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Hierarchies are everywhere, including in the mortgage world. Many people have a subordinate mortgage in the form of a home equity line of credit (HELOC) or home equity loan.

A subordinate mortgage is secured by your property but sits in second position, if you have a primary mortgage. In the event that an owner defaults and the property moves to foreclosure, the primary mortgage would be paid from the proceeds of the foreclosure sale before the subordinate mortgage. Note: SoFi does not offer piggy-back loans, which are a type of subordinate mortgage. It does, however, offer a HELOC and a home equity loan.

Here’s what you need to know about subordination and why it matters.

What Is Mortgage Subordination?

Mortgage subordination is the process of ranking debts tied to your home in the order that they need to be paid in the event of a foreclosure. Whichever mortgage lien is recorded first usually has higher priority than those that are recorded later, but depending on state law, property tax liens, homeowners association (HOA) “super liens,” and mechanic’s liens may have priority over previously recorded liens.

In the event of a foreclosure, a second mortgage is only paid if there are funds left over after paying the primary mortgage.

Lenders that make second mortgages — also called junior mortgages, second liens, or junior liens — typically allow borrowers to tap only a portion of their home equity to help ensure that they will get paid in the event of a foreclosure.

And a subordinate mortgage represents a higher risk to the lender, so borrowers will likely see higher rates than they would be offered on a primary home mortgage loan.

Recommended: Understanding Mortgage Basics

What Are Mortgage Subordination Clauses?

A mortgage subordination clause is typically included in the legal documents of the primary mortgage holder.

The subordination mortgage clause states that all other loans made using the property as collateral are subordinate to the primary mortgage, now and in the future.

What Is a Subordinate Lien?

A lien is a claim against your property. Generally, there are voluntary mortgage liens, such as mortgages you take out, and involuntary liens, like judgment, tax, HOA, and mechanic’s liens.

A subordinate lien is a claim against your property that usually can only be paid after the primary lien has been paid.

How Does a Mortgage Become Subordinate?

When a mortgage is subordinate to another, it simply means that the lender of the subordinate mortgage will get paid only after the senior lienholder is paid.

Again, mortgages are typically ranked in the order they are originated and recorded in county land records. The primary mortgage is first, and a second mortgage is subordinate because it came after.

If a property is refinanced, the situation changes.

Subordinate Mortgages and Refinancing

If a homeowner has two mortgage loans and wants to refinance the first mortgage, most refinancing lenders will ask the second mortgage lender to sign a subordination agreement to stay in second position after the refinance.

If the second lienholder balks at subordinating that loan, you may have enough equity to apply for a cash-out refinance and use the extra money to pay off the second mortgage. Or you could pay off the second mortgage with cash on hand.

This mortgage calculator can help you run the numbers to see if refinancing is right for you.

Recommended: What Are the Different Types of Mortgage Loans?

Subordinate Mortgage Loan Modification

Loan modification is a mortgage relief program in which the terms of the loan are changed so that the homeowner can better meet the monthly payment requirement.

Homeowners who anticipate a permanent change in finances, or are exiting mortgage forbearance but don’t qualify for refinancing, can ask for mortgage modification.

If you have a HELOC or home equity loan and you’re struggling to make the payments, the lender may be willing to modify the credit line or loan: lowering the rate, extending your repayment term, or reducing your principal balance.

The Takeaway

Though lenders are more concerned about subordinate mortgages than you may be, you may want to know how second mortgages and other liens may affect refinancing your primary mortgage.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What type of mortgage is subordinate?

If a homeowner has a first mortgage, home equity lines of credit and home equity loans are examples of subordinate loans. They will be paid second in the event of a foreclosure or cash sale.

Is a subordinate mortgage a second mortgage?

Yes. A second mortgage is a subordinate mortgage because it came after the primary mortgage.

What is subordinate financing?

Subordinate financing is a junior loan secured by an asset that can be sold if the loan is unpaid for a specified amount of time. Interest rates and terms can be more favorable than those of unsecured loans but not as favorable as those for a first mortgage.

How long does it take to subordinate a loan?

On primary loans, subordination is included in the contract. On a subsequent refinance when there is a junior (or subordinate) mortgage, the amount of time it will take to reach a subordination agreement will depend on the lenders involved, but it can often be done in 25 business days.

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Photo credit: iStock/wutwhanfoto

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.

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

SOHL-Q125-030

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If you don’t have a 20% down payment on a home, that’s OK. Most buyers don’t. But if you’re in that league and acquire a conventional mortgage, the lender will want extra assurance — insurance, actually — that you’ll pay the loan back. Private mortgage insurance (PMI) is usually the price to pay until you reach 20% equity or, as lenders say, 80% loan-to-value.

In an effort to help low- and middle-income borrowers, the Biden-Harris Administration reduced monthly mortgage insurance premiums for new FHA loans — that is, loans backed by the Federal Housing Administration. However, those cuts do not affect homebuyers with conventional loans and PMI.

Can you avoid PMI? It’s tough. Below, we’ll take a closer look at PMI, strategies to avoid it, and how to know when you can get rid of it.

What Is PMI?

Private mortgage insurance is charged by lenders of conventional home mortgage loans, which are loans not insured by a government agency. FHA, VA (Veterans Administration), and USDA (U.S. Department of Agriculture) loans are government-insured loans.

The 30-year conventional home loan is the most common mortgage, and 20% down is ideal. But…

You’ve seen home prices lately. Twenty percent down on a $250,000 or $400,000 or $750,000 home is just not doable for everyone. In 2024, the median down payment for buyers was 18%, but for first-time homebuyers, it was nine percent, according to the National Association of Realtors.®

PMI is meant to protect the lender from risk. The premiums help the lender recoup its losses if a borrower can’t make the mortgage payments and goes into default.

How Much Does PMI Cost?

PMI is often 0.5% to 1.5% of the total loan amount per year, but can range up to 2.25%.

The cost of PMI depends on the type of mortgage you get, how much your down payment is, your credit score, the type of property, the loan term, and the level of PMI coverage required by your lender.

If you’re shopping for a mortgage and you apply for one or more, the premium will be shown on your loan estimate. If you go forward with a home loan, the premium will be shown on the closing disclosure.

Estimate PMI Costs

Use this calculator to estimate PMI based on how much home you can afford.

How to Pay PMI

Most borrowers pay PMI monthly as a premium added to the mortgage payment.

Another option is to pay PMI with a one-time upfront premium at closing.

Yet another is to pay a portion of PMI up front and the remainder monthly.

How to Avoid PMI Without 20% Down

One way to avoid PMI is to make use of a piggyback mortgage. Another is to seek out lender-paid mortgage insurance.

Piggyback Loan

With a piggyback loan, typically an 80/10/10 mortgage, you’d take out two loans at the same time, a first mortgage for 80% of the home price and a second mortgage for 10% of the home value, and put 10% down. Note: SoFi does not offer piggyback loans. SoFi does offer fixed-rate and adjustable-rate first mortgages, as well as VA and FHA loans.

The 80% loan is usually a 30-year fixed-rate mortgage, and the 10% loan is typically a home equity line of credit that “piggybacks” on the first mortgage.

A 75/15/10 piggyback loan is more commonly used for a condo purchase because mortgage rates for condos are higher when the loan-to-value ratio (LTV) exceeds 75%.

Both loans do not have to come from the same lender. Borrowers can tell their primary mortgage lender that they plan to use a piggyback loan and be referred to a second lender for the additional financing.

Because you’d be taking out two loans, your debt-to-income ratio (monthly debts / gross monthly income x 100) will fall under more scrutiny. Mortgage lenders typically want to see a DTI ratio of no more than 36%, but that is not necessarily the maximum.

Piggybackers will need to be prepared to make two mortgage payments. They will want to examine whether that secondary loan payment will be higher than PMI would be.

Lender-Paid Mortgage Insurance

In most cases with lender-paid mortgage insurance (LPMI), the lender pays the PMI on your behalf but bumps up your mortgage interest rate slightly. A 0.25% rate increase is common.

Monthly payments could be more affordable because the cost of the PMI is spread out over the whole loan term rather than bunched into the first several years. But the loan rate will never change unless you refinance.

Borrowers will want to look at how long they expect to hold the mortgage when comparing PMI and LPMI. If you need a short-term mortgage, plan to refinance in a few years, or want the lowest monthly payment possible, LPMI could be the way to go. Note: SoFi does not offer LPMI.

When PMI Is No Longer Required

Borrowers generally need to have 20% equity in their home to drop PMI.

The Homeowners Protection Act was put in place to protect consumers from paying more PMI than they are required to. Specifically for single-family principal mortgages closed on or after July 29, 1999, the law covers two scenarios: borrower-requested PMI termination and automatic PMI termination.

Once you’ve built 20% equity in your home, meaning you’re at an 80% LTV based on the home’s original value (the sales price or the original appraised value, whichever is lower), you can ask your mortgage loan servicer — in writing — to cancel your PMI if you’re current on all payments. Your monthly mortgage statement shows your loan servicer information.

The very date of this occurrence, barring no extra payments, should have been given to you in a PMI disclosure form when you received your mortgage. It’s based on your loan’s amortization schedule.

As long as you’re current on all payments, PMI will automatically terminate on the date when your principal mortgage balance reaches 78% of the original value of your home.

If that LTV ratio is not reached by the midpoint of the mortgage amortization period, PMI must end the month after that midpoint.

PMI vs. MIP vs. Funding Fees

The upside of PMI is that it unlocks the door to homeownership for many who otherwise would still be renting. The downside is, it adds up.

If you’re tempted to go with an FHA mortgage, realize that this type of loan requires up front and annual mortgage insurance premiums (MIP) that go on for the life of the loan if the down payment was less than 10%.

Mortgages insured by the Department of Veterans Affairs come with a sizable funding fee, with a few exceptions, and loans backed by the Department of Agriculture come with up front and annual guarantee fees.

Type of Loan	Upfront Fee	Annual Fee
Conventional	n/a	0.5% to 1.5%+
FHA	1.75%	0.15% to 0.75%
VA	1.25% to 3.3%	n/a
USDA	1%	0.35%

Recommended: PMI vs. MIP

Ways to Boost a Down Payment

A bigger down payment not only may allow a borrower to avoid PMI but usually will afford a better loan rate and provide more equity from the get-go, which translates to less total loan interest paid.

So how to afford a down payment? You could shake down Dad or Granny (just kidding; Grandma responds better to sweet talk than coercion). For a conventional loan, gift funds from a relative or from a domestic partner or fiance count toward a down payment. There’s no limit to the gift, but you may be expected to come up with part of the down payment. You’ll also need to present a formal gift letter to validate the funds given to you.

A gift of equity is a wonderful thing indeed. When a seller gives a portion of the home’s equity to the buyer, it is shown as a credit in the transaction and may be used to fund the down payment on principal or second homes.

You could look into down payment assistance from state, county, and city governments and nonprofit organizations, which usually cater to first-time homebuyers. And home listings on Zillow now include information about down payment assistance programs that might be available to buyers searching for homes on the platform.

Even if you can’t come up with 20%, it’s all good because PMI doesn’t last forever, and real estate is one of the key ways to build generational wealth.

The Takeaway

What is PMI? Private mortgage insurance typically goes along for the ride when a borrower puts less than 20% down on a conventional mortgage. A gift or other down payment assistance can fatten the down payment and help you avoid PMI. If you do end up paying, you can step away from PMI once your equity reaches 20%.

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 Mortgages: simple, smart, and so affordable.

FAQ

Is it better to put down 20% or pay PMI?

It would be great to make a down payment of 20% and avoid private mortgage insurance (PMI) but not everyone can afford it. It’s particularly hard for first-time homebuyers, who often don’t have income from the sale of another residence to fund their next home. Use a home affordability calculator to look carefully at monthly mortgage payment amounts for different home prices and interest rates. Then put down what you feel you can afford without compromising your ability to cover other bills.

How long do I have to pay PMI?

If you are paying private mortgage insurance, you’ll need to pay until you have built up 20% equity in your home (based on the original sale price of the home). At this point, you can request in writing that your loan servicer cancel PMI if you are current on your payments.

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

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

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

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

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

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†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.
^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SOHL-Q125-041

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When looking for a property to buy, you might consider a single-family detached home, a townhouse, a condo, a co-op apartment, or something else.

Let’s look at the pros and cons of buying a townhouse vs. a condo.

What Is a Townhouse?

At first glance, a townhouse might look like a typical house, but a closer look will show that it’s attached to at least one similar unit.

Townhouses are often found in urban areas where space is at a premium. They often come with a front or back yard. Owners own the inside and outside of their unit and the land it sits on.

The townhome community may have a homeowners association (HOA) and maintenance fees. You’ll want to make sure you understand the costs of the HOA and its rules before signing a contract and getting a home mortgage loan.

Benefits of Buying a Townhouse

There are at least three upsides to purchasing a townhouse.

Owner Rights

Because people who buy a townhouse own the land it’s on, they have more freedom in how to use the yard. A yard or patio can open possibilities for a grilling spot or dog or child play area.

They also have at least some freedom of choice about the appearance of the inside and outside of the structure, although HOAs may have rules about all of the above.

Price

In communities with high home prices, townhouses may be an affordable alternative for first-time homebuyers.

House hunters from millennial homebuyers to empty-nesters may also find a townhouse a sweet spot between a condo and a traditional detached home with yard.

Plus, because lots tend to be smaller than ones with detached homes on them, property taxes are usually lower as well.

Low Maintenance

Smaller yards mean less yardwork, ideal for busy people and those who are downsizing their home and responsibilities.

The townhouse complex may be gated and have security, and some have pools, gyms, and other shared recreational spaces whose maintenance is covered by homeowner fees.

Disadvantages of Buying a Townhouse

When you think of townhouse living, keep in mind the close quarters with neighbors and possible HOA fees and rules.

HOA

Townhouse communities are less likely to have an HOA than condominiums are, but if they do, the resident-led board will collect ongoing fees to cover common areas and any community perks such as a pool. The HOA will also enforce community rules.

Lack of Privacy

Because of the shared walls, a townhouse provides less privacy than a detached home (although it may offer more privacy than many condo buildings, where you may have a unit above and below yours). Townhouse living may therefore create some challenges for families with young children.

What Is an Apartment?

An apartment is a room or set of rooms within a building. In major cities, some people refer to buying a condo or co-op shares as buying an apartment.

Condo owners own everything within their unit and have an interest in the common elements. “Buying a co-op apartment” really means holding shares in the housing cooperative that owns the property.

Then there are people and companies that buy a multifamily property like an apartment building and rent out the units. An owner could decide to live in one of the units and serve as an on-site landlord.

Benefits of Living in an Apartment

Let’s look at some benefits of buying a condo or a co-op.

Low Maintenance

You won’t typically need to make many repairs, mow the grass, or paint. That’s covered by the monthly or quarterly fees you’ll pay.

Low Utilities

First, condos tend to be smaller than single-family homes, which can reduce the cost of heating and cooling the space, and take less electricity to keep it well lit.

HOA

If the building has an HOA (which may be called a condo or co-op association), the association will take care of property maintenance and enforcement of rules.

Disadvantages of Living in an Apartment

Apartment life can come with disadvantages, too. Here are a few.

Parking

You may or may not have a parking space set aside for you, and street parking isn’t always a given in busy locales. Even if you have a parking spot, if people come to visit, they may not easily find anywhere to park.

Noisy or Nosy Neighbors

If you appreciate quiet calmness, you may not find all you’d like in condo living. Neighbors are nearby and they can be noisy. If you’re in a crowded city, surrounding events can contribute to the jostling and noise.

Limited Space

If you’re used to living in a house, you could find a more compact apartment to be challenging as you try to fit in your belongings. Plus, apartments often lack yard space or a patio, which further limits the amount of space you have to use and enjoy.

Differences Between a Townhouse and an Apartment

When comparing apartment or condo vs. townhouse, keep in mind these differences.

Townhouse	Apartment/Condo
Single-family unit that shares one or more walls with another home	Room or rooms within a building
May have a small yard or patio	May be less likely to have outdoor space
Gives owner some control over how to change the exterior and use yard	Any exterior space is often shared and cared for by HOA
Can be more affordable than traditional detached homes in markets with high prices	Can also be more affordable than traditional detached homes
If there’s an HOA, fees are usually lower because owners are responsible for much of their own upkeep	If an HOA is in place, it will collect fees to cover most maintenance and condo fees can be higher than those for townhouses.
May not provide as much privacy as a freestanding house	May not provide as much privacy as a freestanding house
Thanks to the land ownership, financing is similar to a traditional mortgage	It can be harder to finance a condo than a townhouse

The Takeaway

Buying a townhouse or an apartment can give you many of the pleasures of homeownership with less of the associated upkeep. But there are unique qualities to each and potential downsides, too. Make sure you understand the role a homeowner’s association might play in any property you purchase before you make an offer and nail down your financing.

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 Mortgages: simple, smart, and so affordable.

FAQ

Do townhomes appreciate as much as houses?

In general, townhomes do not appreciate as quickly as single-family detached homes, thanks to the amount of land that comes with traditional stand-alone homes.

Are townhouses a bad investment?

In some circumstances, a townhouse may be a good investment. The price, current market conditions, and location are factors.

Are fees higher for a townhouse or condo?

Condo HOA dues are typically a lot higher than townhouse fees (if the townhouse community even has an HOA). Condo communities usually have many more amenities to maintain.

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Photo credit: iStock/Auseklis

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.
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-Q125-023

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Did you know you can use a home loan for renovations? Renovation home loans cover the cost of purchasing and renovating a home. If you’re familiar with construction loans, renovation loans are similar. Also called “one-close” loans or renovation mortgages, renovation loans can offer buyers simplified financing for transforming a fixer-upper into an attractive, modernized home.

We’ll explain how to add renovation costs to your home loan. We’ll also cover other ways you can fund your home project, including ways to use your existing home equity to help you pay for renovations.

What Is a Renovation Home Loan?

A renovation home loan combines the cost of a home purchase and money for renovations in one mortgage. There’s only one closing and one loan when buying a new home or refinancing an existing home. The lender has oversight of the renovation funds, including the budget, vetting of the contractor, and disbursement of funds for renovation work as it is completed.

The borrower, their property, and their lender must all meet criteria set out by the remodel home loan program to qualify, which can present a challenge. Qualifying lenders in particular can be hard to find. That’s because most lenders must maintain a custodial account for the renovations over the course of an entire year, which requires extra work and resources. However, if you can find a lender that can handle the process, renovation loans can be a convenient way to improve a promising fixer-upper.

Types of Home Loans That Can Include Renovations

Most mortgages will not include renovations in the loan amount. Renovation mortgages are niche products serviced by a fraction of lenders. Buyers and properties must also meet certain requirements, which we’ll outline below.

There are several different types of home loans you can apply for that are eligible for adding renovation costs to the mortgage.

1. FHA 203K

An FHA 203(k) is a mortgage serviced by the Federal Housing Authority in which the cost of repairs is combined with the mortgage amount. It’s different from a traditional FHA loan that does not include improvement expenses, but qualifications (credit score, down payment, etc.) are very similar.

Interest rates and terms are also similar to what you see in a standard FHA loan. However, you can expect additional lender fees to cover the extra oversight needed on a renovation loan.

The amount you can borrow is equal to either the value of the property plus the cost of renovations or 110% of the projected value of the property after rehabilitation. Borrowers must use an FHA-approved lender for this type of mortgage.

Eligible properties must be one to four units. Repairs can include those that enhance the property’s appearance and function, the elimination of health and safety hazards, landscape work, roofing, accessibility improvements, energy conservation, and more. A limited 203(k) is also available for repairs costing $35,000 or less.

2. Fannie Mae HomeStyle

The Homestyle Renovation loan from Fannie Mae takes into account the value of the property after renovations are complete. The amount of allowable renovation money can equal 75% of the value of the property after renovations are complete.

In the world of home loans, the loan-to-value ratio (LTV) is the percentage of your home’s value that is borrowed. Many lenders limit your LTV to 80% to 85%.

A HomeStyle loan allows an LTV of up to 97%. This means it’s possible to put as little as 3% down. Some investment properties are also eligible for this type of loan. Renovations are eligible as long as they are permanently affixed to the property. Work must be completed within 15 months from the closing date of the loan.

3. Freddie Mac CHOICERenovation

The Freddie Mac CHOICERenovation program is virtually identical to the Fannie Mae HomeStyle program. This renovation loan is for buyers who want a loan with more flexibility than an FHA renovation loan.

Like HomeStyle, renovations that are permanently affixed to the property are eligible in one- to four-unit residences, one-unit investment properties, second homes, and manufactured homes. The maximum allowable renovation amount is 75% of the “as-completed” appraised value of the home — meaning the appraised value of the home before renovations but accounting for all planned changes. The maximum loan-to-value (LTV) ratio is 95% (97% for HomePossible or HomeOne loans).

The Freddie Mac CHOICEReno eXPress Mortgage is an extension of the CHOICERenovation mortgage. The CHOICEReno eXPress mortgage is a streamlined mortgage for smaller-scale home renovations. Renovation amounts are limited to 10% or 15% of the “as-completed” appraised value of the home. Borrowers need to work with an approved lender to apply for one of these programs.

4. USDA Purchase with Rehabilitation and Repair Loan

A USDA Purchase with Rehabilitation and Repair Loan assists moderate- to very-low-income households in rural areas with repairs and improvements to their homes. Buyers can secure 100% financing with this loan.

For very low-income borrowers, there’s a separate loan you can qualify for with a subsidized, fixed interest rate set at 1% with a 20-year term. This makes borrowing incredibly affordable.

To apply, you must have a household income that qualifies as low to moderate in your county per USDA standards. The property must be your primary residence (no investments), and rehab funds cannot be used for luxury items, such as outdoor kitchens and fireplaces, swimming pools and hot tubs, and income-producing features. Manufactured homes, condos, and homes built within the last year are not eligible.

5. VA Alteration and Repair Loan

The VA allows qualified service members to bundle repairs and alterations with the purchase of a home. As with all VA loans, 100% financing is available on these low-interest loans.

Alterations must be those “ordinarily found” in comparable homes. Renovations are also required to bring the property up to the VA’s minimum property standards.

The loan amount can include the “as completed” value of the home as determined by a VA appraiser. Leftover money from the home loan after renovations are complete is applied to the principal.

Note: SoFi does not offer the five types of home renovation loans on this list, although it does offer other types of FHA loans and VA add loans.

Home Style Quiz

Other Options for Financing Home Renovations

While a renovation home loan is a great way to finance a renovation, it’s not your only option for borrowing money for home improvements. Nor is it the most flexible. Alternative loans — such as cash-out refis, home renovation personal loans, and home equity loans -– may provide more flexibility.

Cash-out Refinance

A cash-out refinance is useful for those who already own their home. You replace your old mortgage with a new mortgage, and the equity (here, the “cash”) is refunded to you. You will have closing costs with a refinance, but you won’t have separate financing costs for the money you’re using for renovations.

Personal Loan

Personal loans are often used for a home remodel or renovation. Because the funds are not secured by your property, you’ll likely have to pay a higher interest rate. The bright side of funding this way means you won’t lose your home if you have a financial setback and need to stop paying back the loan.

This type of loan comes with a shorter repayment period, higher monthly payment, and lower loan amount. You can find these loans through banks, credit unions, and online lenders.

Home Equity Loan

A home equity loan is a secured loan that uses your home as collateral. That means the lender can foreclose on the home if you stop paying the loan, and so interest rates are typically lower. A home equity loan also comes with a longer repayment period than a personal loan.

Home Equity Line of Credit (HELOC)

A HELOC is a line of credit that lets homeowners borrow money as needed, up to a predetermined limit. As the balance is paid back, homeowners can then borrow up to the limit again through the draw period, typically 10 years. The interest rate is usually variable, and the borrower pays interest only on the amount of credit they actually use.

After the draw period ends, borrowers can continue to repay the balance, typically over 20 years, or refinance to a new loan.

Recommended: A Personal Line of Credit vs. a HELOC

Private Loan

A private loan is a loan made without a financial institution. Loans made from a family member, friend, or peer-to-peer source are considered private loans. Qualification requirements will depend on the individual or group lending the money. There are some serious drawbacks to obtaining funding from a private source, but these loans can help some borrowers in buying a home.

Government or Nonprofit Program

It is possible to finance the cost of remodeling with the help of government programs. Federal programs like the U.S. Department of Housing and Urban Development (HUD) have financing options for renovations, as do some state and local government agencies.

Recommended: What Is HUD?

The Takeaway

Homeowners have a lot of options for financing renovations, especially in an era when home equity is higher than ever before. Renovation home loans allow borrowers to purchase and renovate a property with one loan, but that’s not the only way you can remodel a fixer-upper. Some alternatives to renovation home loans include home equity loans, HELOCs, and personal loans.

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

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

How do renovation mortgages work?

Home renovation loans are known for combining the cost of financing a renovation or remodel with the cost of purchasing the home into a single-closing transaction. Lenders calculate the amount to be borrowed based on the value of the home after renovations are complete.

Can you include renovation costs in a mortgage?

A home loan can include renovations, but you must work with your lender to be approved for specific renovation loan programs.

Can you add renovation costs to your mortgage?

You cannot add renovation costs to an existing mortgage, but you can refinance your mortgage with a cash-out refinance that provides you with funds you can use however you wish. You can also take out a home equity loan or open a home equity line of credit (HELOC) which would provide you with renovation money and would, technically, be a second mortgage.

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Photo credit: iStock/Hispanolistic

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.

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

SOHL-Q125-007

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Mortgage bankers originate, sell, and service residential mortgages for consumers on behalf of the lender they work for. They also may provide escrow services. A mortgage banker plays a central role as people navigate the complexities of applying for a mortgage.

Mortgage bankers are often the first and last point of contact. Getting an interest rate and terms that work for your financial situation, as well as saves you money, is incredibly valuable.

What Is a Mortgage Banker?

An individual or an institution that originates, sells, or services a home mortgage loan can be considered a mortgage banker.

Individual mortgage bankers work for a single lending institution and help applicants sort through the different mortgage types. Mortgage bankers are also called mortgage lenders or mortgage loan officers when referred to in this way.

Customers who want help understanding mortgages or who have questions about mortgages can be assisted by mortgage bankers.

Mortgage bankers can get homebuyers on the right road with mortgage preapproval. They serve as the primary point of contact for buyers’ lending needs.

A mortgage banker can also be an institution, such as a bank, credit union, or other direct mortgage lender. When talking about a mortgage banker that services a loan, for example, it’s in reference to the institution.

A mortgage loan originator employed by a credit union, bank, or a subsidiary of a bank does not have to obtain a loan originator license. Nonbank mortgage loan originators must be licensed in the states where they do business and must be registered with the Nationwide Multistate Licensing System & Registry.

The licensing requirements were put in place after the mortgage meltdown of 2008 to protect consumers from predatory lending and to prevent fraud.

Recommended: Home Loan Help Center

Services Offered by a Mortgage Banker

At their core, mortgage bankers have the ability to create or sell a new mortgage loan. They also have the ability to service it once the loan closes. Here are the details of the mortgage banker’s role:

Originate Loans

Mortgage bankers originate loans, meaning they take an application and create a new mortgage for a residential home. Conforming loans are usually sold to Fannie Mae or Freddie Mac.

Sell Loans

Mortgage bankers sell loans so they can engage in more lending. If it’s a conventional loan, conforming loan, the sale typically goes to the government-backed enterprises, Fannie Mae or Freddie Mac. This increases lenders’ liquidity so they can originate more loans to more customers instead of carrying the amount of the loan on their books.

Service Loans

Once the mortgage has closed, the lender needs to be paid every month. This is what mortgage servicers do: They take on the day-to-day task of making sure your payment gets to all parties that need to be paid. Servicing loans is usually in reference to the mortgage banker as an institution, not the individual mortgage loan officer.

How Do Mortgage Bankers Make Money?

Individual mortgage bankers may make money from a salary, commission, or a combination.

Institutional mortgage bankers make money from origination fees, mortgage points, mortgage servicing, mortgage-backed securities, and the yield spread premium. The yield spread premium is how much money they make based on what they charge a customer relative to how much it costs to obtain that financing.

Differences Between a Mortgage Banker and a Loan Officer

Mortgage banker and loan officer, or loan originator: These terms are often used interchangeably.

However, while a mortgage banker can refer to both individuals and institutions, a loan officer is always an individual.

Differences Between a Mortgage Banker and a Mortgage Broker

In your research to get the best mortgage, you may have also come across mortgage brokers. Though applying for a mortgage will have the same requirements whether you go through a mortgage broker or a mortgage banker, a mortgage banker is different from a mortgage broker in who they work for and how they obtain your mortgage.

A mortgage banker works for a single lending institution that makes loans directly to consumers. The lending decision and underwriting are typically made at the bank level, which can streamline the process.

A mortgage broker works with many different lenders. This is helpful if you want to shop around and don’t have time to do the legwork or need to find a specialty loan not offered by all lenders.

Recommended: Mortgage Calculator

When Is It Better to Have a Mortgage Banker Than a Broker?

Your best bet for finding a home loan with terms most favorable to your financial situation is to shop around for a mortgage. A mortgage banker is closer to the lending process than a mortgage broker, but a broker has access to a greater number of lenders.

Be sure you’re comparing apples to apples on the mortgages offered to you by studying the loan estimate you’re given by each lender after applying. You should take into account both the interest rate and fees being charged for the loan.

The Takeaway

A mortgage banker can play a major role in getting you to the closing table with the right loan. By any name — mortgage banker, loan officer, loan originator — the person who guides you through the loan process is a key part of the home-buying journey.

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 Mortgages: simple, smart, and so affordable.

FAQ

What does a mortgage banker do?

A mortgage banker can originate, sell, and service loans for customers.

Is a mortgage banker similar to a mortgage broker?

Not really. A mortgage banker works for a single lender and makes loans directly to you. Mortgage brokers do not lend money but instead find a lender to work with their buyer.

How do you choose a mortgage banker?

Compare rates and terms from different lenders by getting prequalified for a mortgage. As you communicate with the mortgage banker at various lenders, consider the speed and clarity of communications and how knowledgeable the person seems to be and how much attention they pay to your needs.

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Photo credit: iStock/Lacheev
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.

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