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Multifamily property has the power to generate cash flow and build wealth. Yet it also has the power to drain you of your free time and become the biggest money pit of your life.

If you’re looking to buy a multifamily property and avoid common headaches, you have your research cut out for you.

What Is a Multifamily Property?

Multifamily property consists of multiple units in a single building. This includes duplexes, triplexes, fourplexes, condominium buildings, student housing, apartment complexes, age-restricted communities, low-income housing, and townhomes. The units in a full multifamily housing property must have separate entrances, kitchens, bathrooms, and utility meters.

Multifamily property investing has declined in the year ending November 2023, due in part to concerns about interest rates, but multifamily properties are still a popular investment vehicle. There’s a reason that individual investors gravitate toward two- to four-unit properties, other than ease of management. Residential loans of 30 years with a fixed rate are available for properties with one to four dwelling units. FHA, VA, and USDA loans are available for those properties if they are owner-occupied.

For five or more units, a commercial loan is required. Commercial loans usually come with a higher down payment requirement, higher interest rate, and a shorter term, meaning significantly higher mortgage payments.


💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.

Why Buy a Multifamily Property?

Buying a multifamily home can jump-start your own real estate portfolio and investment portfolio. Here’s how.

Recommended: First-Time Homebuyer Guide

Income From Flipping

Multifamily homes can be improved and then resold for a profit, or ”flipped.” Buying a multifamily property, remodeling, and then reselling can be even more profitable than flipping single-family homes because as you remodel, you can increase rents.

Once you increase rents, the property becomes more valuable, both in terms of monthly income, cash flow and overall worth.

The ‘BRRRR’ Method

BRRRR stands for buy, rehab, rent, refinance, repeat. An investor buys a property, renovates it, and rents out the newly refurbished units for more money. After that, they can refinance the property to take out extra cash to buy a new property to renovate.

This method works well with larger multifamily properties because the rehabbing of multiple units can be done while other units that are not being renovated can still bring in some income.

Cash Flow

Multifamily homes were designed for cash flow. Space and amenities are optimized to bring in money for the investor. On the other hand, single-family homes are designed for comfort. The added space of a single-family home may not bring as high of a return as a multifamily property.

Quick Portfolio Expansion

Buying multifamily properties allows investors to acquire multiple units with one transaction, so they may have a favorite in the single-family vs. multifamily comparison. Additionally, investing in multifamily properties can allow an investor to quickly generate income, which could be enough to acquire more properties.

Reduced Risk

A multifamily property lessens risk exposure. When you have single-family homes, vacancies have a bigger effect on your monthly cash flow. With one or more multifamily properties, the risk is spread across a number of properties. In other words, there are units still rented that can help cover the costs of the units that are vacant.

Analyzing the Investment Potential of a Multifamily Property

Investors can use a number of methods to determine if it makes sense to buy a multifamily property or not. Here are some of the most common calculations you can use to make that determination for yourself.

Cash Flow

In real estate investing, cash flow is money that’s generated by the property and money spent on the property. Positive cash flow means income exceeds expenses. You could also call it profit.

Investors have differing amounts that they consider acceptable. Some real estate investors bank on the appreciation of the property instead of the amount of cash flow.

The 1% Rule

The 1% rule states that the gross rents should be 1% or more of the purchase price. The 1% rule is hard to apply in high-income areas where the purchase price of a property is high relative to the rents it generates.

Gross Rent Multiplier

The gross rent multiplier (GRM) is a ratio: the fair market value of a property divided by its gross annual rents. It doesn’t take expenses into consideration and is meant to be a simple calculation to determine if a property is worth exploring further. If you’re comparing two properties for purchase, the one with the lower GRM may be the better investment.

Cash on Cash Return

The cash on cash return is the annual amount earned compared with the amount of cash invested. It’s expressed as a formula: annual net cash flow divided by cash investment. This is helpful for investors who want to know how much cash is brought in by their cash investment each year.

Capitalization Rate

The capitalization rate, or cap rate, is the amount of net operating income divided by the purchase price. This number indicates how long it will take to get back all your money in an investment.

Recommended: What Is Cap Rate and How Do You Calculate It?

Internal Rate of Return

The IRR measures the rate of return over an amount of time. It takes into account both cash flow and expected appreciation.

Recommended: Mortgage Payment Calculator

How to Buy a Multifamily Property

You may be able to use 75% of documented rental income to help finance mortgage interest on your loan. And again, multifamily homes with four or fewer units can be financed more traditionally, while five or more units require a commercial mortgage.

Getting preapproved for a mortgage for your multifamily investment property is one of the best things you can do to get started. After a mortgage officer has examined your finances and greenlighted an amount, you can go shopping for your multifamily investment properties.

Find a Multifamily Home

To narrow your search for a new multifamily property here, you’ll want to decide what it is you’re looking for. Keep a few of these factors in mind:

•   Location: Do you have an area that you have expertise in? Are you going to manage the property yourself? These are some questions you’ll want to ask yourself to determine if you can buy a multifamily property near or far.

•   Price range: After you’ve looked at where you want to potentially invest, you’ll get a good sense of what properties will cost by looking at real estate listings. Keep in mind that you can count 75% of documented rents toward the purchase price for many loan types, so the price you’ll be looking at will be much different than if you were looking for a single-family home.

•   Type of property: Are you looking for a fourplex or an apartment complex? Duplex or 55+ community? There are a lot of choices to make between different property types and whether or not they’ll bring you a profit.

•   Profit potential: Are you looking to invest for appreciation or cash flow? Many properties with a lower price tag in the Midwest may be better for cash flow, while properties on the West Coast may appreciate more. Take a look at both and decide on your investment strategy.

•   Condition: Do you have the resources and team in place to take on a multifamily property that needs a lot of work? Or would you rather have something turnkey? You’ll want to be sure you know what resources you can commit to the project before you get in over your head.

Choose a Loan

The type of rental property used may determine what type of loan you’re able to get. If this is your first rental, you may want to consider living in one of the units so you can qualify for owner-occupied financing, which usually comes with lower rates and down payment requirements.

Choose a lender that can answer your questions about mortgages.

Make an Offer and Close

Working with a real estate agent, you’ll submit a competitive offer for the property you’ve chosen. Some buyers use cash to make the most competitive offer, while others need financing.

Renovate and Get Ready for Your Tenants

No matter what class of property you buy, the rental units will almost always require some work. Whether it’s a simple clean or a major renovation, these things are both tax-deductible and will improve the value, not to mention rentability, of your property.

Create a Management Plan

To make sure you’re running a business, and it’s not running you, you need to have a solid plan in place for how the rentals will be managed. How are repairs going to be taken care of? What’s your process when a rental turns over? How are you going to keep up with laws and ordinances?

Having a plan helps. Even so, you’ll learn as you go and will need to adjust this plan.


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

The Takeaway

How to buy a multifamily property? Do your research and choose a property that you’ll have the ability to finance and manage. Investing in rental properties and multifamily investing is not easy, but it can generate cash flow and create family wealth.

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

FAQ

Is buying a multifamily property a good investment?

Finding a multifamily property that is a good investment will depend on the investor’s analysis of the property. This can include the price, condition, gross rent multiplier, capitalization rate, and a number of other factors that will make renting the units successful.

What are the different kinds of multifamily properties?

•   Duplexes, triplexes, fourplexes

•   Townhouses

•   Apartment buildings

•   Condominiums

•   Bungalow courts

•   Mixed-use buildings

•   Student housing

•   Age-restricted housing units

•   Low-income housing units

What is the best way to finance a multifamily home?

Some would argue that an FHA loan with 3.5% down is one of the best ways to finance a home with up to four units. The owner must live in one of the units to qualify for this type of financing.

Photo credit: iStock/Andrey Sayfutdinov

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

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

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

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

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

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

SOHL-Q224-1842833-V1

When looking for a home loan, the two main choices of financial institutions are credit unions and banks. Each option comes with pros and cons.

Here’s an overview to help you make the right choice for your situation. You might start with general tips when shopping for a mortgage.

How Credit Union and Bank Mortgages Are Similar

Common types of home loans include fixed-rate and adjustable-rate loans as well as conventional and government-insured loans (such as FHA and VA loans). Most of the different mortgage types are available at both credit unions and banks.

At a high level, approval processes are the same at each type of financial institution as well. Each will have mortgage underwriting guidelines, and after a borrower applies, the loan will be reviewed and approved, suspended, or denied.

Plus, both may offer mortgage preapprovals.


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

Differences Between Credit Union and Bank Mortgages

So, credit union or bank for mortgages? Beyond general similarities, differences exist. Let’s look at credit union mortgages and then bank home loans.

Benefits of Getting a Credit Union Mortgage

Are credit unions good for mortgages? In many ways they are. While a bank has stockholders, a credit union consists of members (account holders) who more or less serve in this role. A bank must satisfy its investors by making a profit; credit unions don’t, so they can return those dollars to members through more attractive interest rates, lower fees, and more.

To enhance their members’ financial wellness, credit unions typically provide the following benefits:

Looser Approval Criteria

In general, credit unions may approve more loans in the lower- to middle-income range for their members. Plus, when credit scores are less than ideal, a credit union loan is sometimes the better choice.

Lower Interest Rates

Overall, credit unions offer lower rates on their mortgage loans. To estimate how much money this may save you, use a mortgage calculator.

Fewer Fees

Credit unions can pass on savings to members through lower fees as well as lower rates.

The Personal Touch

Because credit unions are less likely to sell their mortgage loans to a third party, a borrower is more likely to know the loan servicer (the credit union). This can lead to more personalized service.

Recommended: How Does the Mortgage Preapproval Process Work?

Disadvantages of Getting a Credit Union Mortgage

Are credit unions better for mortgages? That depends on a borrower’s needs and preferences because disadvantages of credit union mortgages also exist, including these:

Membership is a Must

In most cases, a borrower must meet certain requirements to join a credit union. This can include living in a certain community, belonging to a certain profession, or otherwise having the appropriate affiliation.

Fewer Locations

Usually, credit unions have fewer branches, which can limit their geographical range. So when away from home, outside the credit union’s range, it may be harder to conduct all the financial transactions you might like. For example, the ATM network may be smaller and less convenient.

Stale Tech

Because credit unions are often more local institutions, they typically won’t have the up-to-date technology found at larger banks. So if a borrower wants first-class online and mobile banking, credit unions may not be the best choice.

Limited Menu

Credit unions may offer fewer financial products, especially on the savings and investment side. They may only offer checking and savings accounts, for example, plus credit cards. Although that may not affect a borrower’s ability to get a mortgage, this can limit what other products they can benefit from at the credit union.

Possibly Higher Interest Rates

Sometimes credit unions can’t compete with banks, especially when a large bank offers especially good interest rates. So be sure to compare rates if you’re looking for the most attractive ones.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Benefits of Getting a Bank Mortgage

Getting a home loan at a bank has its upsides, including these:

Variety of Services

Banks often offer a significant range of savings, lending, and retirement-related financial products, making it easier for a borrower to have an all-in-one financial institution.

Multiple Branches and ATMs

Banks, especially national ones, will typically allow you to have access to multiple branches in more locations as well as a larger ATM network. This can make for a more convenient experience.

New Tech

Banks are, overall, more likely to have the latest in banking technology, including the ability to bank online and to use more sophisticated mobile apps.

Disadvantages of Getting a Bank Mortgage

Meanwhile, drawbacks of getting a bank home loan can include the following:

Higher Interest Rates

Banks need to generate profit for stockholders — and credit unions don’t — so banks may charge a higher rate on home loans. But this isn’t universally true, so it’s always a good idea to compare rates.

Higher Fees

In general, banks charge higher mortgage fees than credit unions do. Although not always true, this is something to investigate.

Less Personalized Customer Service

Because credit union membership tends to be smaller and more local, bank customers may receive less personal service, especially when using a branch outside their more typical one (perhaps while traveling). Plus, banks are more likely to sell mortgage loans to a third-party loan servicer.

With any lender, bank, or credit union, a house hunter should feel at ease asking a range of mortgage questions.

The Takeaway

Credit union vs. bank mortgage? Each has its upsides and potential downsides. Borrowers looking for a home mortgage loan can explore the pros and cons to make the right choice for their specific situation.

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

FAQ

Is it better to get a mortgage at a credit union?

Not necessarily. It’s a good idea to look into what each route offers before making the right choice for you.

What are the disadvantages of credit unions?

Credit unions tend to be smaller and more localized than many banks, so disadvantages can include fewer locations, a smaller ATM network, and more limited financial products. Borrowers must qualify to become a credit union member; technology probably won’t be as modern as that at a larger bank; and, in some cases, costs can be higher.

Are credit unions safe for mortgages?

The National Credit Union Administration insures deposits of up to $250,000 at all federal and some state credit unions, protects the members who own credit unions, and regulates federal credit unions. Eligible bank accounts of the same amount are insured by the Federal Deposit Insurance Corp.

Can I take out a HELOC or second mortgage through a credit union?

Not all credit unions offer the same products, but many of them do offer home equity lines of credit and home equity loans.

Photo credit: iStock/Lemon_tm

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

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

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

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

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.

SOHL-Q224-1843070-V1

To make homeownership more affordable, the federal government offers programs for first-time homebuyers and buyers with low to moderate incomes. The mortgage credit certificate (MCC) program is one option that helps eligible first-time homebuyers save money on their mortgage.

This guide will unpack how a mortgage credit certificate works, the pros and cons, and claiming it on your taxes.

What Is an MCC?

A mortgage credit certificate, sometimes called a mortgage certificate credit, is designed to help homebuyers recoup a portion of the interest paid on their home mortgage loan. An MCC is a dollar-for-dollar federal tax credit of up to $2,000 on the mortgage interest paid annually. It’s a nonrefundable credit, which just means that the amount of your credit can’t exceed the amount of income tax owed for that filing year.

If you take out a mortgage to buy a home, your monthly payment has four components: principal, interest, taxes, and insurance. State and local housing finance agencies issue MCCs, and if you receive one you can claim the dollar equivalent as a tax deduction to reduce the amount you owe in federal taxes. (Not all states offer MCCs, however. Michigan offers one, for example, while Massachusetts does not.) Eligible homeowners can take advantage of an MCC even if they take the standard deduction rather than itemize deductions. If you are one of the few homeowners who itemizes, any remaining mortgage interest not accounted for in an MCC may qualify for the mortgage interest deduction.

Eligibility for this program is based on income and is generally only available for first-time homebuyers who qualify, though others may be able to buy a home in a “targeted area” designated by the state or Department of Housing and Urban Development and claim a mortgage tax credit.

Keep in mind that different mortgage types may have fixed or variable interest rates. Most fixed-rate loans are eligible for an MCC.

Recommended: First-Time Homebuyer Guide

How Does It Work?

Getting a handle on tax credits and deductions can be confusing as a new homeowner, and that’s OK.

To reiterate, an MCC lets you claim a tax credit for a portion of the mortgage interest paid in a year. This lowers your tax liability, which is the amount you owe to the federal government.

The portion of the mortgage interest you can claim with an MCC, known as the tax credit percentage, depends on the state you live in. Generally, the tax credit percentage ranges from 10% to 50% of a homeowner’s total annual mortgage interest.

The tax credit percentage, the mortgage amount, and interest rate are needed to calculate the total MCC. Note, however, that an annual MCC deduction is capped at $2,000 and can’t exceed a recipient’s total federal income tax liability after factoring in other deductions and credits.

It’s helpful to show how claiming an MCC works in practice. You’ll need to know some mortgage basics, like the interest rate, before getting started.

For instance, a homeowner with a $250,000 mortgage, 3.5% interest rate, and tax credit percentage of 20% could receive a first-year MCC tax credit of $1,750.

Here’s how to break this calculation down by steps:

1.    Determine the mortgage loan balance ($250,000), interest rate (3.5%), and tax credit percentage (20%)

2.    Multiply the loan balance and interest rate to calculate the total interest paid ($250,000 x 0.035 = $8,750)

3.    Multiply the total interest paid by the tax credit percentage to calculate the MCC tax credit ($8,750 x 0.2 = $1,750)

The $1,750 would be applied to your total federal tax bill, rather than deducted from your income. Let’s take a closer look at how claiming an MCC in this example would affect your federal income taxes.

In this example, a mortgage credit certificate could lower the amount owed in federal income taxes by $1,365. If you don’t have a mortgage yet, use this mortgage calculator to estimate your interest rate, loan amount, and, on the amortization chart, interest paid.

Mortgage Credit Certificate Pros and Cons

The mortgage credit certificate program was established by the Deficit Reduction Act of 1984 to make homeownership more affordable for low- and moderate-income first-time homebuyers. While an MCC tax credit can provide financial benefits, there are some potential drawbacks to consider, too.

Here’s a side-by-side comparison of MCC pros and cons to help you figure out if an MCC is right for you if you’re a first-time buyer.

How to Get a Mortgage Credit Certificate

Borrowers are issued an MCC through their lender before closing. Thus, it’s important to discuss options early in the process and when shopping for a mortgage.

Eligibility for an MCC varies by location. State housing finance agencies (HFAs) have established requirements for obtaining an MCC, if one is offered. These include limits on household income, loan amount, and home purchase price.

Other criteria to get an MCC include the following:

•   HFA-approved lender: The HFA may require borrowing from an approved list of lenders.

•   First-time homebuyer status: Borrowers must not have owned a principal resident in the past three years.

•   Primary residence: Only owner-occupied homes are eligible for an MCC.

•   Homebuyer education: HFAs may require borrowers to participate in education courses during the purchase process.

Claiming a Mortgage Credit Certificate on Your Taxes

To claim the MCC each year on your taxes, fill out IRS Form 8396. You’ll need to know the amount of interest you paid on the mortgage that year and the tax credit percentage set for the MCC.

Once complete, you’ll also know if any credit can be carried over for the following tax year.

The Takeaway

What is a MCC? A mortgage credit certificate is a federal income tax credit on a portion of the mortgage interest paid annually for low- to moderate-income first-time homebuyers or people purchasing a home in a targeted area.

The home buying process is a serious undertaking, especially for first-time homebuyers. To get up to speed, SoFi’s mortgage help center is a useful place to start and have your mortgage questions answered.

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

FAQ

Who gives you the mortgage credit certificate?

A mortgage credit certificate program is administered by state-level housing finance agencies and issued by mortgage brokers or lenders.

Does everyone get a mortgage credit certificate?

No, mortgage credit certificates have borrower income limits and other eligibility requirements. For context, only 10,836 MCCs were issued in 2022, down from 22,298 issued in 2019, likely due to the fact that some states have discontinued their MCC program.

Can I refinance with a mortgage credit certificate?

A mortgage credit certificate does not prevent you from refinancing, but you’ll lose the MCC on your current loan. Many programs, though, allow borrowers to apply to receive a new MCC issued with their refinanced mortgage.

How do I know if I have an MCC?

Borrowers apply for an MCC prior to closing and receive a physical copy with a unique certificate number from their local or state government.

Do I lose my mortgage credit certificate if I refinance?

The original mortgage credit certificate becomes void if you refinance, but you may be able to have the MCC reissued if the principal balance on the refinanced loan is lower than the original.

Photo credit: iStock/Morsa Images

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

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

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

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

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.

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

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

SOHL-Q224-1839866-V1

The monthly payments on a $400,000 mortgage could range from about $2,300 to more than $3,700, depending on the loan’s interest rate, term, and other factors. But hopeful homebuyers would be wise to consider how much that mortgage could cost over time as well as what the monthly payments might be. Read on for a breakdown of what some of your home-buying costs might be, and how they could affect the total cost of a $400,000 mortgage.

What Will a $400,000 Mortgage Cost?

There are several different costs you may run into when taking out a mortgage. Most of the time, they can be divided into three main categories.

Closing Costs

Closing costs are expenses you’ll pay upfront when you get a loan. They can include things like loan processing fees, third-party services such as appraisals and title insurance, and government fees and taxes. You also may decide to pay mortgage points (also called discount points) upfront on your loan to lower the interest rate. Closing costs can vary significantly from one loan type and lender to the next, but they generally range from 3% to 6% of the mortgage amount.

Monthly Payments

Monthly mortgage payments, which are paid over the life of your loan, typically include two main parts:

•   Principal: This portion of your mortgage payment goes directly toward paying back the amount you borrowed.

•   Interest: This is the fee the lender will charge you for borrowing money. The amount of interest you pay each month will be calculated by multiplying your interest rate by your remaining loan balance.

Escrow

Some homebuyers may also have a third amount, called escrow, included in their closing costs and/or monthly payments. Lenders often collect and hold money in an escrow account so they can be sure critical bills like homeowners insurance and property taxes are paid on time. (Curious about the most budget-friendly places to buy? Check out this list of the most affordable cities in each state.)


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

What Would the Payment Be on a $400,000 Mortgage?

We’ll keep things simple and eliminate the costs associated with an escrow account to calculate what the payment on a $400,000 mortgage’s monthly payments might be.

Let’s say you wanted to purchase a home for $500,000, and you had $100,000 for a down payment. If your lender offered you a 7% annual percentage rate (APR) on a 15-year loan for $400,000, you could expect your monthly payment — principal and interest — to be about $3,595. If you had a 30-year loan with a 7% APR, your payment could be about $2,661.

Here are some more examples that show the difference between a 15-year loan vs. a 30-year loan, using SoFi’s Mortgage Calculator:

Where Can You Get a $400,000 Mortgage?

Homebuyers may have a few different options when deciding where to go for a mortgage, including online banks and lenders, and traditional banks and credit unions. Because the rates and terms lenders offer may vary, it can be a good idea to shop around for a mortgage that’s the right fit for your individual needs.

Before you start looking for quotes, though, you may want to sit down and review the different types of mortgages you can qualify for. How would a 15-, 20-, or 30-year mortgage affect your monthly payments? Are you looking for a fixed or adjustable mortgage rate? Would you be better off with a conventional mortgage or a government-backed loan? (Some loans may have more flexible requirements for down payment amounts or a borrower’s credit score.)

Once you start comparison shopping, you can note the pros and cons of various offers and narrow down your choices. You also may want to read some online reviews of the lenders you’re considering.

Recommended: 2024 Home Loan Help Center

How Much Interest Will You Pay on a $400,000 Mortgage?

The interest rate your lender offers can make a big difference to the overall cost of your mortgage. So can the mortgage term you choose.

On a $400,000 mortgage at a 7% APR, for example, your total interest costs could range from $247,156 to $558,036, depending on the length of the loan you choose (15 vs. 30 years).

Spreading out your mortgage payments over a longer term can lower your monthly payment, but you can expect to pay more for the loan overall. Your financial circumstances at the time you take out your loan may dictate which is a priority for you. (If you go for a longer loan, and your situation changes, you may decide to refinance your home mortgage to a shorter term down the road.)


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

How Does Amortization Work on a $400,000 Mortgage?

Though your payment will remain the same every month (if you have a fixed-rate loan), the amount you’ll pay toward interest vs. principal will change over the life of your home loan. In the first years, the majority of your payment will go toward interest. But as your balance goes down, more of your payment will go toward principal.

Your lender can provide you with a mortgage amortization schedule that shows you how the proportions will change as you make payments on your loan.

Here’s what the amortization schedules for a $400,000 mortgage with 30- and 15-year terms might look like. (Keep in mind that your payments may include other costs besides principal and interest.)

Amortization Schedule, 30-Year Loan at 7% APR

Amortization Schedule, 15-Year Loan at 7% APR

How to Get a $400,000 Mortgage

If you’re feeling intimidated by the whole home-buying process, breaking it down into some manageable steps may make things a little less overwhelming.

First, Determine What You Can Afford

Reviewing your income, debts, monthly spending, and how much you’ve saved for a down payment can be a good place to start. This will help you decide how much of a down payment you can handle and how much house you can afford.

Compare Different Loans and Lenders

Once you know what you can afford, you can start looking for the loan type, interest rate, loan term, and lender that meet your needs.

Consider Getting Preapproved

If you’ve decided on a loan and lender, it can be a good idea to go through the preapproval process. Getting a letter from your lender that says you’re preapproved for a certain loan amount lets sellers know you’re a serious buyer. (And it can come in handy if you get into a bidding war for your dream home.)

Get Ready to Go House Hunting

When you have your loan lined up, you can look for and potentially make an offer on a house. And since you already know how much you can afford, you can target homes in that range.

Submit a Full Mortgage Application

Once your offer is accepted and you’re ready to move forward, your lender will ask you to complete a more formal loan application and provide additional financial information and documentation.

Prepare for Closing

While you’re waiting for a final loan approval and a closing date, you can shop for homeowners insurance, get a home inspection, and make sure you have all the money you need for your down payment and closing costs.

Take Ownership of Your New Home

At the closing you can sign all the necessary paperwork, hand over the funds needed to make the purchase, and — congratulations! — get the keys to your new home.

Recommended: First-Time Homebuyer Guide

The Takeaway

Researching the different costs you might have to pay if you plan to take out a $400,000 mortgage can help you stick to your budget and avoid unpleasant surprises.

The choices you make about the type of loan you get, the interest rate, loan term, and other costs, will all play part in how much you pay every month — and over the length of the loan. So it can be a good idea to run the numbers before you decide on a particular lender or loan.

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

FAQ

How much is a $400,000 mortgage a month?

The monthly payment for a $400,000 mortgage could range from about $2,300 to more than $3,700, depending on several factors, including the interest rate and loan term.

How much income is required for a $400,000 mortgage?

Lenders will look at several factors besides your income to determine if you can afford a $400,000 mortgage. You can expect to be asked about your debt, credit history, assets, and the down payment you plan to make.

How much is a down payment on a $400,000 mortgage?

Your down payment may vary depending on the price of the house you choose, the type of loan you get, and if you want to avoid paying private mortgage insurance as part of your borrowing costs. Traditionally, lenders like to see a 20% down payment, which on a $500,000 home would be a $100,000 down payment and a $400,000 mortgage. But many lenders accept lower down payments.

Can I afford a $400,000 mortgage with a $70,000 salary?

Since your housing costs (monthly payments, insurance, etc.) would likely be more than half your monthly salary, it could be a challenge to afford a $400,000 mortgage on a $70,000 salary.

Photo credit: iStock/svetikd

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

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

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

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

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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On a salary of $100,000 per year, as long as you have minimal debt, you can afford a house priced at around $311,000 with a monthly payment of $2,333. This number assumes a 6.5% interest rate and a down payment of around $30,000.

The 28/36 rule is often used as a guide when deciding how much house you can afford. The rule stipulates that you should not spend more than 28 percent of your salary on overall housing costs and no more than 36 percent on housing costs and your debt. On a salary of $100K with debts of about $250 per month, a house costing $311,000 just fits in your budget.

However, how much home you can afford depends on other factors also, such as where you intend to live and how much you have saved as a down payment.

This article looks at how all of these factors affect your home purchase and gives some examples of how much home you can realistically afford on a salary of $100,000.

What Kind of House Can I Afford With $100K a Year?

Another rule of thumb often applied when buying a home is to not spend more than three times your annual income on a home. If you earn $100,000 a year, that would be $300,000.

A salary of $100,000 is well above the national median income (according to Census data, the national median income was $74,580 in 2022). That puts you in a good position if you want to buy a home, particularly if the cost of living is low in the area that you are targeting. If you have substantial savings for a down payment and little debt, you’re even better positioned. Debt is important because lenders look at how much debt you have when they qualify you for a mortgage.

Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is the amount of income you receive relative to the amount of payments you make each month to cover your debt. You’ll get better loan terms, and your monthly mortgage loan payments will be less, if you have less debt.

That’s why many experts also recommend the 28/36 rule. So, if you earn $100K, your housing costs should be less than $28,000, $2,333 a month, and your debt and housing costs should not exceed $36,000, or $3,000 a month.

Your Down Payment

Unless you qualify for a zero-down USDA or VA loan, most lenders will expect a down payment of between 3% and 20%. The more you put down, the more house you can afford, but as you think about your down payment amount, make sure you reserve funds for closing costs, moving costs, and an emergency fund for unexpected expenses.

Home Affordability

Homes are more affordable in certain areas. Some areas have a higher cost of living and higher property taxes.

Your credit score will also affect how much home you can afford. If you have a high credit score, you will qualify for a lower interest rate loan. If you pay less interest, you can borrow more and still meet your monthly payments.

Depending on where you want to live, the housing market might dictate how big a home you can afford. House prices are affected by the economic conditions, and low unemployment rates and healthy economic growth gives buyers more purchasing power. If buyers have more purchasing power, they can afford bigger loans, and this will push up house prices.


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

How to Afford More House with Down Payment Assistance

Some people, such as first-time buyers or certain professionals like nurses and teachers, can qualify for down payment assistance from federal, state, and local government, private entities, and charitable organizations. Assistance might be in the form of a low-rate loan, cash grant, tax credit, or a reduced interest rate.

Applying for down payment assistance can add weeks or months to your home buying timeline, but for more information, the U.S. Department of Housing and Urban Development (HUD) keeps a list of programs listed by state, county, and city.

Here are typical down payment amounts for various types of mortgages.

•   Conventional mortgages require a 3% down payment for first-time buyers

•   FHA mortgages require 3.5% down

•   VA mortgages require 0% down

•   USDA: These zero down payment loans serve low-income borrowers in rural areas.

Home Affordability Examples

Let’s take a look at some hypothetical examples for those wondering, “If I make $100K how much home can I afford?” These examples assume an interest rate of 6.5% and average property taxes.

Example #1: Low Down Payment and Significant Debt

Gross annual income: $100,000
Down payment: $10,000
Monthly debt: $1000

Home budget: $238,441

Monthly mortgage payment: $2,000

Payment breakdown:

•   Principal and interest: $1,444

•   Property taxes: $208

•   Private mortgage insurance: $264

•   Homeowner’s insurance: $83

Example #2: Bigger Down Payment, Less Debt

Gross annual income: $100,000
Down payment: $40,000
Monthly debt: $300

Home budget: $333,212

Monthly mortgage payment: $2,333

Payment breakdown:

•   Principal and interest: $1,853

•   Property taxes: $208

•   Private mortgage insurance: $188

•   Homeowner’s insurance: $83

How to Calculate How Much House You Can Afford

You need a budget to find out how much house you can afford. Keeping a budget will show you how much you are spending each month versus how much income you have. Whatever you have leftover after paying essentials like food, clothing, and utilities is how much you can afford to spend on housing.

You can also use a mortgage calculator to help you. Just plug in your own numbers to find out what your monthly payments would be.


💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

How Your Monthly Payment Affects Your Price Range

The more you can afford to pay each month for your mortgage and other housing expenses, the more house you can afford. However if you have significant debt payments each month, or you have a poor credit score that results in a higher interest rate for your loan, that will reduce the amount of loan you can afford and the price range.

Types of Home Loans Available to $100K Households

Four types of loans are the most common. These are conventional loans, FHA loans, USDA, and VA loans.

Conventional loans typically require a credit score of 620 or more, but the down payment can be as low as 3 percent. Remember that a lower down payment means higher monthly payments because you will have to borrow more.

FHA loans. With an FHA loan, home buyers with a credit score over 580 can borrow up to 96.5% of a home’s value. Home buyers with a lower credit score, between 500 to 579, can still qualify for a loan as long as they have a 10% down payment.

USDA: USDA loans are zero down payment financing for low-income borrowers in designated rural areas.

VA: VA loans also require no down payment and are available to qualified military service members, veterans, and their spouses.

The Takeaway

If you are looking to buy a home and would like a more realistic idea of what you can afford, first find out how much you are spending on necessities like food, clothing, transportation, and, most importantly, debt. What you have leftover is how much you can spend each month on housing expenses.

Once you have a grasp on your finances, you can use an affordability calculator to see how much of a house you can afford. The size of home that the amount will buy depends on the local housing market and the cost of living where you want to live.

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

FAQ

Is $100K a good salary for a single person?

A salary of $100k is above the national median income (according to Census data, the national median income was $74,580 in 2022). This is a good salary, but you still might struggle to buy a home in areas with a high cost of living. The larger down payment you have, and the better your credit score, the bigger house you can buy.

What is a comfortable income for a single person?

A comfortable income for a single person is dependent upon where that person lives. The findings from a study using data from the Bureau of Labor Statistics to calculate the cost of necessities to determine a living wage shows wide variance existing among states. According to the study, Hawaii is the most expensive state, and singles require an annual salary of $112,411 to live comfortably. In Mississippi, you can live comfortably on $45,906 a year.

What is a liveable wage in 2023?

A liveable wage will vary depending on where you live. However, the Massachusetts Institute of Technology determined that $104,07 per year was a liveable wage before taxes in 2022. This was for a family of four with two working adults and two children.

What salary is considered rich for a single person?

According to Internal Revenue Service data, an income of $540,009 per year puts a person in the top 1% earnings category.

Photo credit: iStock/Prostock-Studio

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

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

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

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

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

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

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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