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What’s your number? That’s not a pickup line; it’s the digits a mortgage lender will want to know. Credit scores range from 300 to 850, and for most types of mortgage loans, it takes a score of at least 620 to open the door to homeownership. The lowest interest rates usually go to borrowers with scores of 740 and above whose finances are in good order, while a score as low as 500 may qualify some buyers for a home loan, but this is less common.

Why Does a Credit Score Matter?

Just as you need a résumé listing your work history to interview for a job, lenders want to see your borrowing history, through credit reports, and a snapshot of it, expressed as a score on the credit rating scale, to help predict your ability to repay a debt.

A great credit score vs. a bad credit score can translate to money in your pocket: Even a small reduction in interest rate can save a borrower thousands of dollars over time.

Do I Have One Credit Score?

You have many different credit scores based on information collected by Experian, Transunion, and Equifax, the three main credit bureaus, and calculated using scoring models usually designed by FICO® or a competitor, VantageScore®.

To complicate things, there are often multiple versions of each scoring model available from its developer at any given time, but most credit scores fall within the 300 to 850 range.

Mortgage lenders predominantly consider FICO scores. Here are the categories:

•   Exceptional: 800-850

•   Very good: 740-799

•   Good: 670-739

•   Fair: 580-669

•   Poor: 300-579

Here’s how FICO weighs the information:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   New credit: 10%

•   Credit mix: 10%

Mortgage lenders will pull an applicant’s credit score from all three credit bureaus. If the scores differ, they will use the middle number when making a decision.

If you’re buying a home with a non-spouse or a marriage partner, each borrower’s credit scores will be pulled. The lender will home in on the middle score for both and use the lower of the final two scores (except for a Fannie Mae loan, when a lender will average the middle credit scores of the applicants).

Recommended: 8 Reasons Why Good Credit Is So Important

A Look at the Numbers

What credit score do you need to buy a house? If you are trying to acquire a conventional mortgage loan (a loan not insured by a government agency) you’ll likely need a credit score of at least 620.

With an FHA loan (backed by the Federal Housing Administration), 580 is the minimum credit score to qualify for the 3.5% down payment advantage. Applicants with a score as low as 500 will have to put down 10%.

Lenders like to see a minimum credit score of 620 for a VA loan.

A score of at least 640 is usually required for a USDA loan.

A first-time homebuyer with good credit will likely qualify for an FHA loan, but a conventional mortgage will probably save them money over time. One reason is that an FHA loan requires upfront and ongoing mortgage insurance that lasts for the life of the loan if the down payment is less than 10%.

Credit Scores Are Just Part of the Pie

Credit scores aren’t the only factor that lenders consider when reviewing a mortgage application. They will also require information on your employment, income, and bank accounts.

A lender facing someone with a lower credit score may increase expectations in other areas like down payment size or income requirements.

Other typical conventional loan requirements a lender will consider include:

Your down payment. Putting 20% down is desirable since it often means you can avoid paying PMI, private mortgage insurance that covers the lender in case of loan default.

Debt-to-income ratio. Your debt-to-income ratio is a percentage that compares your ongoing monthly debts to your monthly gross income.

Most lenders require a DTI of 43% or lower to qualify for a conforming loan. Jumbo Loans may have more strict requirements.

How to Care for Your Credit Scores Before Buying a House

Working to build credit over time before applying for a home loan could save a borrower a lot of money in interest. A lower rate will keep monthly payments lower or even provide the ability to pay back the loan faster.

Working on your credit scores may take weeks or longer, but it can be done. Here are some ideas to try:

1. Pay all of your bills on time. If you haven’t been doing so, it could take up to six months of on-time payments to see a significant change.

2. Check your credit reports. Be sure that your credit history doesn’t show a missed payment in error or include a debt that’s not yours. You can get free credit reports from the three main reporting agencies.

To dispute a credit report, start by contacting the credit bureau whose report shows the error. The bureau has 30 days to investigate and respond.

3. Pay down debt. Installment loans (student loans and auto loans, for instance) affect your DTI ratio, and revolving debt (think: credit cards and lines of credit) plays a starring role in your credit utilization ratio. Credit utilization falls under FICO’s heavily weighted “amounts owed” category. A general rule of thumb is to keep your credit utilization below 30%.

4. Ask to increase the credit limit on one or all of your credit cards. This may improve your credit utilization ratio by showing that you have lots of available credit that you don’t use.

5. Don’t close credit cards once you’ve paid them off. You might want to keep them open by charging a few items to the cards every month (and paying the balance). If you have two credit cards, each has a credit limit of $5,000, and you have a $2,000 balance on each, you currently have a 40% credit utilization ratio. If you were to pay one of the two cards off and keep it open, your credit utilization would drop to 20%.

6. Add to your credit mix. An additional account may help your credit, especially if it is a kind of credit you don’t currently have. If you have only credit cards, you might consider applying for a personal loan.

Recommended: 31 Ways to Save for a House

The Takeaway

What credit score is needed to buy a house? The number depends on the lender and type of loan, but most homebuyers will want to aim for a score of 620 or better. An awesome credit score is not always necessary to buy a house, but it helps in securing a lower interest rate.

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.

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

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

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

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

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.

^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-Q424-112

Conventional loans — mortgages that are not insured by the federal government — are the most popular type of mortgage and offer affordability to homebuyers.

Private mortgage lenders originate and fund conventional loans, which are then often bought by Fannie Mae and Freddie Mac, publicly traded companies that are run under a congressional charter.

By buying and selling these mortgages, Fannie and Freddie help to ensure a reliable flow of mortgage funding.

Requirements for Conventional Loans

It can be confusing to know how to qualify for a mortgage.

Just realize, for one thing, that a higher credit score is usually required for a conventional home loan than an FHA loan backed by the Federal Housing Administration, a type popular among first-time buyers.

Here are factors a lender will consider when sizing you up for a conventional loan.

Your Credit Score

You’ll usually need a FICO credit score of at least 620 for a fixed-rate or adjustable-rate mortgage.

The FICO score range of 300 to 850 is carved into these categories:

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

In general, the higher your credit score, the better the interest rates you’re offered.

Down Payment

Putting 20% down is desirable because it means you can avoid paying PMI, or private mortgage insurance, which covers the lender in case of loan default.

But many buyers don’t put 20% down. The median down payment on a home is 15%, according to a recent study by the National Association of Realtors®.

Conventional loans require as little as 3% down for first-time homebuyers, and the down payment can be funded by a gift from a close relative; a spouse, fiancé or domestic partner; a buyer’s employer or church; or a nonprofit or public agency. The gift may require a gift letter for the mortgage.

Just keep in mind that the smaller the down payment, the higher your monthly payments are likely to be, and PMI may come along for the ride until you reach 20% equity.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) helps a lender understand your ongoing monthly debt obligations relative to your gross monthly income.

To calculate back-end DTI:

1.    Add up your monthly bills (but do not include groceries, utilities, cellphone bill, car insurance, and health insurance).

2.    Divide the total by your pretax monthly income.

3.    Multiply by 100 to convert the number to a percentage.

In general, lenders like to see a DTI ratio of 36% but will accept 43%.

The Fannie Mae HomeReady® loan, for lower-income borrowers, may allow a DTI ratio of up to 50%.

In any case, the lower your DTI ratio, the more likely you are to qualify for a mortgage and possibly better terms.

Loan-to-Value Ratio

The loan-to-value ratio (LTV) is the amount of the mortgage you are applying for compared with the home value. The higher the down payment, the lower the LTV ratio.

Fannie Mae typically sets LTV limits at 97% for a fixed-rate mortgage for a principal residence (think: 3% down) and 85% for a fixed or adjustable loan for a one-unit investment property.

When LTV exceeds 80% on a conforming loan, PMI will likely apply, although some borrowers employ a piggyback loan to avoid mortgage insurance.

Conventional Conforming Loan Limits

Many loans are both conventional and conforming — meaning they meet the guidelines of secondary mortgage market powerhouses Fannie Mae and Freddie Mac, which buy such mortgages and often package them into securities for investors.

Conventional conforming loans fall below limits set by the Federal Housing Finance Agency (FHFA) every year.
Staying under a conforming loan limit often equates to a lower-cost mortgage because the loan can be acquired by Fannie and Freddie.

The conforming loan limits for 2024 in many counties in the contiguous states, Washington, D.C., and Puerto Rico rose with market prices:

•   One unit: $766,550

•   Two units: $981,500

•   Three units: $1,186,350

•   Four units: $1,474,400

In high-cost areas like Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the 2024 conforming loan limits are:

•   One unit: $1,149,825

•   Two units: $1,472,250

•   Three units: $1,779,525

•   Four units: $2,211,600

If you’re curious about your county’s specific conforming loan limits are, you can check out this FHFA guide.

Nonconforming Loans

Word games, anyone? Nonconforming loans are simply mortgages that do not meet Fannie and Freddie standards for purchase. They usually take the form of jumbo loans and government-backed loans.

A homebuyer or refinancer who needs a mortgage beyond the FHFA limits can seek a jumbo mortgage loan. A jumbo loan is still a conventional loan if it’s not backed by a government agency; it’s just considered a “nonconforming” loan.

FHA, VA, and USDA mortgages — those backed by the Federal Housing Administration, Department of Veterans Affairs, and the U.S. Department of Agriculture — are also nonconforming loans.

Nonconforming mortgage rates for jumbo loans may be higher because the loans carry greater risk for lenders, but when the nonconforming loan is backed by the government, its rate might skew lower than conventional conforming rates.

The Takeaway

Conventional loan requirements are good to know when you’re looking at the most popular type of mortgage around. Would-be homebuyers will want to make sure their credit score, debt-to-income ratio, and down payment numbers are lined up as favorably as possible before pursuing their dream property.

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

Are there any drawbacks to a conventional loan?

The main drawback to a conventional loan is that you will need to make some type of down payment on the property. It doesn’t need to be the 20% down payment that was common in decades past. But even a low down payment of, say, 3.5% could add up to tens of thousands of dollars given today’s home prices.

What’s the main reason I might not qualify for a conventional loan?

The most common reason someone might not qualify for a conventional home loan is usually related to credit — perhaps the applicant has a credit score below 620, or maybe there is some other significant warning sign on the credit report, such as a history of delinquencies or bankruptcy.

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

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

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

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

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.

^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-Q424-113

A non-purpose loan is an alternative type of loan that allows individuals to use investment securities they own as collateral to borrow money. With a non-purpose loan, borrowers can get access to the funds they need and continue to earn potential returns on their investments. However, non-purpose loans come with some financial risks to be aware of.

Read on to learn how non-purpose loans work and their benefits and drawbacks.

What Is a Non-Purpose Loan?

A non-purpose loan — also known as a securities-backed line of credit (SBLOC) — is a type of secured loan offered by some financial institutions and brokerage firms. Instead of using collateral such as a home or car to back the loan, a borrower uses securities in their investment portfolio.

Interest rates on non-purpose loans tend to be variable, and they may be slightly higher than the rates on personal loans. (A personal loan calculator can help you determine the personal loan rate you might qualify for.) The borrower must make interest-only monthly payments on a non-purpose loan until you decide to pay it off. The loan’s principal can be repaid in increments or all at once.

The Way a Non-Purpose Loan Works

With a non-purpose loan, you borrow money using your investments to back the loan, and you continue to earn any interest, dividends, and capital appreciation on those investments.

The amount you can borrow with a non-purpose loan varies, although you can typically borrow between 50% to 95% of your portfolio. The exact percentage depends on two main factors: the types of assets in your accounts and the value of your portfolio. Lender requirements may also be a determining factor. To qualify for a non-purpose loan, a lender may require you to have assets with a market value of at least $100,000.

Unlike traditional lending products such as personal loans, non-purpose loans are subject to maintenance calls. That means if the value of your investment accounts falls below a certain level, the brokerage or financial institution will ask you to boost the equity in your investments to meet the margin requirements.

In the case of a maintenance call, you’ll need to increase your accounts’ value by either depositing more money in them or partially repaying the loan.

Non-Purpose Loan vs Margin Loan

A margin loan is another type of lending product that’s backed by a borrower’s investment securities. Like a non-purpose loan, a margin loan allows you to borrow against the investments in your portfolio while continuing to earn any dividends and interest. Margin loans are subject to maintenance calls just as non-purpose loans are.

However, there are differences between the two. A margin loan is typically used for the sole purpose of purchasing more securities. A non-purpose loan, on the other hand, can be used for virtually anything other than purchasing securities. To obtain a margin loan you can only use the investments in one account as collateral, whereas you can get a non-purpose loan by using investments in several accounts.

Pros and Cons of a Non-Purpose Loan

Non-purpose loans have distinct benefits and drawbacks. For example, these loans are flexible and can be used for many purposes, but they often require borrowers to have investment accounts with a high value.

This chart gives an at-a-glance comparison of the advantages and disadvantages of non-purpose loans.

Pros of a Non-Purpose Loan

Non-purpose loans have several features that can make them attractive to borrowers.

May not require a credit check. Unlike traditional loans such as unsecured personal loans, a non-purpose loan might not involve a credit check. Instead, the lender may base the amount of the loan on the value of your portfolio.

Allows investment returns. Borrowers don’t have to sell their securities to obtain a non-purpose loan. They can continue to get possible returns on investments.

May avoid capital gains tax. Because you don’t have to sell securities to get a non-purpose loan, you won’t have to pay capital gains tax.

Provides flexibility. With a non-purpose loan, you can use the proceeds in almost any way you wish. For instance, you can use the money to pay off medical expenses, tide you over during a job loss, or for home improvement funds.

Recommended: Using a Personal Loan for Taxes

Cons of a Non-Purpose Loan

Along with possible benefits, there are some significant drawbacks of non-purpose loans to consider.

High asset value requirements. To qualify for a non-purpose loan, a lender typically requires you to have assets with a high minimum value of at least $100,000.

Variable interest rates. Non-purpose loans generally have variable interest rates, which means the rates can go up and down throughout the life of the loan. You may want to check personal loan rates to compare the interest rates of other lending options.

Subject to maintenance calls. The investments that serve as your collateral for a non-purpose loan are prone to market volatility, so you could be impacted financially. For instance, should the value of your securities go down, the value of your portfolio may no longer meet the collateral requirements for the loan, prompting a maintenance call. In that case, you might have to deposit money in your accounts or partially repay the loan.

Loan funds cannot be used for investing. Unlike margin loans, you can’t use the money from a non-purpose loan to purchase investment securities.

Recommended: How to Pay Tax on Personal Loans

The Takeaway

A non-purpose loan may be attractive to certain borrowers because it gives them the ability to use their investment securities as collateral while continuing to earn money on their investments. However, these loans tend to have high minimum balance requirements and variable interest rates, and they’re subject to maintenance calls, which could be financially challenging. Consider the potential pros and cons of a non-purpose loan to make sure it’s a good option for you.

You can also look into other lending products. While SoFi doesn’t offer non-purpose loans, we do offer personal loans with amounts ranging from $5,000 all the way up to large personal loans of $100,000. You can explore the different types of loans available, and shop around for the best rates, to decide which option is right fit for your borrowing needs.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

What is the meaning of a non-purpose loan?

A non-purpose loan is an unconventional loan that allows you to use securities from different investment accounts as collateral for the loan. For some borrowers, the main advantage to this type of loan is that their investments stay intact, and they can potentially earn money from interest and dividends.

However, there are disadvantages to non-purpose loans. For instance, if the value of your investments drop, you may be required to add money to your accounts or repay part of the loan.

What is the difference between a purpose and a non-purpose loan?

A purpose loan uses investment securities as collateral and is typically used to buy more securities. A non-purpose loan is also backed by investment securities, but it can be used for almost any purpose, except for purchasing securities.

Is a non-purpose loan better than a purpose loan?

Non-purpose loans and purpose loans have different uses and requirements, and one isn’t necessarily better than the other. It mainly depends on what you’re using the loan for. A purpose loan is generally used for one specific purpose, typically to purchase securities. A non-purpose loan can be used for almost anything except purchasing securities. Only you can decide which type of loan is best for your intended use of the funds.

Photo credit: iStock/RgStudio

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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

SOPL-Q324-013

Ready to buy your own home? There’s a lot to consider, especially if this is your first time applying for a mortgage and you’re carrying debt. While having debt is not necessarily a deal-breaker when you’re applying for a mortgage, it can be a factor when it comes to how much you’ll be able to borrow, the interest rate you might pay, and other terms of the loan.

Understanding how the home loan process works can help you decide whether it’s better to pay off debt or save up for a downpayment on a home. Here’s what you need to know.

How to Manage Debt before Buying a Home

Understand Your Debt-to-Income Ratio

When lenders want to be sure borrowers can responsibly manage a mortgage payment along with the debt they’re carrying, they typically use a formula called the debt-to-income ratio (DTI).

The DTI ratio is calculated by dividing a borrower’s recurring monthly debt payments (future mortgage, credit cards, student loans, car loans, etc.) by gross monthly income.

The lower the DTI, the less risky borrowers may appear to lenders, who traditionally have hoped to see that all debts combined do not exceed 43% of gross earnings.

Here’s an example:

Let’s say a couple pays $600 combined each month for their auto loans, $240 for a student loan, and $200 toward credit card debt, and they want to have a $2,000 mortgage payment. If their combined gross monthly income is $8,000, their DTI ratio would be 38% ($3,040 is 38% of $8,000).

The couple in our example is on track to get their loan. But if they wanted to qualify for a higher loan amount, they might decide to reduce their credit card balances before applying.

That 43% threshold isn’t set in stone, by the way. Some mortgage lenders will have their own preferred number, and some may make exceptions based on individual circumstances. Still, it can be helpful to know where you stand before you start the homebuying process.

Recommended: How to Prepare for Buying a New Home

Consider How Debt Affects Your Credit Score

A mediocre credit score doesn’t necessarily mean you won’t be able to get a mortgage loan. Lenders also look at employment history, income, and other factors when making their decisions. But your credit score and the information on your credit reports will likely play a major role in determining whether you’ll qualify for the mortgage you want and the interest rate you want to pay.

Typically, a FICO® Score of 620 will be enough to get a conventional mortgage, but someone with a lower score still may be able to qualify. Or they might be eligible for an FHA or VA backed loan. The bottom line: The higher your score, the more options you can expect to have when applying for a loan.

A few factors go into determining a credit score, but payment history and credit usage are the categories that typically hold the most weight. Payment history takes into account your record of making on-time or late payments, or if you’ve filed for bankruptcy.

Credit usage looks at how much you owe in loans and on your credit cards. An important consideration in this category is your credit utilization rate, which is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. Put more simply, it’s how much you currently owe divided by your credit limit. It is generally expressed as a percent. The lower your rate, the better. Many lenders prefer a utilization rate under 30%.

Does that mean you should pay off all credit card debt before buying a house?

Not necessarily. Debt isn’t the devil when it comes to your credit score. Borrowers who show that they can responsibly manage some debt and make timely payments can expect to maintain a good score. Meanwhile, not having any credit history at all could be a problem when applying for a loan.

The key is in consistency — so borrowers may want to avoid making big payments, big purchases, or balance transfers as they go through the loan process. Mortgage underwriters may question any noticeable changes in your credit score during this time.

Recommended: What Credit Score is Required to Buy a House?

Don’t Forget, You May Need Ready Cash

Making big debt payments also could cause problems if it leaves you short of cash for other things you might need as you move through the homebuying process, including the following.

Down Payment

Whether your goal is to put down 20% or a smaller amount, you’ll want to have that money ready when you find the home you hope to buy.

Closing Costs

The cost of home appraisals, inspections, title searches, etc., can add up quickly. Average closing costs are 3% to 6% of the full loan amount.

Moving Expenses

Even a local move can cost hundreds or even thousands of dollars, so you’ll want to factor relocation expenses into your budget. If you’re moving for work, your employer could offer to cover some or all of those costs, but you may have to pay upfront and wait to be reimbursed.

Remodeling and Redecorating Costs

You may want to leave yourself a little cash to cover any new furniture, paint, renovation projects, or other things you require to move into your home.

Be Aware of Housing Market Trends

Trends in the housing market may help you with prioritizing saving or paying down debt. So it’s a good idea to pay attention to what’s going on with the overall economy, your local real estate market, and real estate trends in general.

Here are some things to watch for.

Interest Rates

When interest rates are low, homeownership is more affordable. A lower interest rate keeps the monthly payment down and reduces the long-term cost of owning a home.

Rising interest rates aren’t necessarily a bad thing, though, especially if you’ve been struggling to find a home in a seller’s market. If higher rates thin the herd of potential buyers, a seller may be more open to negotiating and lowering a home’s listing price.

Either way, it’s good to be aware of where rates are and where they might be going.

Inventory

When you start your home search, you may want to check on the average amount of time homes in your desired location sit on the market. This can be a good indicator of how many houses are for sale in your area and how many buyers are out there looking. (A local real estate agent can help you get this information.)

If inventory is low and buyers are snapping up houses, you may have trouble finding a house at the price you want to pay. If inventory is high, it’s considered a buyer’s market and you may be able to get a lower price on your dream home.

Price

If you pay too much and then decide to sell, you could have a hard time recouping your money.

The goal, of course, is to find the right home at the right price, with the right mortgage and interest rate, when you have your financial ducks in a row.

If the trends are telling you to wait, you may decide to prioritize paying off your debts and working on your credit score.

Remember, You Can Modify Your Mortgage Terms

If you already have a mortgage, you may be able to make some adjustments to the original loan by refinancing to different terms.

Refinancing can help borrowers who are looking for a lower interest rate, a shorter loan term, or the opportunity to stop paying for private mortgage insurance or a mortgage insurance premium.

Consider a Debt Payoff Plan

If you decide to make paying down your debt your goal, it can be useful to come up with a plan that gets you where you want to be. Many of the financial changes would-be buyers make to save money for a home will also work to help you pay down debt. In an April 2024 SiFi survey of 500 prospective homeowners, cutting back on nonessential expenses was the most popular step — 49% of people had tried it. Almost as many (41%) had taken on an additional job or side hustle. And more than one in four people (26%) had downsized their current living situation to cut costs.

As you think about saving to pay down debt, remember that not all debt is not created equal. Credit card debt interest rates are typically higher than other types of borrowed money, so those balances can be more expensive to carry over time. Also, loans for education are often considered “good debt,” while credit card debt is often viewed as “bad debt.” As a result, lenders may be more understanding about your student loan debt when you apply for a mortgage.

As long as you’re making the required payments on all your obligations, it may make sense to focus on dumping some credit card debt.

Recommended: Beginners Guide to Good and Bad Debt

The Takeaway

Should you pay off debt before buying a house? Not necessarily, but you can expect lenders to take into consideration how much debt you have and what kind it is. Considering a solution that might reduce your payments or lower your interest rate could improve your chances of getting the home loan you want.

When you consolidate your credit card debt, you typically take out a personal loan, ideally with a lower rate than you’re paying your credit cards, and use it to pay off all of your credit cards. You then end up with one balance and one payment to make each month. This simplified the debt repayment process and can also help you save money on interest.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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.

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

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Whether to borrow from a 401(k) or take out a personal loan is a decision that will depend on your unique financial situation and goals. There are several variables to consider. For instance, a loan from a 401(k) can offer a limited amount of cash and reduce your retirement savings, while a personal loan can offer more cash but can impact your credit score.

Here, learn more about these options for accessing cash so you can make the right decision for your needs.

Understanding 401(k) Loans

Retirement plans such as your 401(k) are designed to tuck away money toward expenses during what are known as your “golden years.” And while you didn’t initially open and contribute to a retirement account to take money out prematurely, if you’re in need of some funds, you might consider a 401(k) loan.

Yes, it’s entirely possible to borrow against your 401(k). While it depends on the specifics of your employer’s plan, you might be able to access up to half of what’s vested in your account, or $50,000, whichever is less. So if you have less than $10,000 vested in your 401(k), you can only take out up to $10,000.

Usually, you’ll have up to five years to pay back your loan amount, along with interest. The interest rate and terms of the repayments depend on your employer’s plan. When you repay the 401(k) loan, the principal and interest go back into your account.

How 401(k) Loans Work

Taking out a loan from your 401(k), or the retirement vehicle known as a 403(b), doesn’t require a credit check, nor does it show up on your credit report as debt. As mentioned, you’re essentially taking out funds from yourself. There’s no third-party lender involved, so there are fewer steps in the application process. Plus, your loan payments go straight into your retirement plan.

The restrictions and requirements can vary according to your employer’s plan, so it’s probably a good idea to talk to a benefits administrator or rep from the retirement account for specifics.

Pros and Cons of Borrowing from Your 401(k)

Looking at the advantages and downsides of borrowing against your 401(k) can help you decide whether a 401(k) loan is the right financing choice for you,

Pros
First, consider the upsides of borrowing from your 401(k) account:

•   Doesn’t require a credit check. Because you’re taking out a loan against yourself and there’s no outside lender involved, a 401(k) loan doesn’t require a hard credit inquiry, so it won’t negatively impact your credit score.

•   Easier to obtain. These loans can be easier to get, and you don’t have to jump through as many hoops (including the credit check mentioned above) as other forms of financing.

•   Lower interest rate. While this hinges on your credit, borrowing against your 401(k) often comes with a lower interest rate than other financing options, such as taking out what’s known as a personal loan or using your credit card. This means it can cost you less in interest.

Usually, the interest rate is the prime rate, plus 1% to 2%. As of August 2024, the prime rate is 8.50%, so you’re looking at a 9.50% to 10.50% interest rate.

•   Won’t show up on your credit report. Another plus of a 401(k) loan is that it doesn’t show up on your report as a form of debt, so you won’t have to worry about your payment history impacting your credit in any form.

•   No penalties or taxes. As long as you don’t default on the loan, you won’t have to pay taxes and early withdrawal penalties that come with making early 401(k) distributions. (This is a benefit vs. taking a 401(k) distribution, which will trigger taxes and possibly penalty fees if you are under age 59½.)

•   Interest goes back to you. While you have to pay interest on your 401(k) loan, that money goes into your retirement account.

Cons
Now, review the potential downsides of taking out a 401(k) loan:

•   Not all 401(k) plans allow loans. Many plans do offer the ability to take out a 401(k) loan, but not all of them. Check with your plan administrator to learn whether this is even a possibility for you before planning on getting funds via this method.

•   You might have to pay back the loan right away. Should you lose your job or change workplaces, you might be required to pay the remaining balance on your loan quickly. That can be a tall order, especially after a major financial blow such as a job loss.

•   Smaller retirement fund. When you take money out of your retirement plan, that means losing out on the money in an account designated for your nest egg. Because the clock will be set back, it will take you longer to hit your retirement savings goals.

•   Missing out on potential earnings. Plus, you’re losing out on any potential growth on that money if it were sitting in your 401(k) account instead. While you are paying yourself interest on the loan, the earnings on your returns could be more than the interest.

•   Possibility of taxes and penalties. If you don’t pay back your debt in a timely manner, you could owe taxes and penalty fees on it. That’s because it becomes a 401(k) distribution vs. a loan if you don’t keep up with your payments.

•   Lower loan amounts. How much you can borrow from a 401(k) account has limits. Currently, those are $50,000 or 50% of your vested account balance, whichever amount is less. That may or may not suit your needs.

•   Longer funding times. The funding time can take up to two weeks or longer in some cases.

Overview of Personal Loans

Personal loans are a type of installment loan where you’re approved for a certain loan amount and receive the entire amount upfront. Personal loan amounts vary from $1,000 to $100,000 (some large personal loan amounts go even higher), but the exact amount depends on your approval.

You’re responsible for paying off the personal loan during the repayment term, which is usually anywhere between one and seven years. The time you have to pay off the loan depends on the lender and the specifics of your loan.

Personal loans also come with interest (typically but not always a fixed rate). Your rate depends on factors such as the lender, your credit score, debt-to-income ratio (or DTI), and other aspects of your finances. The national average for a 24-month personal loan as of May 2024 is 11.92%.

Types of Personal Loans

There are different types of personal loans to learn about so you can decide which one might be best for you:

•   Secured personal loans. Secured personal loans are loans that are backed up by an asset, such as a car, home, or other valuable property. Should you fall behind on your payments, the lender can seize your collateral to recoup the money. While you risk a valuable asset, secured loans usually have lower credit score requirements and other less stringent financial qualifications. Plus, you can get a higher amount than with unsecured personal loans.

•   Unsecured personal loans. Unsecured personal loans are loans that don’t require any collateral to secure. They usually have higher credit score requirements and more strict approval criteria than their secured loan counterparts. Unsecured vs. secured personal loans usually have lower amounts available.

•   Fixed-rate personal loan. A fixed-rate personal loan can be unsecured or secured. The interest is the same throughout your loan term, which makes for predictable monthly payments.

•   Variable-rate personal loan. A loan with a variable vs. fixed interest rate, however, can see the interest charges go up and down throughout your repayment term. This means the amount you’ll end up paying in interest on the loan is unknown. Plus, budgeting might be harder, as your monthly payments could change.

Personal loans offer a lot of flexibility. You can use them for various purposes, from funding a major home improvement project to making a big-ticket purchase to financing a wedding or vacation. In some cases, personal loans are geared toward specific purposes:

•   Home improvement loans. A home improvement loan is an unsecured personal loan that can be used for repairs on normal wear and tear, general maintenance, or toward a renovation project.

•   Debt consolidation loans. Debt consolidation loans are used to take multiple loans and lump them together into a new, single personal loan. The main benefits are that debt consolidation loans can potentially lower your interest rate or monthly payment, or both.

Advantages and Disadvantages of Personal Loans

Next, take a look at the pluses and minuses of personal loans:

Pros

•   Quicker access to funding. You might be able to tap into the funds of your personal loan as fast as within 24 hours of approval. So, if you need money in a flash, this could be a good option for you.

•   Flexible amounts and repayment terms. Unlike 401(k) loans, where there’s a borrowing limit of $50,000 and a repayment term of five years, there’s a wide range of borrowing amounts and repayment periods. You’ll likely have a better chance of finding a personal loan that’s a good fit for your time frame vs. with a personal loan.

•   It can accrue lower interest than other financing options. The interest rate of a personal loan can range from 8% to 36%, and the average rate stands at 12.38% as of August 2024. While it might not be lower than the 401(k) loan rate, personal loan rates can be lower than using a credit card or payday loan to make purchases.

Cons

•   Impacts your credit score. When you take out a personal loan, the lender needs to do a hard pull on your credit. This usually reduces your credit score by a few points and will impact your score for up to a year.

Also, since your payments are reported to the credit bureaus, if you fail to keep up with payments, your score could be dinged.

Taking on a loan also drives up your credit utilization, which also can negatively impact your score.

•   Fees and penalties. Some personal loans have origination fees, which can add to your loan amount and your debt. Plus, you might incur late fees. On the flip side, the lender could charge a prepayment penalty if you’re ahead of schedule on your payments. This is to recoup any losses they would’ve earned on the interest.

•   Additional debt. While a 401(k) loan is an additional financial responsibility, personal loan debt means making payments and owing interest that doesn’t go back to you. Instead, you’ll be on the hook for payments until the loan is paid off.

Recommended: Personal Loan Calculator

Key Comparison Factors

Here are key factors to compare when evaluating taking out a personal loan vs. a 401(k) loan:

•   Interest rate. The higher the interest rate, the more you’ll pay for the same amount of borrowed money.

•   Repayment term. The shorter the repayment term, the higher the payments. On the other hand, the longer the repayment term, the lower the payments (but you’re likely to pay more interest over the life of the loan).

•   Impact on retirement savings. You’ll want to weigh the different ways a loan can eat into your retirement goals. For example, a 401(k) loan will shrink your retirement fund. However, if you take out a personal loan, you may have less cash available to put toward retirement since you need to make your monthly payments.

•   Credit score implications. Understanding how taking out either loan can impact your credit score is important, especially if you are building your credit score. A 401(k) loan doesn’t require a hard credit pull nor will payments show up on your credit report. A personal loan, however, does require a hard credit inquiry, and late payments will end up on your credit file and can lower your score.

•   Tax considerations. If and when you’ll be taxed is also something to consider. As for whether a personal loan is taxable, the answer is usually no. But a 401(k) loan could be taxable if you fail to meet certain loan requirements, such as sticking to your repayment schedule.

Scenarios: When to Choose Each Option

If you are contemplating the choice between taking a 401(k) loan or a personal loan, reviewing these scenarios could help you make your decision.

401(k) loan: Going with a 401(k) loan might make more financial sense in these scenarios:

•   You’re far off from retirement. You likely have time to pay back the loan and replenish your account, which can help you hit your target amounts within your desired time frame.

•   Time frame and loan amount are also important considerations: You’ll want to ensure you can repay your loan within five years. If you fall behind, the amount you owe can be treated as a distribution – and you’ll be hit with early withdrawal penalties and taxes.

•   A 401(k) loan can also be a wise move if your credit score doesn’t qualify you for a personal loan with favorable terms. A hard credit inquiry isn’t part of tapping funds from this kind of retirement savings.

Personal loan: A personal loan might be the stronger choice in these situations:

•   If you want quicker access to the funds, a personal loan could be a good bet as you may be able to apply, be approved, and access funds within just a few days. A 401(k) loan can take a few weeks to move funds into your bank account. You will, of course, need to meet the lender’s criteria, such as minimum credit score and debt-to-income requirements.

•   A 401(k) loan also might be a better route if you can stomach another form of debt (since you are, in a sense, borrowing from yourself and not a lender) and feel confident you can stay on top of your payments.

•   A personal loan can also be a good move if you are hoping to borrow more than the $50,000 cap on 401(k) loans. A personal loan may allow you to access twice that amount.

•   If you feel you might be changing jobs soon or that your job is in jeopardy, a personal loan could be a better option than a 401(k) loan. If you leave or lose your job, a 401(k) loan could be due in less than the five-year term.

With either option, you want to make sure you have a steady income to repay the loan. It’s important to prioritize paying off the loan. Otherwise, you’ll get hit with potential fees and/or damage to your credit score.

Long-Term Financial Impact

Borrowing from a 401k vs a personal loan can have a different long-term impact on your money situation. In deciding between the two, you’ll want to take a close look at the following:

Effect on retirement savings. Taking out a 401(k) means a smaller retirement fund, potentially a loss in growth in your investments, and also potentially a setback on your retirement goals.
While a personal loan doesn’t have the same impact on your retirement savings, having less money freed up each month can mean you’ll have less to contribute to a tax-advantaged retirement account.

Potential opportunity costs. Taking on more debt, whether against your retirement account or a loan through a lender, means your money will be tied up in debt repayments. In turn, you might miss out on opportunities to boost your finances, whether that’s putting money toward education, a business venture, your savings, or an investment account.

Debt management considerations. With a 401(k) loan, you’ll want to feel comfortable that you can shore up your retirement funds by paying off the amount within five years. You’ll be required to make payments at least once a quarter. With a personal loan, the monthly payment and repayment term can vary, but you’ll want to make sure both are a good fit for your budget and goals.

The Takeaway

In deciding whether to borrow a 401(k) loan or a personal loan, you’ll want to understand the basics of how each works, their respective advantages and disadvantages, and what factors to consider before landing on the best choice for you. A 401(k) loan can avoid the potential negative credit impact of a personal loan, for instance, but there is a limit to how much you can borrow, which could sway your decision.

If you’re curious about personal loans, see what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

What happens to my 401(k) loan if I leave my job?

If you leave or experience a job loss, you might be required to pay back the remaining balance on your 401(k) quickly.

Can I take out multiple 401(k) loans?

Most plans only allow you to have one 401(k) at a time, and you must pay it back before you can take out another one. However, it’s worthwhile to check with your plan administrator, as you might be allowed to take more than one, as long as the total between the two doesn’t go over the plan’s limit, which is typically $50,000.

How does each option affect my credit score?

A 401(k) loan doesn’t require a hard pull of your credit, nor do your payments show up on your credit report. It therefore doesn’t affect your credit score. A personal loan does trigger a hard credit inquiry, and late or missed payments on your personal loan can negatively impact your score. Plus, taking on a personal loan increases your credit utilization ratio, which can also lower your score.

Photo credit: iStock/JulPo

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.

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

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.

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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