In theory, two people could trade houses without two sales transactions, but the likelihood that this would happen is small. The two houses would need to be of equal value, which is unlikely. The deed would still need to be recorded which involves a title search and lawyers. And if one or both parties has a mortgage, that would further complicate matters.

What salary do you need for a $400,000 mortgage?

Assuming a down payment of 7% (on a home priced at $430,000), and an interest rate of 7.00% on a 30-year loan, you would need to earn $130,000 per year to qualify for a $400,000 mortgage. Your credit score, income, and debts will influence the exact salary number for you.

How do mortgages work when you trade houses?

If one or both parties in a house swap has a mortgage, the process will probably work much the way it does if you were selling or buying a house as an isolated transaction. You’ll pay off your mortgage and take out a new loan, and the other party will do the same. If all goes well, having both transactions happening at the same time can prevent either of the parties from having to hold two mortgages simultaneously.

Is house trading a good option in a slow real estate market?

House trading may be a smart choice in a slow real estate market because, provided you can find someone to trade with, you won’t have to list your home and keep it open for viewings for months on end. Nor will you have to sit through round after round of price cuts in order to get a buyer. If you can find a trading partner, the deal can be done quickly and without involving a real estate agent (though you will want to hire a lawyer familiar with house trades).

Photo credit: iStock/AndreyPopov

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